Supreme Court clarifies the scope of contempt in resolution plan disputes: Committee of Creditors of A MTEK Auto Limited vs. Dinkar T Venkatasubramanian & Ors (2021)

Introduction

Date of the Judgment: 23 February 2021

Citation: Not Available

Judges: Dr Dhananjaya Y Chandrachud, J and M R Shah, J

Can a party be held in contempt of court for attempting to withdraw from a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC), and for raising a plea of force majeure to avoid its obligations? The Supreme Court of India recently examined this question in a case involving the Committee of Creditors of A MTEK Auto Limited and Deccan Value Investors LP (DVI). The court had to determine whether DVI’s actions, after initially agreeing to a resolution plan, amounted to a deliberate disregard of the court’s orders. This judgment was delivered by a two-judge bench comprising Justice Dr. Dhananjaya Y Chandrachud and Justice M.R. Shah, with the majority opinion authored by Justice Dr. Dhananjaya Y Chandrachud.

Case Background

The case began when an application under Section 7 of the IBC was admitted against A MTEK Auto Limited on 24 July 2017, initiating the corporate insolvency resolution process. Mr. Dinkar T Venkatasubramanian was appointed as the Interim Resolution Professional (IRP), later confirmed as the Resolution Professional (RP). The RP invited resolution plans, and Liberty House Group and DVI submitted their plans. Initially, Liberty House Group’s plan was approved by the Committee of Creditors (CoC) on 2 April 2018, and subsequently by the National Company Law Tribunal (NCLT) on 25 July 2018.

However, Liberty House Group failed to fulfill its obligations, leading the CoC to seek a fresh resolution process. The NCLT directed the reconstitution of the CoC to consider DVI’s plan. The National Company Law Appellate Tribunal (NCLAT), on 16 August 2019, ordered liquidation of the corporate debtor due to the elapsed time. The CoC then appealed to the Supreme Court, which stayed the liquidation and directed a fresh invitation for resolution plans on 24 September 2019. DVI was declared the highest evaluated resolution applicant on 6 January 2020, and its plan was approved by the CoC on 11 February 2020.

Subsequently, DVI sought modifications to the order, citing the impact of the COVID-19 pandemic and the unviability of the resolution plan. The Supreme Court rejected this on 18 June 2020, stating that any attempt to withdraw the offer would be treated as contempt. Despite this, DVI sought to terminate the resolution plan, invoking a force majeure clause, and filed an appeal against the NCLT’s approval order. This led to the CoC filing a contempt petition against DVI.

Timeline:

Course of Proceedings

The NCLT initially approved Liberty House Group’s resolution plan, but after their failure to comply, directed the reconstitution of the CoC to consider DVI’s plan. The NCLAT then ordered the liquidation of the corporate debtor. The Supreme Court stayed the liquidation and directed a fresh invitation for resolution plans. After DVI’s plan was approved by the CoC, the Supreme Court relegated the matter to the NCLT for approval. DVI then sought to modify this order, which was rejected by the Supreme Court. Despite the NCLT approving the resolution plan, DVI filed an appeal before the NCLAT, challenging the NCLT order.

Legal Framework

The judgment primarily revolves around the interpretation and application of Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC). Section 31(1) of the IBC states:

“(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantors and other stakeholders involved in the resolution plan:
[Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.]”

This section outlines the process for the Adjudicating Authority (NCLT) to approve a resolution plan once it has been approved by the Committee of Creditors (CoC). The NCLT must ensure that the plan meets the requirements of Section 30(2) and has provisions for effective implementation.

Section 31(2) of the IBC states:

“(2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order reject the resolution plan.”

This section empowers the Adjudicating Authority to reject the resolution plan if it does not meet the requirements of Section 31(1).

The court also considered the second proviso to Section 12(3) of the IBC, which was amended to stipulate a time limit of 330 days for the completion of the corporate insolvency resolution process.

Arguments

Arguments on behalf of DVI (Applicant for Rectification):

• DVI argued that its application on 12 June 2020 was not for withdrawal of the resolution plan, but for a modification of the order of 8 June 2020 to allow time to assess the impact of COVID-19.
• They contended that the order of 18 June 2020 was based on two factual misconceptions: that DVI sought to withdraw its offer and that various orders were passed at its instance.
• DVI maintained that it only sought time to re-evaluate the resolution plan due to the pandemic’s financial impact and that it never sought an extension of time from the Supreme Court previously.

Arguments on behalf of CoC (Respondent in Rectification, Appellant in Contempt):

• The CoC argued that DVI was attempting to wriggle out of its commitments by highlighting the impact of COVID-19, despite the plan being approved.
• They pointed out that DVI failed to submit the second tranche of the performance bank guarantee, did not nominate members to the Implementation and Monitoring Committee (IMC), and refused to attend IMC meetings.
• The CoC contended that DVI’s conduct was contumacious, as it disregarded the Supreme Court’s order of 18 June 2020 and thwarted the implementation of the resolution plan.

Arguments on behalf of the Resolution Professional (RP):

• The RP argued that DVI had raised a plea of force majeure due to COVID-19, even after the Supreme Court’s order of 18 June 2020.
• They submitted that DVI intentionally attempted to evade compliance with its obligations under the approved resolution plan.

