Supreme Court Clarifies Powers of Adjudicating Authority in Jaypee Infratech Resolution Plan (24 March 2021)

Introduction

Date of the Judgment: 24 March 2021
Citation: (2021) ibclaw.in 15 SC
Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J., Sanjiv Khanna, J.

Can an Adjudicating Authority modify a resolution plan approved by the Committee of Creditors? The Supreme Court of India recently addressed this critical question in a complex case involving Jaypee Infratech Limited (JIL). This judgment clarifies the extent and limitations of the Adjudicating Authority’s powers in corporate insolvency resolution processes.

The core issue revolved around the approval of a resolution plan for JIL, a company entangled in disputes affecting numerous homebuyers. The Supreme Court examined objections raised by various stakeholders, including dissenting financial creditors, dissatisfied homebuyers, and the land providing agency. The judgment clarifies the powers of the Adjudicating Authority in dealing with a resolution plan approved by the Committee of Creditors.

The bench comprised Justices A.M. Khanwilkar, Dinesh Maheshwari, and Sanjiv Khanna. The judgment was authored by Justice Dinesh Maheshwari.

Case Background

The case involves the corporate insolvency resolution process (CIRP) of Jaypee Infratech Limited (JIL), a company whose real estate projects impacted a large number of homebuyers. The CIRP was initiated on 09.08.2017 after JIL defaulted on its dues. The homebuyers were initially treated as ‘other creditors’ and not at par with financial and operational creditors. This led to multiple proceedings in the Supreme Court, including directions to Jaiprakash Associates Limited (JAL), the holding company of JIL, to make deposits in the court.

The Supreme Court, exercising its powers under Article 142 of the Constitution, extended the CIRP period and allowed for the constitution of a new Committee of Creditors (CoC). The court also directed that the amount of INR 750 crores deposited by JAL be transferred to the National Company Law Tribunal (NCLT). Further disputes arose regarding the voting percentage of homebuyers in the CoC, leading to additional appeals. The resolution plan submitted by NBCC (India) Limited was approved by the CoC on 17.12.2019 with a vast majority of over 97%. However, the NCLT approved the plan with some modifications which led to further appeals in the Supreme Court.

Timeline

Legal Framework

The judgment primarily interprets and applies the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). Key sections and regulations include:

• ✓ Section 7 of the IBC: Initiation of CIRP by a financial creditor.
• ✓ Section 18 of the IBC: Duties of the interim resolution professional.
• ✓ Section 21 of the IBC: Composition of the Committee of Creditors (CoC).
• ✓ Section 25A of the IBC: Rights and duties of authorized representative of financial creditors.
• ✓ Section 30 of the IBC: Submission of resolution plan.
• ✓ Section 31 of the IBC: Approval of resolution plan by the Adjudicating Authority.
• ✓ Section 32 of the IBC: Appeal against an order approving the resolution plan.
• ✓ Section 43 of the IBC: Preferential transactions.
• ✓ Section 53 of the IBC: Distribution of assets in case of liquidation.
• ✓ Section 61 of the IBC: Appeals and Appellate Authority.
• ✓ Section 238 of the IBC: Overriding effect of the Code.
• ✓ Regulation 37 of the CIRP Regulations: Contents of the resolution plan.
• ✓ Regulation 38 of the CIRP Regulations: Mandatory contents of the resolution plan.
• ✓ Regulation 39 of the CIRP Regulations: Approval of resolution plan.

The Supreme Court also considered the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Uttar Pradesh Industrial Area Development Act, 1976.

Arguments

The arguments presented before the Supreme Court were diverse, reflecting the complex nature of the case. Here’s a breakdown:

Arguments for the Resolution Plan (NBCC)

• ✓ The resolution plan was approved by a vast majority of the CoC (97.36%).
• ✓ The Adjudicating Authority exceeded its jurisdiction by modifying the resolution plan.
• ✓ The plan adequately addresses the interests of all stakeholders, including homebuyers.
• ✓ The plan is compliant with the requirements of the IBC and CIRP Regulations.
• ✓ The dissenting financial creditors were not entitled to payment in cash and could be provided with equity or land.

Arguments Against the Resolution Plan

• ✓ Dissenting Financial Creditors (ICICI Bank): Entitled to payment in cash as per liquidation value; the resolution plan does not comply with Section 30(2)(b) of the IBC.
• ✓ Homebuyers’ Associations: The plan does not adequately protect homebuyers’ interests, particularly regarding compensation for delays and refund options; the plan violates RERA.
• ✓ JAL (Holding Company): The deposited amount of INR 750 crores belongs to JAL and should be refunded; the resolution plan is a device to enrich NBCC.
• ✓ YEIDA (Land Providing Agency): The resolution plan does not adequately address the contingent liability of additional land acquisition compensation; the plan unilaterally alters the Concession Agreement.
• ✓ Minority Shareholders: The resolution plan does not provide fair treatment to minority shareholders.
• ✓ YES Bank Limited: The resolution plan unauthorisedly deals with the assets of Jaypee Healthcare Limited.

