FACTS
IDBI Bank Limited (herein referred to as “the Financial Creditor”) filed an application under Section 7 of Insolvency & Bankruptcy Code, 2016 (herein referred to as “the Code”) to initiate the Corporate Insolvency Resolution Process (“CIRP”) against M/s Siva Industries and Holdings Limited (herein referred to as “the Corporate Debtor”)
The National Company Law Tribunal (herein referred to as “the Adjudicating Authority”) admitted the application and appointed a Resolution Professional (“RP”) wherein RP submitted a resolution plan before the Committee of Creditors (“COC”). However, due to the lack of a majority of votes, the resolution plan could not succeed. Thus, the RP filed an application before the Adjudicating Authority for the liquidation of the Corporate Debtor.
Thereafter, the Appellant who was a promotor of the Corporate Debtor proposed a one-time settlement plan which was duly considered and approved by the COC with a majority vote of 94.32%. Thus, in view of the approved settlement plan by COC, the RP filed an application under Section 12A of the Code before the Adjudicating Authority, seeking withdrawal of CIRP initiated against the Corporate Debtor.
The Adjudicating Authority rejected the application of RP and initiated the liquidation proceedings against the Corporate Debtor on the grounds that the settlement plan cannot be considered as a settlement per se under Section 12A of the Code rather it was merely a Business Restructuring Plan.
Being aggrieved by the order of Adjudicating Authority, the Appellant filed an appeal before the National Company Law Appellate Tribunal (“the Tribunal”). However, the appeal was dismissed by the Tribunal. Hence the present appeal.
ISSUE BEFORE THE SUPREME COURT
Whether the adjudicating authority or the Tribunal can sit in an appeal over the commercial wisdom of the COC or not?
CONTENTIONS OF THE PARTIES
The Appellate contended that it’s a trite law that the Adjudicating Authority and Tribunal cannot reject the settlement plan, once it’s been accepted by the COC with a majority vote.
The Appellant submitted that the main objective of the Code is to protect the ongoing business of the Corporate Debtor and to provide the maximum dues to the Creditors, the orders passed by the Adjudicating Authority and the Tribunal are contrary to the main object of the Code.
DECISION AND FINDINGS
The Supreme Court of India (herein referred to as “the Court”) after considering the submissions of the Appellant, noted that the commercial wisdom of the COC has always been given importance without any judicial intervention in order to complete the procedure as prescribed under the Code.
The Court observed that Section 12A of the Code has always been more stringent as compared to Section 30(4) of the Code in as much as under Section 30(4) of the IBC, the voting share of COC for approving the Resolution Plan is 66% whereas the requirement under Section 12A of the IBC for withdrawal of CIRP is 90%.
The Court further stated that, if the COC after due deliberation approves the settlement and withdrawal of CIRP with over and above 90% of the votes, the Adjudicating Authority and the Tribunal cannot sit in an appeal over the wisdom of the COC. In fact, the interference of the Adjudicating Authority and the Tribunal are only considered if the decision of the COC is wholly capricious, arbitrary, irrational, and dehors the provisions of the statute or the Rules.
The Court held that the decision made by the COC for the approval of the settlement plan submitted by the Appellant and withdrawal of CIRP was considered after due deliberation with the majority voting of 94.23%. Thus, neither Adjudicating Authority nor the Tribunal were correct in ignoring the wisdom of COC.
The Court allowed the appeal by relying upon the decision of the Supreme Court in the case of Arun Kumar Jagatramka v. Jindal Steel and Power Limited and Another Civil Appeal No. 9664 of 2019
wherein it was held that;
“we do take this opportunity to offer a note of caution for NCLT and NCLAT, functioning as the adjudicatory authority and appellate authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. As we have noted earlier in the judgment, the IBC was introduced in order to overhaul the insolvency and bankruptcy regime in India. As such, it is a carefully considered and well-thought-out piece of legislation that sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legislation remains robust by constantly amending it based on its experience. Consequently, the need for judicial intervention or innovation from NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC”
AMLEGALS REMARKS
The freedom of COC under the Resolution Process is a key element that requires to be protected in order to maintain the efficacy of the Code. The judiciary has time and again provided the correct understanding towards the freedom of COC that the commercial decisions of the COC in regards to the resolution plans of the Corporate Debtor shall not be considered for the judicial review and which is also reflected in the decision of the Supreme Court in the case of K Sashidhar vs Indian Overseas Bank CIVIL APPEAL NO.10673 OF 2018 and Committee of Creditors of Essar Steel India Limited (through authorized signatory) v. Satish Kumar Gupta and Others, (2020) 8 SCC 531.
The Court in the present case has correctly explained and explained a thin line for judicial interference wherein the Adjudicating Authorities can interfere in the framework envisaged under the Code.
The Court also observed that unless the decision of the COC has taken on capricious, arbitrary, irrational grounds which results in the contravention of the provisions of the IBC, the decisions of the COC shall be considered as final, and judicial interference shall not be warranted.
– Team AMLEGALS
For any queries or feedback, please feel free to get in touch with siddharth.kakka@amlegals.com or rohit.lalwani@amlegals.com.
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