The resolution plan is created for the firm based on the advice and recommendations of the committee of creditors members to maximize the effectiveness of the corporate insolvency resolution process. According to this Code, any financial or operational creditor may initiate the corporate insolvency process against the corporate debtor on behalf of a company registered under the Companies Act of 1956, such as Limited Liability Partnerships, Partnership firms, and Individuals, or under the Insolvency and Bankruptcy Code. This may only be started if the corporate debtor has fallen behind on debt repayment.
The committee of creditors plays a vital role in the insolvency process. This committee of creditors is regarded as a higher-level decision-making body and oversees the Corporate Insolvency Resolution Process. A committee of creditors is established under regulation 21 of the Code to carry out the duties of the interim resolution professional and solicit claims from all creditors. The committee of creditors should be created no later than 14 days after the public notification and after the claim has been confirmed.
ROLE OF COC
- The committee of creditors must include every financial creditor as a code requirement. It also lists the financial and operational creditors separately per the Code’s rules.
- The committee of creditors has several obligations and duties to fulfill by the Corporate Insolvency Resolution Process outlined in the law. The following are some critical duties:
- All significant decisions are made after approval from the committee of creditors’ creditors.
- The decision to adopt the resolution plan and restore the corporate debtor is up to the creditors’ committee.
- They can elect to replace the insolvency professional with the interim resolution professional or even decide to use the latter as the resolution professional.
- They have frequent meetings where the procedures for the specialists involved in the interim resolution, who finally decide the destiny of the corporate debtor, are addressed.
- The respected committee of creditors operates by the administrative choices made by the resolution specialist.
POWERS OF THE CREDITORS’ COMMITTEE
A committee of creditors serves as an authoritative body and is heavily involved in decision-making. It also controls the processes, activities, and roles of the creditors. According to the rules of the Code, they are granted the following authority:
- The committee of creditors has the authority to decide whether the corporate debtor will operate normally and can make crucial decisions in the company’s favor.
- When there is a suspicion of wrongdoing, they can go to the adjudicating body, the national business law tribunal.
- They can apply to the adjudicating body to switch the interim resolution professional if necessary.
- They may decide to move forward with liquidating the corporate debtor even without any approval on any resolution plan.
NCLT AND ITS JURISDICTION
The National Company Law Tribunal (NCLT) was established as a quasi-judicial body to settle conflicts in Indian corporations. It is the Company Law Board’s replacement. It is controlled by the laws that the central government has established. Cases about civil court have been transferred to the NCLT, a special court.
The Board for Industrial and Financial Reconstruction (BIFR), The Appellate Authority for Industrial and Financial Reconstruction (AAIFR), and the powers relating to winding up or restructuring and other provisions vested in High Courts are consolidated under the National Company Law Tribunal (NCLT). As a result, all governing authority over Indian-registered corporations would be consolidated under the National Company Law Tribunal. The Company Law Board established by the Companies Act of 1956 has since been abolished with the creation of the NCLT and NCLAT.
The main issue that emerges from all of this confusion is whether Tribunals are permitted to interfere with the CoC’s operations and reverse its judgments about resolution plans. If the voluntary arrangement unduly prejudices the interests of creditors or there has been a severe irregularity in connection with the applicable qualifying decision procedure, remedies are provided by the UK Insolvency Act, 1986. The Adjudicating Authority has, in several instances, expanded the scope of its power under Section 31 in examining resolution plans and, in a sense, provided remedies for creditors whose interests have been harmed, despite the Insolvency and Bankruptcy Code, 2016, lacking any specific provisions, where this issue can be dealt with, the case laws, the cases.
Shrawan Kumar Agrawal Consortium Vs. Rituraj Steel Private Limited in Company Appeal
- Facts and issues:
The CoC approved the resolution applicant in Company Appeal (AT) (Ins.) No. 1490 of 2019 is the AppAppellantnd the Committee of Creditors has adopted the Resolution Plan with 84.70% of the voting shares. The AppAppellantaims that following the CoC’s acceptance of the resolution plan, the RP submitted the plan to the Adjudicating Authority for approval by Section 31 of the Code. The other two bids (the failed bidders) contested said application before the adjudicating authority. The Resolution Plan is challenged before the NCLT.
