Operational creditors Pratap Technocrats Pvt Ltd and others (the appellants) recently filed an appeal before the Supreme Court,(1) challenging an order passed by the National Company Law Appellate Tribunal (NCLAT). The NCLAT's order had upheld an order of the National Company Law Tribunal (NCLT) that had approved the resolution plan for Reliance Infratel Ltd (the corporate debtor).
On 2 March 2020, in its 19th meeting, the Committee of Creditors (the Committee) declared Reliance Digital Platform & Project Services Ltd a successful resolution applicant after due verification of its eligibility under section 29A of the Insolvency and Bankruptcy Code 2016 (the Code). The resolution plan was approved with a 100% voting share of the Committee. Subsequently, the NCLT approved the resolution plan in a 3 December 2020 order (the order). During the NCLT's approval process, one of the financial creditors, Doha Bank, filed an application that challenged the resolution professional's decision to recognise the indirect lenders of the corporate debtor as financial creditor. The NCLT noted that the pendency of the applications before it would not stand in the way of the resolution plan being approved, since it was unanimously approved by the Committee. The NCLT clarified that the distribution of payments was subject to the orders passed in the applications pending before it.
The appellants challenged the order on the following grounds:
- The appellants were kept unaware of the corporate insolvency resolution procedure and the resolution professional did not provide them with details of the disposal of funds towards their claims.
- The appellants' claims had not received fair and equitable treatment.
- The fair market value and the liquidation value of the corporate debtor had not been taken into account, and an amount of 8 billion rupees (the value of certain preference shares) did not form a part of the corpus of payments to the appellants.
- There were material irregularities in the accumulation and disbursal of funds that constituted the corpus of the corporate debtor.
- The appellants were made to suffer a reduction of 90% of their total claims.
In reaching its decision, the NCLAT relied upon the decisions of the apex court in Swiss Ribbons Pvt Ltd v Union of India(2) and Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta.(3) The Court rejected the appellants' appeal in a 4 January 2021 order. The appellants challenged this order before the Supreme Court.
The appellants argued that:
- by placing certain assets of the corporate debtor outside the resolution amount, the Committee had failed to safeguard the operational creditor's interests;
- the resolution plan reserved a sum of 8 billion rupees – which were realisable from the preference shares held by a wholly owned subsidiary of the corporate debtor – exclusively for distribution to the financial creditors. This was a violation under section 30(2)(b) of the Code;
- six banks were excluded from the Committee after consideration of Doha Bank's application before the NCLT. If 21 indirect creditors were excluded, it would have major implications on the constitution of the Committee, and the rate of recovery for the financial creditors could increase from 10.32% to 91.28%. On the other hand, the operational creditors would have a recovery of a mere 19.62%;
- the appellants were kept unaware of the corporate insolvency resolution plan; and
- there were material irregularities in the resolution professional's exercise of their powers during the corporate insolvency resolution plan.
The monitoring committee for the corporate debtor submitted the following arguments on their behalf:
- Under section 30(2)(b) of the Code, payments to operational creditors in the resolution plan cannot be less than the amount to be paid in the event of liquidation. The liquidation value, as per the provisions of the Code, would be zero. Despite this, under the appellants' resolution plan, they were due to receive 19.62% of their dues.
- The NCLT's decision to exclude six banks was upheld by the NCLAT. However, the corporate debtor opined that this decision should not impact the resolution plan's approval, as it was unanimously passed by the Committee.
- The decision to exclude 21 indirect creditors (which would lead to the financial creditors receiving 90% of their dues) was an unviable option because there is a fundamental difference between operational creditors and financial creditors, as emphasised in Essar Steel.
- The 8 billion rupees, which were realisable from the preference shares, was part of the liquidation value, and had been duly taken in account in the resolution plan.
- The Committee approved the resolution plan based on its commercial wisdom. The NCLT rightfully declined to scrutinise the plan while approving it.
The Supreme Court analysed the four main issues as follows:
Valuation of preference shares
The Court observed that, as per regulation 27 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations 2016, two registered valuers had been appointed to determine the liquidation value and fair value, in accordance with regulation 35(1) therein. On perusal of the affidavit supported with extracts from the valuation reports, the Court observed that the proceeds realised from the preference shares had been included in the corporate debtor's determination of the liquidation value. Therefore, the Court held that the appellants' contention that the value of preference shares amounting to 8 billion rupees had not been included in valuation was incorrect.
Corporate debtor's liquidation value
The Court observed that the valuation of the operational creditor in case of liquidation would be zero in all scenarios. Further, the Court clarified that even if the proceeds of the preference shares were to be considered in isolation for distribution among all operational creditors, the liquidation valuation due to the appellants would still be zero. Therefore, the appellants' contention that the distribution was not in accordance with section 30(2)(b) of the Code was untenable.
