SC: NCLT / NCLAT should not sit in a appeal over commercial wisdom of COC

VALLAL RCK V. M/S. SIVA INDUSTRIES AND HOLDINGS LIMITED AND ORS.
CIVIL APPEAL NOS. 1811-1812 OF 2022
03 JUNE 2022

THE SUPREME COURT, HELD THAT

When 90% or more of the creditors decide that it will be in the interest of all the stake­holders to permit Settlement Plan filed by promoter of the Corporate Debtor and withdraw Corporate Insolvency Resolution Process as per Section 12A of the Insolvency and Bankruptcy Code, 2016, the adjudicating authority (NCLT) or the appellate authority (NCLAT) cannot sit in appeal over such commercial wisdom of Committee of Creditors.

BRIEF FACTS

• IDBI Bank Limited had filed an application under Section 7 of the IBC seeking initiation of Corporate Insolvency Resolution Process (CIRP) against M/s Siva Industries and Holdings Limited (Corporate Debtor).
• On 04.07.2019, the application was admitted by the NCLT and CIRP was initiated.
• The Resolution Professional (RP) presented a resolution plan before the CoC which was not approved as it did not receive 66% votes, as per the requirement of the statue.
• The RP filed an application for initiating liquidation.
• Subsequently, Mr. Vallal Rck, the promoter of the Corporate Debtor filed a settlement application under Section 60(5) of IBC to offer a one-time settlement plan.

ADJUDICATING AUTHORITY FOR CORPORATE PERSONS

SECTION 60 (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

• Thereafter, the CoC considered the Settlement plan in its 13^th , 14^th and 15^th meeting held between October and December, 2020.
• The final settlement proposal was submitted by the promoter and was considered by the CoC on 18.01.2021.
• Ultimately, the settlement plan was approved on 01.04.2021.
• Consequently, the RP filed an application seeking withdrawal of CIRP.
• However, the NCLT rejected the said application stating that the Settlement Plan was only a Business Restructuring Plan. Moreover, it initiated the liquidation process.
• The appeal filed before NCLAT was dismissed.
• The learned council for appellant , appearing on behalf of the promoter of the Corporate Debtor argued that neither the adjudicating authority nor appellant authority can sit in an appeal over the commercial wisdom of the CoC, which had accepted the Settlement Plan by 94.32% voting share. He emphasized that the impugned orders are in the teeth of the object of IBC,2016 to permit the Corporate Debtors as going concern, while clearing the dues to the best of its ability.

SECTION 12A OF IBC 2016

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 prescribed.

THE OBSERVATIONS AND DECISION OF SUPREME COURT OF INDIA

• Referring to Section 12A, which deals with withdrawal of applications admitted under Section 7, 9 or 10, the Court noted that the provision was inserted by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 , after much deliberation by the Insolvency Law Committee. The Committee had recommended that an exit should be allowed provided the CoC approves it by 90% voting share. The recommendation reads as under -

"(vii) in order to cater to exceptional circumstances warranting withdrawal of an application for CIRP post­ admission, it has been recommended to all allow such exit provided the CoC approves such action by ninety per cent of voting share."

• The Court observed that the recommendation was made as the Committee reckoned that the intent of the IBC is to discourage individual actions for enforcement and settlement. In the light of the same, it had opined that the settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted. Pursuant to the insertion of Section 12A in the IBC, Regulation 30A was added to the Regulations, 2016 which lays down the detailed procedure for withdrawal of application.
• It was further noted that in Swiss Ribbons Private Limited And Anr. v. Union of India And Ors., validity of Section 12A was upheld. Moreover ,considering that a catena of judgments of the Apex Court had already held that commercial wisdom of CoC is not to be interfered with by NCLT and NCLAT, it opined-

“When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stake­holders to permit to settlement and withdrawal of CIRP, in our view , the adjudicating authority or appellate authority cannot sit in an appeal over the commercial wisdom of Committee of Creditors. The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of CoC to be capricious , arbitrary ,irrational and de hors the provisions of the statute of the Rules.”

CONCLUSION

The Preamble of IBC,2016 says that –

"An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto."

The main purpose of the Code,2016 is to resolve disputes of Corporate Debtors through re-organization and resolution process and keep the corporate debtor as a going concern. The liquidation of a Corporate Debtor is the last stage ,when all resolution process fails and there is not hope of getting better plan than liquidation.

In a case when there is a better plan exist to run business of the Corporate Debtor and same has been approved by the majority of Committee of Creditors ,then it is duty of Adjudicating Authority or the Appellate Authority not to interfere the decision of COC.

DISCLAIMER:  The case law presented is for sharing information and knowledge with the readers. The views expressed here are personal and should not be taken as professional advice. In case of necessity do consult with professionals for more understanding and clarity on subject matter.