- Judgment:
It is held that the Adjudicating Authority cannot interfere with the commercial judgment of CoC in light of the facts mentioned above. The instruction to rebid to maximize the corporate debtor’s value also amounts to legal interference with the CoC’s business choice. The NCLAT further ruled that the prospective resolution applicant has a right to full disclosure of the corporate debtor but that the Appellants were not given this opportunity. As a result, the entire process was biased in favor of the bidder, which is also not a basis for the adjudicating authority to conduct a judicial review on this basis.
Additionally, the NCLAT ruled that the judicial review of the Resolution Plan is based on an equitable perception and that the AA is not permitted to contest the CoC’s commercial judgment or engage in quantitative analysis. Additionally, the NCLAT ruled that the Resolution Plan’s Evaluation Matrix also fits under the CoC’s definition of commercial wisdom, which is non-justiciable.
In the case of Maharashtra Seamless Limited (Supra), the Honorable Supreme Court restricted the NCLTs and NCLAT’s ability to intervene. While Section 31 of the Code, when read with Section 30(2), limits the NCLT’s latitude. Similarly, Section 61(3) of the Code limits NCLAT discretion. Notably, the issues or grounds—whether under Section 30(2) or Section 61(3) of the I&B Code—are about determining whether the CoC’s “approved” resolution plan is still valid, not about accepting the resolution plan that the CoC has disapproved or determined to have rejected. It follows that the limited judicial review that is permitted must fall within the parameters of Sections 30(2) and 61(3) of the Code, respectively, and cannot under any circumstances infringe upon a business decision made by the majority of the Committee of Creditors.
In other words, when the approved resolution plan passes muster under Section 31 read with Section 30(2) of the Code, and there is no violation of any provision of law currently in effect, the court would rely on the collective wisdom of the CoC to determine whether or not the plan makes economic sense. If the NCLT substituted its opinion about the resolution plan’s economic soundness, that would not be correct. Therefore, it would not be appropriate for NCLT and NCLAT to influence CoC’s business judgment. Additionally, the NCLT and NCLAT’s investigation of the authorized resolution plan must stay within Sections 31 and 61 and if it is not in its preview then the NCLT can take decisions regarding the issue. Where if the Resolution plan has not stayed within the section, then the NCLT has the authority to look into the problem within its jurisdiction.
K Sashidhar v. Indian Overseas Bank and others
The Hon’ble Supreme Court ruled that the National Company Law Tribunal lacks the authority and jurisdiction to assess the Committee of Creditors (CoC) decision regarding the legitimacy of the dissenting financial creditors’ rejection of the resolution plan. The Adjudicating Authority applies a judicial mind at this point to the resolution plan that has been provided, and after being satisfied that it satisfies (or does not satisfy) the standards outlined in Section 30, it has the option of either approving or rejecting the plan. An appeal from a decision approving such a plan may only be made on the few grounds specified in Section 61 (3). The Adjudicating Authority is required by Section 33(1) of the I&B Code to begin the liquidation procedure after receiving a settlement plan that has been “rejected.” The legislature has not granted the Adjudicating Ability the “ authority or jurisdiction to review or assess” the CoC’s commercial decision, much less to consider whether the dissenting financial creditors’ rejection of the resolution plan was justified.
Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd.
The Tribunal observed that Rajputana Properties Private Limited had not balanced the interests of stakeholders, such as operational creditors, and had made distinctions between certain financial creditors who are in an equal position. Clearly, the CoC did not use its best judgment in approving the proposal and acted in a discriminatory manner. The NCLAT ruled that Rajputana Properties Private Limited’s proposal was discriminatory and violated the Code’s design. It also ruled that the resolution plan might violate the Code’s requirements if it is proven biased against any financial or operational creditors.