The various parties relied on a plethora of authorities and legal provisions to make their points.

The innovativeness of the arguments was particularly seen in the interpretation of the term ‘payment’ by NBCC and in the interpretation of the term ‘financial debt’ by ICICI Bank.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for determination:

1. What is the extent of, and limitations over, the powers and jurisdiction of the Adjudicating Authority while dealing with the resolution plan approved by the Committee of Creditors?
2. As to whether approval of the resolution plan of NBCC is vitiated because of simultaneous voting over two resolution plans in the Committee of Creditors?
3. (i) As to whether the Adjudicating Authority has erred in not approving the stipulations in the resolution plan for meeting with the contingent liability of additional amount of land acquisition compensation; and has also erred in modifying these stipulations? (ii) As to whether the Adjudicating Authority has erred in not approving the mechanism provided in the resolution plan for transfer, of the concessionaire’s rights and obligations under the Concession Agreement with YEIDA, to the SPVs proposed to be incorporated; and has also erred in modifying the relevant stipulations? (iii) As to whether the Adjudicating Authority has erred in not approving the reliefs and concessions sought for in the resolution plan in relation to YEIDA?
4. As to whether the Adjudicating Authority has erred in not approving the treatment of dissenting financial creditor like ICICI Bank Limited in the resolution plan, as being not in accord with Section 30(2)(b) of the Code read with Regulation 38(1)(b) of the CIRP Regulations; and has erred in modifying the terms of resolution plan and in directing payment to the dissenting financial creditor in monetary terms?
5. As to whether the Adjudicating Authority has erred in modifying the step provided in the resolution plan in regard to the fixed deposit holders and in directing the resolution applicant to make provision towards the dues of unclaimed fixed deposit holders also?
6. (i) As to whether the resolution plan unauthorisedly purports to deal with the assets of Jaypee Healthcare Limited? (ii) As to whether the Adjudicating Authority has erred in assuming that YES Bank Limited had agreed for constitution of a committee to take forward the disinvestment process of Jaypee Healthcare Limited?
7. As to whether the stipulation in the resolution plan for cancellation of certain agreements/sub-leases is unfair and the Adjudicating Authority has erred in not modifying the same?
8. As to whether the minority shareholders are entitled to state their claims/objections despite having not approached the Adjudicating Authority; and as to whether the resolution plan does not provide fair treatment to the minority shareholders?
9. (i) As to whether, after approval of the resolution plan of NBCC by the Committee of Creditors, where homebuyers as a class assented to the plan, any individual homebuyer or any association of homebuyers could maintain a challenge to the resolution plan and could be treated as a dissenting financial creditor or an aggrieved person? (ii) As to whether the stipulations in the resolution plan stand in violation of the provisions of the Real Estate (Regulation and Development) Act, 2016? (iii) As to whether the resolution plan is violative of the requirements of CIRP Regulations? (iv) As to whether any housing project which has been completed or is nearing completion ought to be kept out of the purview of the resolution plan?
10. (i) As to whether the amount of INR 750 crores, which was deposited by JAL pursuant to the orders passed by this Court in the case of Chitra Sharma, and accrued interest thereupon, is the property of JAL and stipulation in the resolution plan concerning its usage by JIL or NBCC is impermissible? (ii) As to whether any amount is receivable by JIL and/or its homebuyers from JAL; and the accounts between JAL and JIL need reconciliation?
11. (i) As to whether Clause 23 of Schedule 3 of the resolution plan providing for extinguishment of security interest of lenders of JAL could not have been approved by the Adjudicating Authority? (ii) As to whether adequate provision is required to be made in the resolution plan as regards utilisation of the land bank of 758 acres, that has become available to JIL in terms of the judgment dated 26.02.2020 by this Court?
12. What should be the appropriate orders on the other issues raised by the resolution applicant seeking clarification/directions?
13. As to whether the Appellate Authority was justified in providing for an Interim Monitoring Committee for implementation of the resolution plan in question during the pendency of appeals?
14. What should be the final order and relief?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authorities while deciding the case:

The court also considered various sections of the IBC, including Section 5(8) (financial debt), Section 30 (submission of resolution plan), Section 31 (approval of resolution plan), Section 43 (preferential transactions), Section 53 (distribution of assets), Section 61 (appeals), and Section 238 (overriding effect of the Code). The court also looked at the relevant regulations of the CIRP Regulations.