Effect of excluding certain financial creditors
The Court observed that the application filed by Doha Bank had no bearing on the resolution plan's approval as it had received a 100% approval vote by the Committee, and that said application did not provide for any inclusion of new financial creditors. This application affects the distribution among the financial creditors; it has no consequences for the operational creditors.
Adjudicating and appellate authorities' jurisdiction
The Court observed that the adjudicating authority's jurisdiction under section 31(1) of the Code provided for the authority determining whether the resolution plan, as approved by the Committee, complied with the requirements of section 30(2) of the Code. Therefore, the NCLT was within its jurisdiction to approve the resolution plan, which accorded with the Code. The Code's provisions do not provide the NCLT with equity-based jurisdiction.
The Court discussed the process of approving of the resolution plan, wherein, upon the resolution plan's submission, the resolution professional is required to examine and confirm if the plan is in accordance with section 30(2) of the Code, and that the plan abides by the requirements provided for under clauses (a) to (f) thereof. Thereafter, the resolution professional submits the plan to the Committee, which may approve the resolution plan if the voting percentage of the financial creditors' voting shares is at least 66%. Before voting, the Committee will consider:
- the plan's feasibility and viability;
- the manner of proposed distribution, as provided for under section 53(1) of the Code; and
- requirements specified by the Indian Insolvency and Bankruptcy Board.
The Court further observed that the resolution plan's approval is a statutory function entrusted upon the Committee under Section 30(4) of the Code.
While outlining the adjudicating authority's functions, the Court observed that the authority must determine whether the resolution plan approved by the Committee under section 30(4) of the Code meets the requirements of section 30(2) of the Code. Once satisfied, the adjudicating authority will approve the resolution plan. The authority's jurisdiction is statutorily defined, recognised and conferred. Hence, it cannot be equated with a jurisdiction of equity that operates independently of the provisions of the statute. The adjudicating authority must abide by the nature and extent of its jurisdiction as defined in the statute. The appellate authority's jurisdiction is set out under section 61(3) of the Code.
The Court referred to the judgment passed by the two-judge bench in K Sashidhar v India Overseas Bank,(4) wherein the Court set out the jurisdiction exercised by the adjudicating authority while approving a resolution plan under section 31 of the Code. The judgment emphasised that the authority is circumscribed by section 31 of the Code to scrutinise only the resolution plan "as approved" by the Committee under section 30(4) of the Code. However, even within that limited scope of that scrutiny, the adjudicating authority can reject the plan in reference to the matters specified in section 30(2) of the Code. The appellate authority can even entertain an appeal against an approved resolution plan, as defined under section 61(3) of the Code.
The Court also observed that, as regards whether the adjudicating authority or the appellate authority can scrutinise the commercial wisdom underlying the Committee's approval of the resolution plan, the law has been consistently laid down in this context. The commercial wisdom of the Committee derives from its collegial capacity, hence, it is not justiciable. The Court referred to paragraph 62 of K Sasidhar, wherein it was held that "there is a contra indication that the commercial or business decisions of financial creditors are not open to any judicial review by the adjudicating authority or the appellant authority".
The Court referred to the judgment passed by the three-judge bench in Essar Steel, wherein it was clarified that once the adjudicating authority is satisfied that the Committee has applied its mind to the statutory requirements provided for in section 30(2) of the Code, it must pass the resolution plan. The judgment also emphasises that there must be equitable treatment of creditors only within their own class.
Further, the Court considered the term "fair and equitable" as appears in the explanation to section 30(2)(b) of the Code. The Court stated that "fair and equitable treatment" is what is fair and equitable between the class of creditors, not between different classes of creditors. If the resolution plan is fair and equitable among the operational creditors as a class, it satisfies the requirements of section 30(2)(b) of the Code.
While comparing the laws in various countries with the Code, the Court observed that, although foreign jurisdictions allow resolution and reorganisation plans to be challenged on the grounds of fairness and equity, under the Indian insolvency regime the legislature appears to have made a conscious choice not to confer any independent equity based jurisdiction on the adjudicating authority, other than the statutory requirement provided for under section 30(2) of the Code.
Finally, the Court stated that once the Code's requirements have been fulfilled, the adjudicating authority and the appellate authority are duty bound to abide by the discipline of the statutory provision; 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.
After considering the above, the Court held that the resolution plan was approved by the requisite majority members of the Committee, in conformity with provision of the Code; any exclusion of Committee members had no bearing on the plan's approval. As the Code's requirements had been duly fulfilled, the decisions of the NCLT and the NCLAT were in conformity with law. Thus, the appeal was dismissed.
For further information on this topic please contact Aniketh Nair or Dev Motta at Clasis Law by telephone (+91 22 4910 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.