SCI (10.08.2021) in Pratap Technocrats (P) Ltd. & Ors. vs. Monitoring Committee of Reliance Infratel Limited & Anr.. [Civil Appeal No 676 of 2021] held that;
# 22. . . .The jurisdiction of the Adjudicating Authority under Section 31(1) is to determine whether the resolution plan, as approved by the CoC, complies with the requirements of Section 30(2). The NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC. There is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.
# 29. . . . . Fair and equitable treatment, in other words, is what is fair and equitable between the operational creditors as a class, and not between different classes of creditors. The statute has indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.
# 39. . . . .The jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment.
Excerpts of the order;
# 1 This appeal arises under Section 62 of the Insolvency and Bankruptcy Code, against a judgment the dated 4 January 2021 of the National Company Law Appellate Tribunal. Reliance Infratel Limited is the corporate debtor. The appellants are operational creditors. By its order dated 3 December 2020, the National Company Law Tribunal, Mumbai, approved the resolution plan formulated in the course of the insolvency resolution process of the Corporate Debtor. The NCLAT has upheld the order.
# 7 An application was submitted under Section 30(6) of the IBC by the RP, seeking the approval of the resolution plan by the NCLT. The NCLT discussed the salient aspects of the resolution plan in the course of its order on the approval application.
# 8 In the course of deciding upon the approval plan, the NCLT noted that Doha Bank, which was one of the financial creditors of the Corporate Debtor, had instituted proceedings challenging the admission of the claims of a few other creditors and a proceeding to impugn the decision of the RP to recognize the indirect lenders of the Corporate Debtor as financial creditors. The NCLT noted that the applications were pending, but it came to the view that the pendency of these and other applications would not stand in the way of the approval of the resolution plan, particularly since it had been unanimously approved by the CoC. However, it clarified that the distribution of payments to creditors, financial or operational, shall be subject to the orders which are passed in the interim applications, within the ambit of the IBC. In the above backdrop, the NCLT by its order dated 3 December 2020 approved the resolution plan.
# 9 The appellants challenged the decision of the NCLT approving the resolution plan in appeal before the NCLAT. The grounds of challenge of the appellants were:
(i) The appellants were kept unaware of the CIRP and no details were provided by the RP as regards the disposal of the fund towards their claims;
(ii) The claims of the appellants had not received a fair and equitable treatment;
(iii) The fair market value and the liquidation value of the Corporate Debtor had not been taken into account and an amount of Rs 800 crores, being the value of certain preference shares, did not form a part of the corpus of payments to the operational creditors;
(iv) There were material irregularities in the accumulation and disbursal of funds that constituted the corpus of the corporate debtor; and
(v) The appellants were made to suffer a reduction of 90 per cent of their total claims, while substantial claims of nearly Rs 120 crores have been rejected.
# 10 The NCLAT by its judgment dated 4 January 2021 rejected the appeal. The NCLAT noted that there was no substance in the grievance that the operational creditors had been unfairly or inequitably treated in regard to the distribution of funds. As a matter of fact, operational creditors (other than related parties and statutory creditors) were allocated 19.62 per cent of the up-front payment of Rs 3720 crores, while the financial creditors were paid only an amount of 10.32 per cent of the upfront payment. The approved resolution plan, the NCLAT observed, ensures restructuring and revival of the corporate debtor.
# 11 The appellants were not excluded from the CIRP as they had filed their claims, which had been partly admitted. In dealing with the submission that there was an absence of equitable treatment of the operational creditors, the NCLAT held that equitable treatment can be claimed only by similarly situated creditors. Operational creditors stand on a different footing as compared to financial creditors. They are entitled to receive payment not less than liquidation value, which does not apply to financial creditors. In this backdrop, the NCLAT relied upon the decisions of this Court in Swiss Ribbons (P) Ltd. vs Union of India (“Swiss Ribbons”) and Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta (“Essar Steel India Limited”). Finally, the NCLAT did not find substance in the grievance in regard to the preferential shares. It held that the distribution mechanism conforms to the provisions of Section 53 and was in accordance with the provisions of the IBC. The appeal was accordingly dismissed.
