[Prakriti is a third-year student at the Hidayatullah National Law University]
The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) was an active step by the legislature to provide a consolidated law for reorganization and insolvency resolution in India. It was an attempt to scrap the earlier existing defaulters’ paradise in India. The IBC has successfully pushed India upwards in the Ease of Doing Business Index. The National Company Law Tribunal (NCLT) is tasked with interpreting the IBC and ensuring legal propriety in the CIRP.
In the matter of SSB Retail India Private Limited, the Hyderabad Bench of the NCLT has passed an order contrary to the scheme of the IBC and the jurisprudence laid down by the Apex Court. It has laid down the foundation for violations of the voting thresholds of the Committee of Creditors (CoC) under the IBC. It has overstepped its authority by introducing the concept of “present and voting” to calculate the voting threshold. This new concept will have ramifications on the Indian Insolvency Regime.
This post seeks to present an analysis of the approach followed by the NCLT in this order. It will draw a comparative analysis of the NCLT’s approach with the jurisprudence of the IBC. It will analyze the flaws in the parallel reasoning adopted in this judgment. The author opines that the NCLT has adopted an unreasonable approach and consequently deviated from the real problem. It aims to analyze the same and present a better solution to the facts and circumstances of the present case.
This case pertains to an appeal filed by the Resolution Professional (RP) seeking an order of liquidation. The NCLT had previously admitted an application under section 10 of the IBC. There are two financial creditors. Karnataka Bank has 55.87% voting share, while Mr. Basanthlal Sah has 44.13% voting share. A public announcement and several CoC meetings have previously been held in the present case. The latter has been absent from the CoC voting.
One Financial Creditor has been absent in the entire process, and the other lone Financial Creditor has approved the liquidation of the Corporate Debtor (CD) (there are no assets, liquidation is the only option). Section 33(2) IBC lays down a requirement of a minimum of sixty-six per cent of the voting share of the CoC to approve liquidation. The prima facie issue, in this case, was whether the NCLT was authorized to order the Liquidation of the CD, when the voting threshold had not been fulfilled.
The Court’s Ruling
The NCLT drew a parallel with section 30(4) of the IBC based on the National Company Law Appellate Tribunal’s (NCLAT) ruling in Tata Steel Limited v. Liberty House Group. In this ruling, the NCLAT had interpreted that section 30(4) of the IBC provides voting rights only to CoC members who attend CoC meetings. Those who have remained absent are considered to have failed to assess the feasibility of the Resolution Plan. Based on this reasoning, the NCLT ordered liquidation on the basis of 55.87% approval of the CoC.
Comment and Analysis
Promoting Timely Liquidation of the Corporate Debtor
The order of the NCLT is progressive in one aspect. The CD was defunct. In the absence of any assets, liquidation was the most practical route to be adopted. Contrary to a majority of cases under the IBC where the Resolution Professional attempts a resolution before the liquidation, the RP, in this case, filed directly for liquidation. There was no possibility of resolution. Thus, the RP prevented the forceful conduct of the Corporate Insolvency Resolution Process (CIRP) and also the costs which would incur during the entire process. This is a proposed amendment to the IBC. The NCLT has reflected a sound understanding in terms of maximizing the economic benefit of the Code. However, the order is problematic in several other aspects.
The similarity between section 30(4) and section 33(2) of the IBC
In this order, the NCLAT has considered sections 30(4) and 33(2) “almost identical” on the basis of the NCLAT ruling in Tata Steel. The use of “almost” itself indicated a flaw in the NCLT reasoning. As it has been highlighted in the Insolvency Law Committee Report, 2018, the Adjudicating Authority and the Appellate Authority must be alive to the facts and circumstances of the specific case before it. The author believes that the NCLT has failed on this parameter.
