[Piyush Rathi is a 4th year B.A. L.L.B student at NALSAR University of Law]
Earlier this year in K. Sashidar v Indian Overseas Bank, the Supreme Court held that the adjudicating authorities, i.e., the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have no jurisdiction or authority to analyse or evaluate the commercial decision of the Committee of Creditors (CoC) or to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors.
The matter arose in relation to the insolvency resolution process concerning Kamineni Steels & Power Pvt Ltd. (KS&PIPL) and Innovative Industries Ltd. (IIL). The NCLAT affirmed the order passed by NCLT, Mumbai bench recording rejection of resolution plan concerning IIL and directing initiation of the liquidation process under chapter III, part II of the Insolvency and Bankruptcy Code, 2016 (IBC). With regards to KS&PIPL, the NCLAT reversed the decision of the NCLT, Hyderabad which had approved its resolution plan and remanded the proceedings to NCLT, Hyderabad for initiation of liquidation process under sections 33 and 34 of the IBC. The NCLAT had held that in both the cases resolution plan did not garner the support of at least 75% of the voting share of the financial creditors constituting the CoC and the same stood rejected and thereby warranted initiation of liquidation process of KS&PIPL and IIL.
The main issues before the Supreme Court of India were: (a) the approval of the resolution plan by the CoC of the respective corporate debtors, namely KS&PIPL and IIL, by a vote of less than 75% of voting share of the financial creditors and about the correctness of the view taken by the NCLAT that the percentage of voting share of the financial creditors specified in section 30(4) of the IBC is mandatory; and (b) whether it is open to the NCLT or NCLAT to reckon any other factor (other than specified in sections 30(2) or 61(3) of IBC, as the case may be) which, according to the resolution applicant and the stakeholders supporting the resolution plan, may be relevant.
Judgment and Analysis
With regards to the first contention the Court held that regulations 25 and 39 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the “CIRP Regulations”) must be read in light of section 30(4) of the IBC as it concerns the process of approval of a resolution plan. The “percent of voting share of the financial creditors” approving vis-à-vis dissenting is required to be reckoned and it is not on the basis of members present and voting as such. Therefore, the approving votes should fulfill the threshold percent of not less than 75% of voting share of the financial creditors. Having failed to garner the requisite approval, the resolution plan shall deemed to be rejected. Hence, no fault can be attributed to the NCLAT as the inevitable corollary of rejection of resolution plan is to initiate the liquidation process according to section 33 of the IBC.
It was further observed that the action of liquidation process as envisaged under sections 33 and 34 of the IBC can be avoided only if approval of the resolution plan is by a vote of not less than 75% (as in October 2017) of voting share of the financial creditors and, conversely, the legislative intent is to uphold the opinion or hypothesis of the minority dissenting financial creditors. That must prevail: if it is not less than the specified percentage, the inevitable outcome of voting by not less than requisite percent of voting share of financial creditors to disapprove the proposed resolution plan, de jure, entails in its deemed rejection.
Further, while restricting the power of adjudicating authority the court stated that “NCLT and NCLAT have been endowed with limited jurisdiction as specified in the Code and not to act as a court of equity or exercise plenary powers and that NCLT or NCLAT have not been endowed with jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors” thereby giving paramount status to the commercial wisdom of the CoC.
The jurisdiction of the NCLAT being in continuation of the proceedings would be circumscribed in that regard and, more particularly on account of section 32 of the IBC, which envisages that any appeal from an order approving the resolution plan shall be in the manner and on the grounds specified in section 61(3) of the Code. The inquiry in an appeal before the NCLAT would be limited to the power exercisable by the resolution professional under section 30(2) of the Code or, at best, by the NCLT under section 31(2) read with 31(1) of the IBC and no other inquiry would be permissible.
The Court further also made observations with regards to the amended provisions of the IBC and the CIRP Regulations, which posit that the CoC should be objective in its approach and consider the feasibility and viability of the resolution proposal and must assign reasons for approval or rejection of the proposal. Here the Court held that the amended provision:
merely restates what the financial creditor is expected to bear in mind while expressing their choice during consideration of the proposal for approval of a resolution plan. Indubitably, the legislature has not provided for a ground to challenge the justness of the commercial decision expressed by the financial creditor- be it approved or reject the resolution plan. The opinion so expressed by voting is non-justiciable.
It further held:
“if the opposition of the resolution plan is purely a commercial or business decision, the same being non-justiciable is not open to challenge before the adjudicating authority (NCLT or NCLAT). If so non-recording of any reason would be of no avail.”
The judgment limits the scope of challenges that can be initiated against the decision made by the CoC in approving or rejecting the resolution plan. The Court finally put rest to the controversy with regards to the extent of the jurisdiction of adjudicating authority when an application for liquidation of a corporate debtor on account of rejection of the plan by the CoC due to insufficient members of the CoC voting in favor of the resolution plan.
Further, the observation made by the Court with regards to the recent amendments clarifies and settles the issue for future that the commercial decision taken by CoC is non-justiciable. This thereby limits the scope of challenges that can be taken against the decision made by the CoC in approving or rejecting the resolution plan. Therefore, non-recording of reason at the time of rejecting resolution plan for commercial reason will sustain no action before the court of law.
– Piyush Rathi