# 12 When the present appeal came up on 10 March 2021, this Court noted the submission of the learned Senior Counsel that as a consequence of the order of the NCLT of 2 March 2021, certain entities which were recognized as financial creditors in the resolution plan have been de-recognized as financial creditors. The issue, then, was whether this decision would have any bearing on the requisite majority required to pass a resolution plan. The Court noted the submission of Senior Counsel for the Monitoring Committee, that the resolution plan has been approved by 100 per cent of the voting shares and the exclusion of some financial creditors from the CoC would be of no consequence. However, since the issue had been raised during the course of the submission, by an order dated 10 March 2021, opportunities were granted to the parties to file affidavits explaining the position. Affidavits have accordingly been exchanged between the parties, to which a reference would be made. It is in this backdrop that the appeal has been heard finally at this stage.
# 22 The resolution plan was approved by the CoC, in compliance with the provisions of the IBC. The jurisdiction of the Adjudicating Authority under Section 31(1) is to determine whether the resolution plan, as approved by the CoC, complies with the requirements of Section 30(2). The NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC. There is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.
# 26 The jurisdiction which has been conferred upon the Adjudicating Authority in regard to the approval of a resolution plan is statutorily structured by sub-Section (1) of Section 31. The jurisdiction is limited to determining whether the requirements which are specified in sub-Section (2) of Section 30 have been fulfilled. This is a jurisdiction which is statutorily-defined, recognised and conferred, and hence cannot be equated with a jurisdiction in equity, that operates independently of the provisions of the statute. The Adjudicating Authority as a body owing its existence to the statute, must abide by the nature and extent of its jurisdiction as defined in the statute itself.
# 27 The jurisdiction of the Appellate Authority under Section 61(3), while considering an appeal against an order approving a resolution plan under Section 31, is similarly structured on specified grounds.
# 29. These provisions indicate that the ambit of the Adjudicating Authority is to determine whether the amount that is payable to the operational creditors under the resolution plan is consistent with the above norms which have been stipulated in clause (b) of sub-clause (2) of Section 30. Significantly, Explanation-1 to clause (b), which is clarificatory in nature, provides that a distribution which is in accordance with the provisions of the clause ―shall be fair and equitable to such creditors. Fair and equitable treatment, in other words, is what is fair and equitable between the operational creditors as a class, and not between different classes of creditors. The statute has indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.
# 30 The appellants are challenging the treatment of operational creditors on the ground that it has not been fair and equitable. The entitlement of the operational creditors being defined by sub-clause (b) of sub-section (2) of Section 30, the clarification contained in Explanation-1 must apply. As such, as long as the payment under the resolution plan is fair and equitable amongst the operational creditors as a class, it satisfies the requirements of Section 30(2)(b).
# 31 The nature of the jurisdiction which is exercised by the Adjudicating Authority, while approving a resolution plan under Section 31, has been interpreted in the judgment of a two-Judge Bench in K Sashidhar vs India Overseas Bank (“K Sashidhar”). The decision emphasizes that the Adjudicating Authority is circumscribed by Section 31 to scrutinizing the resolution plan - as approved‖ by the CoC under Section 30(4). Moreover, even within the scope of that enquiry, the grounds on which the Adjudicating Authority can reject the plan is with reference to the matters specified in sub-Section (2) of Section 30. Similarly, the Court notes that the jurisdiction of the Appellate Authority to entertain an appeal against an approved resolution plan is defined by sub-Section (3) of Section 61. Now, it is in this context, that the consistent principle of law which has been laid down is that neither the Adjudicating Authority nor the Appellate Authority can enter into the commercial wisdom underlying the approval granted by the CoC to the resolution plan. The commercial wisdom of the CoC in its collegial capacity is, hence, not justiciable.
# 33 The above principles have been re-emphasised and taken further by a three-Judge Bench in Essar Steel India Limited (supra). The Court, speaking through Justice R F Narminan, held:
“73. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or sub-class of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximize the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.”