Coming to the circumstantial differences, in Tata Steel, the absenteeism was much lower as compared to in SSB Retail. The impugned Resolution Plan had been approved by 97.12 per cent of the CoC. Thus, the share of the CoC who had approved the Plan was much higher than the 66% threshold. In SSB Retail, the absenteeism is 44.13%. considering the glaring difference, it might be imprudent to draw a parallel between these two cases.
In Tata Steel, the issue was of consideration of the Resolution Plan and value maximization of assets. In SSB Retail, it is about the Liquidation of the CD. The IBC has placed Resolution on a higher pedestal than liquidation. There is a considerably larger time frame for consideration of the Resolution Plan. On the other hand, liquidation is the last resort under the IBC. Section 30(4) of the IBC delves into the voting thresholds for Resolution Plan, while section 33(2) delves into the voting thresholds for the Liquidation of the CD. There is a jurisprudential as well as an implementational difference between these two sections of the IBC. Recognizing these two issues as identical would blur the line of distinction developed by the Bankruptcy Law Reforms Committee and incorporated by the IBC.
Contradicting the scheme of the IBC
The interpretations presented by the NCLT in this order may unsettle the settled issues of the IBC. One of the objectives behind the enactment of the IBC was to secure the creditors’ rights. In order to cure the earlier existing mischief in the insolvency regime, the IBC executed a clear demarcation between the commercial and judicial dimensions of the IBC. The NCLT and NCLAT do not have the authority to decide on the commercial aspects of the CIRP. It is the function of the CoC. The Bankruptcy Law Reforms Committee recommended that once the CD has defaulted, the creditor should get control of the commercial decisions. Even the Apex Court, in K. Sashidhar v Indian Overseas Bank had circumscribed the authority of the NCLT. The NCLT cannot scrutinize the commercial decisions taken by the CoC. Instead, it is the job of the NCLT to ensure that the provisions are abided by the CoC.
In SSB Retail, the NCLT seems to have taken a route which is exactly opposite to this scheme and jurisprudence. It has violated the thresholds under section 33(2) of the IBC. Thus, it has overstepped its authority by adopting a convoluted approach. It has even introduced a new concept- “present and voting” for the calculation of the voting thresholds of the CoC. It has even attempted to concretize this concept by suggesting the IBBI to incorporate the same within the IBC.
The “present and voting” concept can unsettle the supreme position conferred upon the “commercial wisdom of the CoC”. As noted in the Insolvency Law Committee Report, 2018, a pragmatic approach for the IBC would be to have a high voting threshold with the “present and voting” concept or a lower threshold without this concept. The earlier threshold was 75%. This was hindering the swiftness of the Insolvency Resolution Process as it was a disproportionately high requirement. In order to cure this mischief, this threshold was reduced to the current existing 66% threshold.
This amendment has introduced a balance between different stakeholders of the Resolution Process. It has allowed flexibility in the process. In the present case, the NCLT has overstepped its authority and introduced this concept in a lower threshold. The author believes this will threaten the CoC rights provided by the IBC. This further threatens to revert the Indian Insolvency regime to a debtor-in-possession model, which resulted in extremely low recovery rates and high pendency when compared to the IBC.
Recognizing the Urgency of a Code of Conduct
In the present case, the issue arose from a stalemate between the two Financial Creditors. The author believes that the NCLT has failed to perform its role by introducing this new concept and breaching the scheme of the IBC. However, the NCLT faced a challenge due to mischief in the IBC, which needs to be resolved. An effective way to solve such stalemate and regulate the Financial Creditors would be by bringing a Code of Conduct for the CoC.
The need for this Code has been emphasized by the 32nd Report of the Parliamentary Standing Committee on Financeand the recently presented Insolvency Law Committee Report, 2022. Bringing this Code of Conduct would circumscribe the actions of the CoC. In the long run, this scrutiny of the CoC would prevent such stalemate. If the Adjudicating Authority keeps bringing new concepts to resolve such a deadlock, the entire scheme of the IBC could be disrupted.
– Prakriti Singh