For quick completion of the corporate insolvency resolution process (CIRP), the IBC gives autonomy to the creditors to choose a plan, and pass it with a requisite majority. The authority granted to the committee of Creditors (COC), to approve a resolution plan, is free from judicial interference. Questions, however, may arise, when a plan approved by the creditors may not be the most viable solution for the effective resolution of a CD.
In such cases, the role of an adjudicating authority in reviewing the decision of the COC becomes questionable. By reinstating the law in force, the National Company Law Appellate Tribunal (NCLAT), in Shrawan Kumar Agarwal Consortium v. Rituraj Steel Private Limited untangled the knot of ambiguity surrounding the issue.
The Committee of Creditors (COC) of the PHIL Minerals Beneficiation & Energy Private Limited (Corporate Debtor) approved a resolution plan for the restructuring of the Corporate debtor with a majority of 84.70 percentage. Since the approved plan wasn’t the plan with the highest proposed bid, it failed to get its approval from the National Company Law Tribunal (NCLT), under Section 31. The NCLT, Kolkata bench, while rejecting the plan, directed the COC to conduct a fresh bidding process, keeping in mind the goal of maximising the value of CD’s assets.
Challenging the order passed by the NCLT, an appeal before the National Company Law Appellate Tribunal was filed on the ground that a approved in accordance with the statutory limits prescribed under Section 30(4) of the Insolvency and Bankruptcy Code (IBC), cannot be rejected on the basis of its contents or commercial viability.
Issues framed before the NCLAT
The appellant contended the validity of the order passed by the NCLT on the following grounds:
Approved plan contradicted the objectives of the IBC
The appellant (CD) contended that the resolution plan passed by the COC was not the plan bidding for the highest amount of fund infusion. According to the appellant, the bid placed by the successful resolution applicant; Rs 89 Crores, was lesser than other bid amounts, which went up to Rs 136 Crores. This was contended to be in violative of the Objective of the IBC to maximise the assets of the CD. Further, Sub Regulation (5) of Regulation 36B and Sub regulation (2) of Regulation 39 of the Insolvency and Bankruptcy (Insolvency Resolution Process) for Corporate Persons Regulations, were claimed to be bypassed by the COC. As contended, these regulations, read along with Section 30(2) and 30 (4), mandates the COC to comply with the asset maximisation goal of the IBC.
Violation of Principles of Natural Justice by the COC
The appellant claimed a bias amongst the COC towards the successful resolution applicant of the CD. It was claimed that the process of approving a resolution plan, adopted by the COC was of a non-transparent nature, without affording an opportunity of hearing to all the applicants. It was further contended that the pre-determined evolution matrix, for approving a resolution plan was not followed by the COC. It was further alleged that the prospective resolution applicants were not given complete information about the corporate debtor, debts owed by it, and its activities as a going concern before it went through the CIRP process. On all these grounds, the appellant claimed the evaluation process adopted by the COC to be biased, and pre inclined towards the successful resolution applicant.
Judgment and reasoning
The NCLAT while rejecting the contentions raised by the appellants, overturned the decision of the NCLT. It declared the resolution plan passed by the COC to be valid and enforceable. These were the segments of the ratio of the judgment:
Limited jurisdiction of NCLT
The NCLAT mentioned that the approval of a resolution plan by the COC is by application of its ‘commercial wisdom’, and the legislature hasn’t endowed the NCLT with the authority to intrude upon, or question that decision of the COC.
Reference was made to the Supreme Court’s judgments of K. Shashidhar v. Overseas Bank, and Committee of Creditors of Essar Steel India Limited v. Satish Kumar. Law laid down by the SC in these cases, clarified that the NCLT, under Section 31 is having limited power of judicial review was limited to the scrutiny of the resolution plan as approved by the requisite percentage of voting share of financial creditors under Section 31. It further mentioned that the, apart from the checking the requisite percentage of approval by the COC, the only inquiry pertaining to the resolution plan by the NCLT should be in reference to matters specified in Section 30(2).
The NCLAT held that all resolution plan can be scrutinized by the NCLT only on the following grounds:
- Whether it provides for the payment of insolvency resolution costs in a specified manner.
- It should provide for Repayment of debts of operational creditors
- It should provide for the management of the affairs of the CD
- It should provide for the implementation and supervision of the resolution plan.
- It does not contravene any of the provisions of law for the time being in force,
- Whether It confirms with such other requirements as may be specified by the board.
Thus, the jurisdiction of NCLT, in terms of scrutinizing the resolution plan is limited to the grounds mentioned by the SC in the K. Shashidhar case. Apart from these grounds, any other question in terms of the financial viability falls within the commercial wisdom of the financial creditors.
Limited Jurisdiction of NCLAT
The limitation of NCLAT’s powers to review a resolution plan was reinforced by the NCLAT from the limited grounds specified for instituting an appeal under Section 31and Section 61 of the IBC. While referring to the provisions of the IBC, the NCLAT concluded these to be the exhaustive grounds for filing an appeal against an NCLT’s order:
- If it is in contravention of the provisions of any law in force.
- There has been a material irregularity in exercise of powers by the Resolution professional. During the CIRP.
- Debts owed to the operational creditors have not been provided for in the resolution plan.
- The resolution plan costs have not been provided for repayment in priority to all other debts.
- The resolution plan does not comply with any other criteria specified by the Board.
Thus, even the NCLAT hasn’t been provided with powers to review the commercial wisdom of the Financial creditors in approving a resolution plan.
The order directing the COC to rebid for resolution plans contradicts the objective of the IBC
The NCLAT mentioned that the purpose behind the enactment of the IBC was to implement a swift resolution process to be completed in 270 days. According to the NCLAT, this feature of the IBC differentiates it from the earlier regimes, which permitted the CD to remain functional for an indefinite period. Thus, to ensure this swift implementation of a resolution process, the commercial wisdom of the COC has been given paramount status without any judicial intervention.
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