21 March 2020

Can Adjudicating Authority Go Into The Merits Of A Resolution Plan

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Insolvency and Bankruptcy Code, 2016 was enacted with the objective of maximization of value of assets, to promote entrepreneurship, availability of credit and balance of interests of all stakeholders.
India Insolvency/Bankruptcy/Re-Structuring
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Insolvency and Bankruptcy Code, 2016 was enacted with the objective of maximization of value of assets, to promote entrepreneurship, availability of credit and balance of interests of all stakeholders. Resolution Plan, as defined under Section 5(26) of the Insolvency and the Bankruptcy Code, 2016 "means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II."

In simple words, it is a plan proposed to resolve the incapacity of a Corporate Debtor to pay off its debts as a going concern.

Section 30 of the Code, provides that a Resolution Plan submitted by the Resolution Applicant to the Resolution Professional must necessarily provide for the following:

  • payment of insolvency resolution process costs,
  • payment of debts of operational creditors,
  • payment of debts of financial creditors who do not vote in favor of the resolution plan,
  • management of the affairs of the corporate debtor,
  • implementation of the resolution plan.

The resolution plan after being approved by the Committee of Creditors by not less than 66% of the votes, is then submitted to the Adjudicating Authority ("AA") under Section 31 of the Code. The AA after being "satisfied" that the plan meets the requirements under Section 30 of the code as enumerated above and has the necessary provisions for its implementation approves the resolution plan which then becomes binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. However, if the AA is not satisfied as above, it may reject the plan.

One important question that has cropped up since the enactment of the Code and which has been addressed in various judgments is, "Whether, the AA has the authority to go into the merits of the resolution plan."

The Code provides for AA's satisfaction of the resolution plan, however, the code is silent as to the extent to which the AA must look into the resolution plan. During the course of time, the judicial authorities have come to lay down the jurisdiction that resides with the AA with respect to the merits of the resolution plan. The Ld' NCLT, Ahmedabad Bench, Ahmedabad, in its order dated 15th January 2018 in the matter of Vivek Vijay Gupta v. Steel Konnect (India) Private Limited, stated, "The Parliament, in its wisdom, thought it fit to give the authority to this Adjudicating Authority to accept the Resolution Plan approved by the COC or to reject the Resolution Plan approved by the COC but not to sit over Judgment on the Resolution of the COC in the rejecting the Resolution Plan. Here itself, it is necessary to refer to Section 33 of the Code.

Section 33 of the Code gives authority to this Adjudicating Authority to consider a Resolution Plan that is given before it before the expiry of Insolvency Resolution Process period or the maximum period permitted for completion of the Corporate Insolvency Resolution Process under Section 12. In case if no Resolution Plan is placed before this Adjudicating Authority before the expiry of the Insolvency Resolution Process period or the extended period, then this Adjudicating Authority has no other option to go except to order for liquidation. Section 33(1)(b) gives authority to this Adjudicating Authority to order liquidation in case it rejects the Resolution Plan under Section 31(2) for non-compliance of the requirements satisfied therein. Therefore, even at the stage of ordering liquidation, this Adjudicating Authority has no authority to consider a Resolution Plan that was rejected by the COC." Ld, NCLT, Ahmedabad also referred the Hon'ble Supreme Court's judgment in the case of Innoventive Industries Limited v. ICICI Bank and Anr, wherein the apex court had referred to the report of Bankruptcy Law reforms Committee 2015 in order to gain an insight into why the Code was enacted and purpose for which it was enacted. The apex court read into the report that stated: "The Committee believes that there is only one correct forum, for evaluating such possibilities, and making a decision: a creditors committee, where all financial creditors have voted in proportion to the magnitude of debt that they hold. In the past, the laws in India have brought arms of the government (legislature, executive or judiciary) into this question. This has been strictly avoided by the Committee. The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it."

Ld' NCLT thus opined, "Therefore, the wisdom of the Parliament is that it is for the COC to take a business decision to reject or accept a Resolution Plan. In case if the COC accepts a Resolution Plan, then it is subject to the authority and jurisdiction of the Adjudicating Authority. As already said, no provision is made in the IB Code or the Rules or in the Regulations that would enable or enjoin upon the Adjudicating Authority to sit over the Resolution of the COC in rejecting a particular Resolution Plan.

Therefore, this Adjudicating Authority is of the considered view that it has no authority or jurisdiction to interfere with the Resolution of the COC in rejecting the Resolution Plan."

In the case of K. Shashidhar v. Indian Overseas Bank & Ors, the Hon'ble Supreme Court in its judgment dated 5th February 2019 stated, "As aforesaid, upon receipt of a "rejected plan" the adjudicating authority (NCLT) is not expected to do anything more, but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyze or evaluate the commercial decision of the COC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors."

The Hon'ble Supreme Court further held that "the legislature, consciously, has not provided any ground to challenge the "commercial wisdom" of the individual financial creditors or their collective decision before the adjudicating authority".

In the most recent judgment dated 15th November 2019 of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors delivered by the Hon'ble Supreme Court, it was strongly opined by the Hon'ble Apex Court that the AA can exercise only a limited judicial review in respect of any COC decision. NCLT/NCLAT does not have jurisdiction under the provisions of the Code to interfere in the merits of a business decision taken by the majority of COC.

The Hon'ble Supreme Court held that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the CoC and that the CoC is the final authority in this regard. The Hon'ble Supreme Court restricted the role of NCLT to only adjudicate whether the CoC has complied with the objects of the Code i.e. the corporate debtor needs to keep going as a going concern during CIRP, it needs to maximize the value of the assets of the corporate debtor, and interests of all stakeholders have to be taken care of.

The Court referred to its judgment in K Shashidhar's matter wherein it was provided that there is no provision under the Code which empowers the Adjudicating Authority to oversee the justness of the reason or the commercial decision taken by the financial creditors in approving or rejecting the proposed resolution plan. The apex court upheld the autonomy of the COC regarding the commercial matters and decisions that cannot be questioned by the AA. Further, any modification to the resolution plan (as seen above) by NCLAT was held to be illegal.

It may be safely concluded based on the various judgments referred above, that AA has no authority to go into the merits of the Resolution Plan, but only adjudicate in respect of compliance with Section 30 of the Code. The courts have time and again clarified that the jurisdiction of AA is restricted only to ensure the compliance of Section 30 of the Code and Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and in supersession of that ensure the satisfaction of the objectives of the Code. The Code has intended to leave the commercial aspects in the hands of the COC consisting of the financial creditors, relying on their commercial and technical wisdom. Unless the resolution plan violates the Code/Regulations/ objectives, the AA shall be exceeding its jurisdiction if it chooses to go into the merits of the plan. With clearly defined roles of the resolution applicant, resolution professional, COC, AA, it will only be wise to conclude that the Adjudicating Authority should restrict its perusal of the matter to adherence of law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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