# 34 The precedents laid down by this Court are in tandem with recommendations made in the UNCITRAL‘s Legislative Guide on Insolvency Law, which states that it is desirable that a court does not interfere with the commercial wisdom of the decisions taken by the creditors. The relevant extract is reproduced below:
“63. The more complex the decisions the court is asked to make in terms of approval or confirmation, the more relevant knowledge and expertise is required of the judges and the greater the potential for judges to interfere in what are essentially commercial decisions of creditors to approve or reject a plan. In particular, it is highly desirable that the law not require or permit the court to review the economic and commercial basis of the decision of creditors (including issues of fairness that do not relate to the approval procedure, but rather to the substance of what has been agreed) nor that it be asked to review particular aspects of the plan in terms of their economic feasibility, unless the circumstances in which this power can be exercised are narrowly defined or the court has the competence and experience to exercise the necessary level of commercial and economic judgement.”
# 39. These decisions have laid down that the jurisdiction of the adjudicating authority and the appellate authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity based jurisdiction in the adjudicating authority or the appellate authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of IBC and the Regulations under the enactment.
# 40. Certain foreign jurisdictions allow resolution/reorganisation plans to be challenged on grounds of fairness and equity. One of the grounds under which a company voluntary arrangement can be challenged under the United Kingdom’s Insolvency Act, 1986 is that it unfairly prejudices the interests of a creditor of the company12. The United States’ Bankruptcy Code provides that if a restructuring plan has to clamp down on a dissenting class of creditors, one of the conditions that it should satisfy is that it does not unfairly discriminate, and is fair and equitable13. However, under the Indian insolvency regime, it appears that a conscious choice has been made by the legislature to not confer any independent equity based jurisdiction on the adjudicating authority other than the statutory requirements laid down under sub-section (2) of Section 30 IBC.
# 41. An effort was made by Mr Dushyant Dave, learned Senior Counsel, to persuade this Court to read the guarantees of fair procedure and non-arbitrariness as emanating from the decision of this Court in Maneka Gandhi v. Union of India [Maneka Gandhi v. Union of India, (1978) 1 SCC 248] into the provisions of IBC. IBC, in our view, is a complete code in itself. It defines what is fair and equitable treatment by constituting a comprehensive framework within which the actors partake in the insolvency process. The process envisaged by IBC is a direct representation of certain economic goals of the Indian economy. It is enacted after due deliberation in Parliament and accords rights and obligations that are strictly regulated and coordinated by the statute and its regulations. To argue that a residuary jurisdiction must be exercised to alter the delicate economic coordination that is envisaged by the statute would do violence on its purpose and would be an impermissible exercise of the adjudicating authority’s power of judicial review. The UNCITRAL, in its Legislative Guide on Insolvency Law, has succinctly prefaced its recommendations in the following terms [pp. 14-15.] :
“C. Balancing the goals and key objectives of an insolvency law
15. Since an insolvency regime cannot fully protect the interests of all parties, some of the key policy choices to be made when designing an insolvency law relate to defining the broad goals of the law (rescuing businesses in financial difficulty, protecting employment, protecting the interests of creditors, encouraging the development of an entrepreneurial class) and achieving the desired balance between the specific objectives identified above. Insolvency laws achieve that balance by reapportioning the risks of insolvency in a way that suits a State’s economic, social and political goals. As such, an insolvency law can have widespread effects in the broader economy.”
Hence, once the requirements of IBC have been fulfilled, the adjudicating authority and the appellate authority are duty-bound to abide by the discipline of the statutory provisions. It needs no emphasis that neither the adjudicating authority nor the appellate authority have an unchartered jurisdiction in equity. The jurisdiction arises within and as a product of a statutory framework.’
# 42 In the present case, the resolution plan has been duly approved by a requisite majority of the CoC in conformity with Section 30(4). Whether or not some of the financial creditors were required to be excluded from the CoC is of no consequence, once the plan is approved by a 100 per cent voting share of the CoC. The jurisdiction of the Adjudicating Authority was confined by the provisions of Section 31(1) to determining whether the requirements of Section 30(2) have been fulfilled in the plan as approved by the CoC. As such, once the requirements of the statute have been duly fulfilled, the decisions of the Adjudicating Authority and the Appellate Authority are in conformity with law.
# 43 For the above reasons, we find no merit in the appeal. The appeal shall accordingly stand dismissed.
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