Supreme Court on Commercial Wisdom of the Committee of Creditors

[Rohit Sharma is a Partner at Mamta Binani & Associates, Mumbai]

In a judgment dated 3 June 2022 in Vallal RCK v. Siva Industries and Holdings Limited, the Supreme Court sought to hold, once again, that the commercial wisdom of the Committee of Creditors (‘CoC’) is supreme. Apart from the paramountcy of the commercial wisdom of the CoC, the Court also noted the tremendous importance of safeguarding a corporate debtor from being liquidated and providing it a chance of revival. This post seeks to analyse the said judgement and to understand the multiplicity of litigation that this judgement may bring about.  

Brief facts of the Case

IDBI Bank Limited filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) for initiation of the corporate insolvency resolution process (‘CIRP’) against Siva Industries and Holdings Limited (‘Corporate Debtor’ or ‘Siva’), before the National Company Law Tribunal, Chennai Bench (‘NCLT’). The NCLT was pleased to initiate CIRP against the Corporate Debtor by way of its order dated 5 July 2019. During the CIRP of the Corporate Debtor, the resolution plan could not be approved; hence, according to the mandate of law, the Resolution Professional (‘RP’) of the Corporate Debtor filed an application for liquidation of the Corporate Debtor.

In the meantime, one of the shareholders of Siva (being an erstwhile promoter) filed an application under section 60(5) of the Code seeking consideration of the one-time settlement offer by the CoC of Siva. This application was allowed by the NCLT and accordingly the tribunal directed the RP to convene a CoC meeting to consider the one-time settlement offer. After a detailed deliberations between the erstwhile promoter of the Corporate Debtor and the CoC on the one-time settlement offer, the same was approved by the CoC with 94.23% votes. Consequently, the RP filed an application under section 30A of the Code read with regulation 30A(1)(b) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) for withdrawal of the CIRP of the Corporate Debtor.

However, the NCLT deemed it fit to reject the application for withdrawal of the CIRP of the Corporate Debtor, through its order dated 12 August 2021, and initiated liquidation against the Corporate Debtor by way of its order dated 12 August 2021. The said rejection by the NCLT was primarily on the ground that the settlement proposal put forth by the erstwhile promoter of the Corporate Debtor was not a settlement simpliciter as envisaged under Section 12A of the Code, but that it is a ‘business restructuring plan’. Furthermore, the NCLT also held that the CoC, without receipt of a single penny from the erstwhile promoter of the Corporate Debtor, passed the resolution for withdrawal of CIRP of the Corporate Debtor.

Aggrieved by the said order of the NCLT, an appeal was preferred before the National Company Law Appellate Tribunal, Chennai bench (‘NCLAT’). The NCLAT, through its order dated 28 January 2022 on almost similar grounds as the NCLT, rejected the said appeal.

Further aggrieved by the said order of the NCLAT, an appeal was preferred before the Supreme Court. The Apex Court set aside the order of the NCLAT and the NCLT and allowed the withdrawal of the CIRP of the Corporate Debtor. The Court held that the commercial wisdom of the CoC has been, time and again, given paramount status without any judicial intervention.

Statutory Provisions

The Code envisages settlement after initiation of CIRP, in the following ways:

Sl. No.

Particulars

Provisions of the Code

Relevant Extract of the Code

a.        

After initiation of CIRP, but before constitution of the CoC

Sec. 12A of the Code r/w Reg. 30A(1)(a) of the IBBI CIRP Regulations, 2016

12A. Withdrawal of application admitted under section 7, 9 or 10.

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.

 

XXX

 

30A. Withdrawal of Application

1.      An application for withdrawal under section 12A may be made to the Adjudicating Authority –

a.       before the constitution of the committee, by the applicant through the interim resolution professional;

XXX

b.       