Arguments on behalf of the Contemnor (DVI in Contempt Petition):

• DVI argued that contempt requires willful disobedience, not an implied one.
• They stated that exercising legal rights, such as challenging the NCLT order, cannot constitute contempt.
• DVI contended that the merits of their submissions regarding the fulfillment of conditions precedent to the implementation of the resolution plan should not be the basis for invoking contempt.
• They claimed that the resolution plan had contingent conditions that were not fulfilled, such as obtaining prior written consent for the lease of the Ace Complex Land.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the application filed by DVI on 12 June 2020 was for withdrawal of the resolution plan or for modification of the order of 8 June 2020.
2. Whether the order of 18 June 2020 suffers from any factual misconceptions.
3. Whether the conduct of DVI amounts to contempt of the order of 18 June 2020.
4. Whether DVI’s plea of force majeure was valid.
5. Whether DVI was within its rights to challenge the NCLT order and whether conditions precedent to the implementation of the resolution plan were fulfilled.

Treatment of the Issue by the Court

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

Authorities

The Court did not cite any authorities in this judgment.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

No authorities were cited by the court in this judgment.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain the integrity of the corporate insolvency resolution process and to ensure that parties adhere to their commitments. The Court emphasized that the process under the IBC is time-bound and that attempts to resile from approved resolution plans should not be entertained. The Court also considered the fact that DVI continued to raise the plea of force majeure even after it was rejected by the court. However, the court was also circumspect about invoking the contempt jurisdiction, noting that not every untenable plea or default should invite penal consequences. The court’s reasoning was a balance between enforcing the sanctity of the resolution process and ensuring that the contempt jurisdiction is not overused.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The court’s decision was influenced more by legal considerations, such as the interpretation of Section 31 of the IBC and the principles of contempt law, than by the specific facts of the case.

Logical Reasoning:

Key Takeaways

• Parties involved in corporate insolvency resolution processes must adhere to their commitments under approved resolution plans.
• Attempts to withdraw from or renegotiate approved resolution plans are viewed unfavorably by the courts.
• The plea of force majeure cannot be used as a tool to evade obligations under a resolution plan, especially after the court has rejected such a plea.
• The contempt jurisdiction should be exercised with caution, and not every default or untenable plea should invite penal consequences.
• The IBC process is time-bound, and parties must act in a timely and responsible manner.

Directions

The Supreme Court gave the following directions:

• The application for rectification moved by DVI was dismissed.
• The contempt petition was dismissed, subject to the condition that DVI shall not set up a plea for force majeure in the proceedings before the NCLAT.
• The NCLAT was directed to hear and dispose of the appeal filed by DVI against the NCLT order within one month from the date of the judgment.

Specific Amendments Analysis

The judgment does not discuss any specific amendments in detail.

Development of Law

The ratio decidendi of this case is that parties involved in the corporate insolvency resolution process must adhere to their commitments under the approved resolution plan, and attempts to withdraw or renegotiate the plan are viewed unfavorably by the courts. The judgment also clarifies that the contempt jurisdiction should be exercised cautiously and that not every default or untenable plea should invite penal consequences. There is no change in the previous position of law.

Conclusion

In conclusion, the Supreme Court dismissed DVI’s application for rectification and the contempt petition filed by the CoC, while directing DVI not to raise the plea of force majeure in its appeal before the NCLAT. The court emphasized the importance of adhering to the resolution process under the IBC and cautioned against the misuse of the contempt jurisdiction. The court also directed the NCLAT to dispose of the appeal filed by DVI within a month.

Category

Parent Category: Insolvency and Bankruptcy Code, 2016

Child Categories:

• Section 31, Insolvency and Bankruptcy Code, 2016
• Corporate Insolvency Resolution Process
• Contempt of Court
• Resolution Plan
• Force Majeure

FAQ

Q: What is the main issue in the case of Committee of Creditors of A MTEK Auto Limited vs. Dinkar T Venkatasubramanian & Ors?

A: The main issue was whether a party can be held in contempt of court for attempting to withdraw from a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC), and for raising a plea of force majeure to avoid its obligations.

Q: What did the Supreme Court decide regarding DVI’s attempt to withdraw from the resolution plan?

A: The Supreme Court held that DVI’s application was an attempt to withdraw from the resolution plan and that it was not merely seeking a modification of the order.

Q: Did the Supreme Court find DVI in contempt of court?

A: No, the Supreme Court did not find DVI in contempt of court, even though it noted that DVI’s conduct was not bona fide. The court emphasized that contempt jurisdiction should be exercised with caution.

Q: What is the significance of the force majeure clause in this case?

A: DVI attempted to use the force majeure clause to terminate the resolution plan due to the COVID-19 pandemic. However, the Supreme Court did not accept this plea and directed DVI not to raise it in the NCLAT.

Q: What is the practical implication of this judgment for parties involved in insolvency proceedings?

A: Parties involved in insolvency proceedings must adhere to their commitments under approved resolution plans. Attempts to withdraw or renegotiate plans are viewed unfavorably by the courts. The judgment reinforces the time-bound nature of the IBC process and the need for parties to act responsibly.