Judgment

How each authority was viewed by the Court

• ✓ K. Sashidhar v. Indian Overseas Bank and Ors. (2019) 12 SCC 150: The Court relied on this case to emphasize the limited scope of judicial review over the commercial wisdom of the CoC.
• ✓ Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. (2020) 8 SCC 531: The Court reiterated the primacy of the CoC’s commercial wisdom and the role of resolution professionals, while also outlining the scope of judicial review.
• ✓ Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Ors. (2020) 11 SCC 467: The court reinforced that there is no requirement for a resolution applicant to match the liquidation value and that the courts must cede ground to the commercial wisdom of the creditors.
• ✓ Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors. (2019) 8 SCC 416: The Court reiterated that RERA and IBC must be held to co-exist and be interpreted harmoniously and in the event of clash, RERA must give way to IBC.
• ✓ Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc. etc. (2020) 8 SCC 401: The Court relied on this judgment to hold certain transactions as preferential and that the lenders of JAL are not financial creditors of JIL.
• ✓ Chitra Sharma and Ors. v. Union of India and Ors. (2018) 18 SCC 575: The Court referred to this case to show the background of the case and also to emphasize the fact that the homebuyers were recognized as financial creditors.
• ✓ Jaiprakash Associates Limited and Anr. v. IDBI Bank Ltd. and Anr. (2020) 3 SCC 328: The Court referred to this case to show the timeline of the case and also to show that it had extended the CIRP period and allowed for submission of revised resolution plans.
• ✓ Wg. Cdr. Arifur Rahman Khan & Ors. v. DLF Southern Homes Pvt. Ltd. & Ors. (2020) SCC OnLine SC 667: The court held that the homebuyers are entitled to interest for the delay in handing over the possession of the flat but this case was not applicable to the facts of the present case.
• ✓ Municipal Corporation of Greater Mumbai (MCGM) v. Abhilash Lal and Ors. 2019 SCC OnLine SC 1542: The court held that IBC will not have overriding effect on every enactment which is applicable to the transactions related to the corporate debtor but this was not applicable to the facts of the present case.
• ✓ India Thermal Power Ltd. v. State of M.P. & Ors. (2000) 3 SCC 379: The court held that a contract entered into in exercise of an enabling power conferred by a statute cannot be rendered a statutory contract but this was not applicable to the facts of the present case.
• ✓ Savitri Devi v. State of U.P. & Ors. (2015) 7 SCC 21: The court referred to this case to show the background of the case and held that the decision of Allahabad High Court in Gajraj case was upheld.
• ✓ Gajraj and Ors. v. State of U.P. and Ors. 2011 SCC OnLine All 1711: The court referred to this case to show the background of the case and the Allahabad High Court ruled in favour of payment of additional compensation to the land owners.
• ✓ ONGC and Anr. v. Association of Natural Gas Consuming Industries and Ors. (2001) 6 SCC 627: The court held that no one shall suffer by an act of the court but this case was not applicable to the facts of the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors, including:

• ✓ The need to balance the interests of all stakeholders, including homebuyers, financial creditors, and operational creditors.
• ✓ The importance of adhering to the statutory framework of the IBC and CIRP Regulations.
• ✓ The limited scope of judicial review over the commercial wisdom of the CoC.
• ✓ The need to ensure that dissenting financial creditors are treated fairly and are not discriminated against.
• ✓ The importance of upholding the sanctity of contracts and agreements, such as the Concession Agreement with YEIDA.
• ✓ The need to provide a fair and equitable resolution for the corporate debtor while also protecting the interests of all stakeholders.
• ✓ The need to ensure that the resolution process is not unduly delayed and that the corporate debtor can be revived in a timely manner.

Final Orders

The Supreme Court issued the following final orders:

1. The resolution plan was sent back to the Committee of Creditors (CoC) for reconsideration, specifically regarding the treatment of dissenting financial creditors and the contingent liability of additional land acquisition compensation.
2. The Adjudicating Authority’s order was modified to approve the reduction of share capital.
3. The amount of INR 750 crores deposited by Jaiprakash Associates Limited (JAL) was ordered to be returned to JAL after reconciliation of accounts with Jaypee Infratech Limited (JIL).
4. The security interest of lenders of JAL over the land of JIL cannot be extinguished by the resolution plan.
5. The court held that the Appellate Authority was not justified in providing for an Interim Monitoring Committee.
6. The court directed NBCC and YES Bank to work out a solution regarding the assets of Jaypee Healthcare Limited.
7. The court upheld the decision of the Adjudicating Authority in regard to cancellation of invalid agreements/sub-leases while preserving the rights of the affected parties.

Key Takeaways

The Supreme Court’s judgment in the Jaypee Infratech case provides important clarifications on the powers of the Adjudicating Authority in the corporate insolvency resolution process. Key takeaways include:

• ✓ The Adjudicating Authority has limited jurisdiction and cannot interfere with the commercial wisdom of the Committee of Creditors (CoC).
• ✓ The Adjudicating Authority can only send the resolution plan back to the CoC for reconsideration if it finds deficiencies.
• ✓ Dissenting financial creditors are entitled to payment in cash as per liquidation value.
• ✓ Homebuyers, as a class, are bound by the decision of the majority; individual homebuyers cannot be treated as dissenting creditors.
• ✓ The resolution plan cannot unilaterally alter the terms of existing contracts and agreements, such as the Concession Agreement with YEIDA.
• ✓ The resolution process must balance the interests of all stakeholders, including homebuyers, financial creditors, and operational creditors.
• ✓ The security interest of lenders of JAL over the land of JIL cannot be extinguished by the resolution plan.
• ✓ The Appellate Authority was not justified in providing for an Interim Monitoring Committee.

Flowchart of the Resolution Process