After initiation of CIRP and after constitution of the CoC, but before the issuance of expression of interest (‘EoI’)

Sec. 12A of the Code r/w Reg. 30A(1)(b) of the IBBI CIRP Regulations, 2016

12A. Withdrawal of application admitted under section 7, 9 or 10.

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.

 

XXX

30A. Withdrawal of Application

b. after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be:

 

c.        

After initiation of CIRP, after constitution of CoC and after the issuance of EoI.

Sec. 12A of the Code r/w Reg. 30A(1)(b) of the IBBI CIRP Regulations, 2016 r/w proviso of Reg. 30A(1)(b) of the IBBI CIRP Regulations, 2016.

12A. Withdrawal of application admitted under section 7, 9 or 10.

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.

 

XXX

30A. Withdrawal of Application

b. after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be:

 

Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitations.

Analysis

Juxtaposing the aforesaid provisions of the Code with the issue at hand, it can be seen that the Code primarily envisages the concurrence of at least 90% members of the CoC for withdrawal of the CIRP of a corporate debtor and the reason for justifying the withdrawal after such issue, both of which were present in the instant case. The application filed by the RP for withdrawal of CIRP of the Corporate Debtor complied with the provisions of the Code, but it was yet rejected by the NCLT. Further, the Supreme Court in its judgement held the NCLTs or NCLAT cannot sit in an appeal over the decisions of the CoC approving the withdrawal of the CIRP of the Corporate Debtor.

However, there have been numerous instances whereby applications are filed before the NCLTs for reconvening of the CoC of the Corporate Debtor, despite the expiry of the CIRP period of 180/270 days, for re-considering their proposed plan. The NCLT has allowed the convening of the CoC even after the expiry of the CIRP period keeping the liquidation application in abeyance.

In Sendoz Commercial Pvt. Ltd. v. Kohinoor Paper and Newsprint Private Limited, the NCLT, Kolkata Bench, through its order dated 6 November 2020 and 17 November 2020 directed that the application of liquidation be kept in abeyance owing to the pendency of the application filed by one of the bidders for re-considering of its plan by the CoC. The NCLT, Kolkata Bench directed the RP to convene a meeting of the CoC, even after the expiry of the CIRP period, for considering the said plan. After the said plan was rejected by the CoC, the NCLT was pleased to initiate liquidation of the corporate debtor, in the instant matter.

Impact of the Siva Judgement

Considering the practice, since the inception of the Code, there have been many instances wherein frivolous applications have been filed in order to defer the initiation of the CIRP or to defer the order of liquidation or to defer the approval of the resolution plan. However, the judgement of the Apex Court in Siva may turn out to be an initiator of many more of such applications being filed for the consideration of one’s proposal by the CoC or reconsideration of one’s revised plan by the CoC, especially after the expiry of the term of the CIRP. This may not only act as a multiplicity of litigation, but also to some extent impacts one objective of the Code, being the adherence to a time-bound process.

On the other hand, for a company and its employees, resolution of the company is always beneficial in terms of their livelihood. This is because the objective of the Code qua the resolution of the company being the primary objective (as opposed to liquidation) is achieved. Needless to mention, it would be a herculean task for the adjudicating authorities to differentiate between the various applications being filed before them.  

Conclusion

The judgment of the Supreme Court has no doubt allowed the promoters of a corporate debtor to breathe a sigh of relief in terms of taking the reins of the company back into their own hands. It may also be relevant to state here that the Supreme Court in K. Sashidhar v. Indian Overseas Bank declared, for the first time, that the commercial wisdom of the CoC was supreme. Further, in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta as well as the instant decision of Siva (and in scores of judgements of the NCLTs and the NCLAT), the supremacy of the commercial wisdom of the CoC has been reiterated. However, only time will tell how the judgement of the Court in Siva will be utilized by litigants in their favour, or how the adjudicating authorities will try and resolve such litigation by, at the same time, ensuring strict adherence to the timeline prescribed by the Code.

Rohit Sharma

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