Minimum Judicial Interference by the NCLAT and NCLT in the Framework of IBC: SC
A Bench comprising of Justices B.R. Gavai and Hima Kohli of the Hon’ble Supreme Court of India vide Judgment dated 3rd June, 2022 in the matter of Vallal RCK Vs. M/s Siva Industries and Holdings Limited and Ors. (Civil Appeal Nos. 1811-1812 of 2022) held that National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) should not sit in appeal over the commercial wisdom of the Committee of Creditors (CoC).
Facts:
IDBI Bank Limited had filed a Section 7 application under the IBC for the initiation of the Corporate Insolvency Resolution Process (‘CIRP’) against Siva Industries (Corporate Debtor). The said Application was admitted by NCLT and CIRP in respect of the Corporate Debtor was initiated. Subsequently, the Resolution Professional presented a Resolution Plan before the CoC and the said Plan received only 60.90% votes of the CoC and did not meet the requirement of receiving 66% votes. Hence, the said Plan could not be approved.
Further, Resolution Professional filed an application under Section 33(1)(a) of the IBC seeking initiation of liquidation process of the Corporate Debtor. Subsequently, Vallal RCK (Promoter of the Corporate Debtor), filed a settlement application under Section 60(5) of the IBC before the NCLT, offering onetime settlement plan. Meetings of the CoC were held to consider the Settlement Plan as submitted by the appellant. There were wide deliberations among the members of the CoC with regard to the said Settlement Plan and suitable amendments were carried out and the final Settlement Plan was approved by 94.23% votes.
Accordingly, the Resolution Professional filed an application before the learned NCLT seeking withdrawal of CIRP initiated against the Corporate Debtor. However, NCLT, held that the said Settlement Plan was not a settlement simpliciter under Section 12A of the IBC but a “Business Restructuring Plan” and rejected the application for withdrawal of CIRP and approval of the Settlement Plan. Moreover, the learned NCLT initiated liquidation process of the Corporate Debtor. Aggrieved by this, the appellant preferred two appeals before the learned NCLAT. Vide the common impugned judgment dated 28th January 2022, the same was dismissed against which the appeals were filed before the Hon’ble Supreme Court of India.
Held:
Firstly, the Court while deciding upon the said appeal referred to Section 12-A of the IBC which deals with withdrawal of application admitted under Section 7, 9 or 10 on an application made by the applicant with the approval of ninety percent voting shares of Committee of Creditors. It was further noted that Section 12-A was added to the Code vide Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (Act No. 26 of 2018) which was brought in on the basis of Insolvency Law Committee (“Committee”) Report. Clause (vii) of the Committee 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 allow such exit provided the CoC approves such action by ninety per cent of voting share;"
The Court also referred to Para 29 of the Committee Report which states that the intent of the IBC is to discourage individual actions for enforcement and settlement and the Committee recommended that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety percent.
In light of the above, the Court observed that approval of Resolution Plan requires 66% of CoC approval and withdrawal of CIRP requires 90% of CoC approval which could clearly reflect that more stringent provision was made as withdrawal of CIRP is concerned.
Moreover, the Court also referred to Regulation 30A which was added to the Regulations, 2016 which lays down the detailed procedure for withdrawal of application.
Thereafter, the Court also referred to the judgment of Hon’ble Supreme Court in Swiss Ribbon Private Ltd Vs Union Of India (2019) 4 SCC 17 vide which the validity of section 12A of the Code was upheld. Moreover, many other judgments passed by Supreme Court was considered where it was already held that commercial wisdom of CoC is of paramount status and that the financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan.
Therefore, it was held that
“24. When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stake-holders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC. The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the CoC to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.”
The appeals were allowed and the Application filed by Resolution Professional before the NCLT for withdrawal of CIRP was also allowed.
Case Name: Vallal Rck v. M/s. Siva Industries And Holdings Limited And Ors.
Case No.: Civil Appeal Nos. 1811-1812 of 2022
Judgment Date: 03 June 2022
Bench: Justices B.R. Gavai and Hima Kohli
This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Partner).
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