National Company Law Appellate Tribunal (NCLAT) recently decided an interesting question that whether the Adjudicating Authority (NCLT) has exceeded its jurisdiction in passing order for re-bidding, despite the approval of the Resolution Plan by Committee of Creditors (CoC), with a vote share of 84.70% of votes? in bunch of appeals in the matter of Shrawan Kumar Agrawal Consortium Vs. Rituraj Steel Private Limited in Company Appeal (AT) (INS) No. 1490 of 2019, 78 of 2020, and 184 of 2020 disposed by common order dated 05.03.2020.
In this article we will be discussing the aforesaid Question, as well as whether NCLT can intervene the commercial wisdom and decision of CoC. We will be discussing various judgments of NCLAT and Supreme Court of India which would be relevant for shedding some light on the aforesaid questions.
FACTS OF THE CASE :
That the Appellant in Company Appeal (AT) (Ins.) No. 1490 of 2019 is the successful resolution applicant, whose Resolution Plan has been approved by the Committee of Creditors with 84.70% of voting share. The Appellant contends that after the approval of the resolution plan by the CoC, the RP filed the same before the Adjudicating Authority for its approval under Section 31 of the Code. Thus, said application was challenged by the other two bidders (unsuccessful bidders) before Adjudicating Authority.
The final figures of the bid amount offered by the bidders during CIRP are as under:
(i) H1 (Appellant in Appeal No.1490/2019) bidder (total bid amount) is Rs.89.86 crores (“First Appellant)”.
(ii) H2 (Appellant in Appeal No.184/2020) bidder offered Rs. 85.66 crores (“Second Appellant”). and
(iii) Rituraj Steels Private Limited (Appellant in Appeal No.78/2020) offered Rs. 57 crores (“Third Appellant”).
SUBMISSIONS OF THE PARTIES :
The Appellant in Company Appeal (AT) (Ins.) No. 1490/2019 contends that as per the law laid down by the Hon’ble Supreme Court, the Adjudicating Authority, under Section 31, is having limited power of judicial review which has to be within the four corners of Section 30(2) of the Code and the same cannot, in any circumstance, trespass upon the commercial wisdom of the CoC. The approach of the Adjudicating Authority while directing the re-bidding to take place after the approval of Resolution Plan by the requisite majority is erroneous, as a Resolution Plan is neither a sale nor an auction, and not a recovery proceeding or liquidation proceeding.
The Appellant in Company Appeal (AT) (Ins.) No.1490/2019 placed reliance on the judgment of the Hon’ble Supreme Court passed in case of:
> Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150; and
> Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta and Others (2019) SCC OnLine SC 1478.
Appellant in Company Appeal (AT) (Ins.) No. 184 of 2020, alleged that the Resolution Professional (“RP”) has conducted the proceeding in a non-transparent manner without affording an opportunity of hearing to the applicant; that the H1 bidder was declared on NPV basis and Evaluation Matrix was not followed; the approval of CoC is forged as the conditions required for the Resolution Plan was not followed; the RP manipulatively conducted the bidding process and vitiated the whole process of approval of the Resolution Plan.
Appellant (another prospective applicant) in Company Appeal (AT) (Ins.) No.78 of 2020 contended that he has not received complete information i.r.t debts owed and activities of the Corporate Debtor. The Appellant also contended that there is a complete bypass of the provisions of Regulation 36B (5) and Regulation 39(2) of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process) for Corporate Persons Regulation, 2016 (“Regulations”), and Section 30(2), Section 30(4) of the Code. Since the CoC in the instant case has overlooked the maximization of assets and as such, the Adjudicating Authority has all the right to interfere under Section 31 of the Code. While saying so Appellant relied on fact that he had placed a bid of Rs. 57 crores, later on increased to Rs.92 crores which was again revised to Rs.102 crores. He also pressed on the fact that the figure of Rs.92 crores is higher than the bid approved for H1, i.e. Rs.89.86 crores. Thus, the figure of the Appellant in Company Appeal No. 78 of 2020 was the highest, but the same had not been considered. The appellant has placed reliance on the judgment of the Hon’ble Supreme Court in Essar Steel India Limited through Authorized Signatory Vs. Satish Kumar Gupta and Others (2019) SCC OnLine SC 1478, Swiss Ribbons Pvt. Ltd. Vs. Union of India and Maharashtra Seamless Limited Vs. Padmanabhan Venktesh & Others.
