Committee Approved Resolution Plan – The Final Words?
The Insolvency and Bankruptcy Code of India, 2016 (‘IBC’ or ‘the Code’) is a unique legislation that has paved a way for not only helping out the default-ridden entities, but it also seeks to protect the interest of the creditors. Liquidation of an entity that has the potential to significantly contribute to the economy would be futile especially when the interest of a large number of stakeholders is involved and there is a high possibility of bringing it out of the defaulting status. IBC tends to give a breather to a defaulting entity in the form of reorganization and insolvency resolution in a time-bound manner.
Under the concerned legislation, Corporate Insolvency Resolution Process (‘CIRP’) begins when an application for initiating the same is filed before adjudicating authority (‘NCLT’). The prerogative of filing such application lies with the financial creditor(s), operational creditors(s), or the corporate debtor itself. Once an application is admitted, an interim resolution professional is appointed for managing the affairs of a corporate debtor, claims are invited and a moratorium is ordered which prohibits certain activities for a period commencing from the date of such order till the completion of CIRP. Thereafter, claims are collated and a committee of creditors (‘COC’) is formed. An information memorandum is prepared by Resolution Professional (‘RP’) and resolution plans are invited. Among the resolution plans submitted, the one approved by COC by a vote of 66% of the voting share is the successful resolution plan which is then placed before adjudicating authority for final approval under section 31 of the Code. Adjudicating authority proceeds with approving a COC-approved resolution plan only when the conditions laid down under section 30(2) are fulfilled. The concerned section states:
The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan-
(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the 1[payment] of other debts of the corporate debtor;
(b) provides for the 2[payment] of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;
(c) provides for the management of the affairs of the corporate debtor after approval of the resolution plan;
(d) The implementation and supervision of the resolution plan;
(e) does not contravene any of the provisions of the law for the time being in force
(f) confirms to such other requirements as may be specified by the Board.
Although, the Code clearly emphasis that an adjudicating authority shall accept a resolution plan if all the requisite conditions as mentioned in section 30(2) are met still there are instances wherein adjudicating authority or appellate authority (‘NCLAT’) has interfered with a perfectly COC approved resolution plan either on its own accord or on the basis of an application filed before it in this regard. The present article analyses the scope of interference by adjudicating authority when a resolution plan, approved by COC, is placed before it for final approval.
The Apex court, in the landmark decision in K Sashidhar v. Indian Overseas Bank & Others, explained the scope of jurisdiction of adjudicating authority while dealing with the COC-approved resolution plan. The Hon’ble Court observed that the role of adjudicating authority is ‘no more and no less. The court held that the discretion of the adjudicating authority is circumscribed by Section 31 and is limited to the scrutiny of the resolution plan as approved by the requisite percentage of voting share of financial creditors. Even in that inquiry, the grounds on which the adjudicating authority can reject the resolution plan are about matters specified in Section 30(2) when the resolution plan does not conform to the stated requirements.
In the matter of Maharashtra Seamless Limited v. Padmanabhan Venkatesh, NCLAT directed the appellant to increase the upfront payment to Rs. 597.54 crore to the creditors by paying an additional amount of Rs. 120.54 crore and in the event of failure to carry out such direction, the order of approval of the resolution plan was to be treated to be set aside. On appeal, the Apex Court observed that “the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan based on quantitative analysis” and held that the appellate authority ought not to have interfered with the order of the adjudicating authority by directing the successful resolution applicant to enhance their fund inflow upfront.
In the matter of Ricoh India Limited – Kalpraj Dharamshi & Anr. v. Kotak Investment Advisors Limited, Kalpraj submitted its resolution plan on January 27, 2019, while the last date for submission of resolution plans was set on or before January 08, 2019. NCLAT set aside the resolution plan approved by COC and NCLT on the ground that the procedure adopted by RP and CoC was in breach of the provisions of IBC. However, the Apex Court observed that since there was a material irregularity, therefore, NCLAT was justified because of the provisions of Clause (ii) of Sub-section (3) of Section 61 of the Code to interfere with the exercise of power by RP. However, all the actions of RP including acceptance of resolution plans after the due date, albeit before the expiry of the timeline specified by IBC for completion of the process were consciously approved by COC therefore, any interference in this regard by NCLAT would be deemed to be exceeding the jurisdiction.
In the matter of India Resurgence ARC Private Limited v. M/s. Amit Metaliks Limited & VAP Udyog Private Limited, the order of NCLT approving the resolution plan was challenged on the ground that the same failed to deal with the interest of all the stakeholders including the Appellant and that the valuation and quality of the security held by the Appellant were not considered while dealing with his claim. NCLAT while dismissing the present appeal observed that considerations including the value of security are only relevant for COC to make an informed decision the viability and feasibility of a resolution plan. However, such a business decision, taken in exercise of commercial wisdom of COC, would not warrant judicial intervention unless creditors belonging to a class being similarly situated are not given fair and equitable treatment.
Further, in the matter of J.P. Kensington Boulevard Apartments Welfare Association & Ors. v. NBCC (India) Ltd. & Ors., the Apex Court held that it is not in the jurisdiction of adjudicating authority to modify the resolution plan. If the Adjudicating Authority or the Appellate Authority finds any shortcoming in the resolution plan vis-à-vis the specified parameters, it can only send the resolution plan back to the Committee of creditors for re-submission after satisfying the parameters delineated by the Code.
Recently, NCLT has approved a resolution plan submitted for Videocon Industries and its 12 group companies. Out of the total claim amount of Rupees 71,433.75 Crores, claims worth Rs 64,838.63 Crores were admitted and the COC approved resolution plan only provides for an amount of 2962.02 Crores due to which the total hair cut to all the creditors stands at 95.85%. As the resolution plan providing for such a huge haircut was approved by COC in the exercise of its commercial wisdom, NCLT approved the resolution plan. Since NCLT had very limited jurisdiction in the concerned matter on account of the commercial wisdom of the COC therefore, it suggested and requested both CoC and the Successful Resolution Applicant to increase the pay-out amount to the operational creditors especially MSMEs since they form a voluminous number of operational creditors and it was perceived that payment of 0.72% of the admitted claim amount would inevitably lead these MSMEs into insolvency shortly.
Adjudicating Authority is the ultimate body for determining whether a particular resolution plan will be approved or rejected, in which case an order liquidating corporate debtor shall be passed. The Apex Court has always endeavored to clarify the scope of jurisdiction inculcated by the Code in the adjudication authority or appellate authority from time to time vide several judgments. It is pertinent to note that in every case where the question of the extent of jurisdiction of the adjudicating authority arose, it has always been emphasized by the Apex Court that such jurisdiction is limited in nature and that it is the actual prerogative of the financial creditors to deliberate and decide whether a particular resolution plan is feasible, viable and will ensure maximization of the assets of a corporate debtor. The Code respects the commercial wisdom of the financial creditors since it is their interest that is at stake and who can be a better judge of a proposed resolution plan than these financial creditors. Though the picture regarding the adjudicating authority’s jurisdiction is quite clear, however, this issue seems to keep cropping up in one or another form.
Sanya Chandel pursued BA LLB (Hons.) from Guru Gobind Singh Indraprastha University and Company Secretary (CS) from Institute of Company Secretaries of India and am currently interning with KS Legal & Associates, Mumbai in the Corporate Law field.