The Adjudicating Authority ruled that just because a discriminatory plan was presented to the CoC and received their approval, it does not automatically follow that the Adjudicating Authority should also approve it because doing so would go against the fundamental goals of maximizing the corporate debtor’s assets on the one hand and balancing the interests of all stakeholders on the other.
The Tribunal’s two main concerns were:
- Did CoC treat qualified resolution applicants differently while evaluating Rajputana Properties Private Limited’s resolution plan?
- Is Rajputana Properties Private Limited’s proposed resolution plan discriminatory?
The Tribunal looked at the financial details of the plans to prove that the CoC had unfairly treated the resolution applicants. This was proven by the fact that the improved proposal made by Ultratech Cement Limited and its request for negotiation were not even remotely taken into account and the Resolution plan has been sent for review. The Tribunal also emphasized that both the RP and the CoC have a responsibility to maximize value within the time frame required by the Code and noted that the CoC’s goal in identify a resolution applicant who can offer the highest amount in order to protect the interests of all parties involved with the corporate debtor is lacking.
Scope and Extent of Power Vested on the Adjudicating Authority
In Bhaskara Agro Agencies v. Super Agri Seeds, the NCLAT held that the Adjudicating Authority could not revisit the decision of the CoC to determine the viability and feasibility of a resolution plan because the Adjudicating Authority cannot approve a plan unless approved by the necessary majority of the CoC. Likewise, in Darshak Enterprise Pvt. Ltd. v. Chhaparia Industries Pvt. Ltd., the NCLAT held that in the absence of any It neglected to mention, however, that “satisfaction” is one of the prerequisites for the Adjudicating Authority’s acceptance of a plan. This suggests that for the Adjudicating Authority to accept a resolution plan, it must be “satisfied” that the CoC’s authorized resolution plan complies with Section 30. (2).
In Arcelor Mittal India Private Limited v. Satish Kumar Gupta, the Hon. Supreme Court utilized this concept by examining specific passages from the resolution plan to determine the applicant’s eligibility. Following its deliberations on the scope of the Adjudicating Authority’s jurisdiction under Section 31’s provisions, the Apex Court issued the following observations:
After the CoC has approved a plan, it must be submitted to the Adjudicating Authority, which applies a judicial mind after determining whether the plan complies with (or does not comply with) the requirements listed in Section 30. At that point, the Adjudicating Authority may either approve or reject the plan.
After hearing arguments from both the resolution applicant and the CoC, the adjudicating authority, acting quasi-judicially, might decide if the resolution plan breaches any legal restrictions, including Section 29A of the Code.
The NCLT, Mumbai Bench interpreted the phrase “if the adjudicating authority is satisfied….” under Section 31 in Pratik Ramesh Chirana v. Trinity Auto Components Ltd., noting that “satisfaction” must be objective, subjective, or both and that in order to form an opinion, careful examination of a resolution plan is necessary. Objective Satisfaction: The Preamble’s declaration of the Code’s purpose for being enacted serves as the focal point of objective satisfaction. Subjective satisfaction is based on a logical analysis of the provided financial facts, and a systematic examination of the financial statement is anticipated before agreeing to the CoC’s approval.
Again, it was noted in the case of J.R. Agro Industries P Limited v. Swadisht Oils Pvt Ltd. that the resolution plan’s benefits and drawbacks should be considered, and if the Tribunal approves the plan, it should express its pleasure in writing in the judgment.
Citations:
- Company Appeal (AT) (Insolvency) No. 1490 of 2019
- Civil Appeal no. 4242 of 2019
- Civil Appeal No. 10971 of 2018
- (2018) ibclaw.in 100 SC
- 2018 SCC OnLine NCLAT 340
- Company Appeal (AT) (Insolvency.) No. 327 of 2017
- Civil Appeal Nos. 9402 – 9405 /2018
- CP No. 1032, MB, NCLT
- (2018) ibclaw.in 142 NCLAT
This article is written by Inian R, a 4th Year BA LLB (Hons.) student, School of Law, Christ (Deemed to be) University, Bangalore.