NCLAT before adverting to its findings and ratio relied upon the dictum passed by the Hon’ble Supreme Court in the matter of K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150: (2019) 4 SCC (Civ) 222: 2019 SCC OnLine SC 257 wherein it was held that,
a. Adjudicating Authority (AA) is bestowed with no jurisdiction to do anything more on receiving of ‘rejected’ resolution plan, other than to initiate liquidation process;
b. Further AA has no jurisdiction under Code to analyse or evaluate the commercial decision of CoC;
c. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan;
d. 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. That is made non-justiciable;
e. Power of the AA is circumscribed under Section 31 of the Code i.e. limited to scrutiny and enquiry of plan in terms of Section 31 read with 30 (2) of the Code;
f. AA cannot make any other inquiry nor is competent to issue any direction in relation to the exercise of commercial wisdom of the financial creditors — be it for approving, rejecting or abstaining, as the case may be; and
g. That the adjudicating authority (NCLT) has not been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors.
Thus, said dictum was reiterated by the Hon’ble Supreme Court in the matter of Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta and Others (2019) SCC OnLine SC 1478 and in Maharashtra Seamless Limited Vs. Padmanabhan Venkatesh & Others Civil Appeal No.4242 of 2019 judgment dated 22nd January 2020.
Thus, it is clear that the Adjudicating Authority is having limited power of judicial scrutiny under Section 31, which has to remain within the four corners of Section 30(2) of the Code and the same cannot, in any circumstance, trespass upon the commercial wisdom of the CoC.
The statutory provision does not permit the Adjudicating Authority to interfere with the commercial wisdom of the CoC. Even for maximisation of value of the assets of the Corporate Debtor, the Adjudicating Authority cannot overturn the business decisions of the Corporate Debtor.
The ground that the bid amount is below the fair market value of the corporate debtor also fails in the light of the decision of the Hon’ble Supreme Court in case of Maharashtra Seamless Limited (Supra) wherein Hon’ble Supreme Court has noted that, “..the Appellate Authority has, in our opinion, proceeded on equitable perception rather than commercial wisdom. On the face of it, release of assets at a value 20% below its liquidation value arrived at by the valuers seems inequitable. Here, we feel the Court ought to cede. The ground that the bid amount is below the fair market value of the corporate debtor also fails in the light of the decision of the Hon’ble Supreme Court in case of Maharashtra Seamless (supra) wherein the Hon’ble Supreme Court has noted that „the Appellate Authority has, in our opinion, proceeded on equitable perception rather than commercial wisdom. On the face of it, release of assets at a value 20% below its liquidation value arrived at by the valuers seems inequitable.”
In the circumstances as stated above, it is clear that the Adjudicating Authority cannot interfere with the commercial wisdom of CoC. The direction for rebidding for maximisation of the value of the corporate debtor also amounts to interference in the business decision of the CoC, which is not permitted in law. Thus, the Appeal No 1490/2019 was allowed.
NCLAT also held that the prospective resolution applicant has a right to receive complete information as to the Corporate Debtor but the Appellant was not given an opportunity and hence the whole process is biased towards H1 bidder is also not a ground which can justify the judicial scrutiny by the Adjudicating Authority on this ground.
NCLAT also held that judicial scrutiny of the Resolution Plan is based on the equitable perception and the AA cannot question the Commercial wisdom of CoC and indulge in quantitative analysis. Thus, appeal No 78 of 2020 fails and is therefore dismissed.
NCLAT also held that Evaluation matrix of the Resolution Plan also falls within the parameters of commercial wisdom of the CoC, which is non-justiciable. Thus appeal No 184 of 2020 also fails and is therefore dismissed.
That the Hon’ble Supreme Court in the matter Maharashtra Seamles Limited (Supra) not only limited the intervention of the NCLT but also of the NCLAT. Whereas, the discretion of the NCLT is circumscribed by Section 31 read with Section 30(2) of the Code. Similarly, NCLAT discretion is circumscribed under Section 61(3) of the Code. Significantly, the matters or grounds – be it under Section 30(2) or under Section 61(3) of the I&B Code – are regarding testing the validity of the “approved” resolution plan by the CoC; and not for approving the resolution plan which has been disapproved or deemed to have been rejected by the CoC in exercise of its business decision. Thus, it is clear that the limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code and Section 61(3) of the Code respectively.
In other words, when the approved resolution plan pass the muster under Section 31 read with Section 30(2) of the Code and there is no infringement of any provision of law time being in force, whether it make economic sound sense or not, is a question where the court would rely on the collective wisdom of the CoC. It would not be correct if the NCLT to substitute its own view with regard to economic soundness of the resolution plan.
Thus, it will not be correct if NCLT as well as NCLAT interfere with the commercial wisdom of CoC. Further, while scrutinizing approved resolution plan enquiry of the NCLT as well as NCLAT has to confine itself within the ambit of Section 31 and 61(2) of the Code respectively.
Authors are advocates at New Delhi being Managing Partner and Partner respectively at Indo Legal Services a boutique law firm in New Delhi.
Disclaimer: This article is for information purposes only. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Although we have endeavored to accurately reflect the subject matter of this article, we make no representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this article.
No recipient or reader of this article should construe it as an attempt to solicit business in any manner whatsoever.