Supreme Court overturns NCLT order on revaluation of assets in insolvency case: Ramkrishna Forgings Limited vs. Ravindra Loonkar (2023)

Date of the Judgment: 21 November 2023

Citation: 2023 INSC 1013

Judges: Vikram Nath, J., Ahsanuddin Amanullah, J.

Can the National Company Law Tribunal (NCLT) interfere with the commercial wisdom of the Committee of Creditors (CoC) and order a revaluation of assets during a corporate insolvency resolution process (CIRP)? The Supreme Court of India recently addressed this critical question in a case involving Ramkrishna Forgings Limited and the resolution professional of ACIL Limited. The court clarified the extent of the NCLT’s jurisdiction in such matters, emphasizing the importance of the CoC’s decision-making power. The judgment was delivered by a two-judge bench comprising Justices Vikram Nath and Ahsanuddin Amanullah.

Case Background

ACIL Limited, a manufacturer of precision engineering and automobile components, underwent a Corporate Insolvency Resolution Process (CIRP) initiated by IDBI Bank Ltd. Mr. Ravindra Loonkar was appointed as the Resolution Professional (RP). The total admitted claim in the CIRP was Rupees one thousand seven hundred and eighty-two crores. The RP published an Expression of Interest, and Ramkrishna Forgings Limited (the appellant) submitted a resolution plan. After several revisions, the final plan proposed a total payout of Rupees one hundred twenty-nine and a half crores with Rupees eighty crores and forty-four lacs as upfront payment to Financial Creditors (FCs). This plan also included that proceeds from the monetization of land at Manesar would go to the FCs. The Committee of Creditors (CoC) approved this plan on 14.08.2019 with a majority of 88.56% votes. The RP then moved an application before the NCLT for approval of the resolution plan.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) kept the approval of the Resolution Plan in abeyance on 01.09.2021, directing the Official Liquidator (OL) to re-evaluate the assets of the Corporate Debtor. The NCLT’s reasoning was that the amount offered by the appellant was very close to the fair value of the assets. The National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s order on 19.01.2022, stating that the involvement of “figures of crores” justified the interference. The appellant then appealed to the Supreme Court.

Legal Framework

The case primarily involves the interpretation of the Insolvency and Bankruptcy Code, 2016 (the Code), specifically:

• Section 30(6) of the Code, which states that “the resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.”
• Section 31 of the Code, which outlines the approval process for a resolution plan. It states that “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.”
• Section 62 of the Code, which allows appeals to the Supreme Court on questions of law arising from NCLAT orders.
• Section 26 of the Code, which provides that “The filing of an avoidance application under clause (j) of sub-section (2) of Section 25 by the resolution professional shall not affect the proceedings of the corporate insolvency resolution process.”

The judgment also references Section 79 of the Income Tax Act, 1961, which pertains to the carry forward and set off of losses in the case of certain companies. The Resolution Plan sought to allow ACIL to carry forward its losses under this provision.

Additionally, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), particularly Regulations 27 and 35, which deal with the appointment of registered valuers and the determination of fair value and liquidation value, are also relevant.

Arguments

Appellant’s Submissions

• The appellant argued that the NCLT exceeded its jurisdiction by ordering a revaluation, as the CoC had already approved the resolution plan with a significant majority (88.56%).
• The appellant contended that the NCLT’s power is limited to ensuring compliance with Section 30(2) of the Code and that it cannot interfere with the CoC’s commercial wisdom.
• The appellant submitted that the NCLT should not have directed the Official Liquidator (OL) to conduct a revaluation, as the Code and CIRP Regulations provide a specific mechanism for valuation through registered valuers.
• The appellant emphasized that the resolution plan was the result of extensive negotiations and revisions, with the final plan being approximately 48% higher than the initial proposal.
• The appellant stated that the NCLT’s observation that the amount offered was close to the fair value was erroneous as the fair value was not available to the appellant when it submitted its first resolution plan.
• The appellant relied on precedents like Maharashtra Seamless Limited v Padmanabhan Venkatesh, (2020) 11 SCC 467, and M K Rajagopalan v Dr Periasamy Palani Gounder , 2023 SCC OnLine SC 574, to argue that valuation is primarily the domain of the CoC and not subject to judicial scrutiny.
• The appellant highlighted that the RP had certified that the resolution plan complied with all provisions of the Code and Regulations.
• The appellant submitted that the NCLAT’s observation about an avoidance transaction of approximately Rupees one thousand crores was irrelevant, as the resolution plan already provided for the treatment of such transactions, with proceeds going to the FCs.
• The appellant relied on Tata Steel BSL Limited v Venus Recruiter Pvt. Ltd., 2023 SCC OnLine Del 155, to argue that any benefits from avoidance transactions should go to the creditors.
• The appellant asserted that the commercial wisdom of the CoC is supreme, as held in K Sashidhar v Indian Overseas Bank, (2019) 12 SCC 150, and Committee of Creditors of Essar Steel India Ltd. v Satish Kumar Gupta (2020) 8 SCC 531.
• The appellant cited Ebix Singapore (P) Ltd. v Committee of Creditors of Educomp Solutions Limited, 2021 SCC OnLine SC 707, to argue that the NCLT can only approve or reject a plan based on Section 30(2) and cannot compel further negotiations.

Respondents’ Submissions

• The respondents supported the appellant’s contentions.

Submissions by the Solicitor General and Additional Solicitor General

• The Solicitor General and Additional Solicitor General, assisting the Court, submitted that the NCLT has no jurisdiction to sit in appeal over the commercial wisdom of the CoC.
• They argued that interference is only warranted if the CoC’s decision is capricious, arbitrary, irrational, or violates the Code or Regulations.
• They cited Vallal RCK v Siva Industries and Holdings Limited, 2022 SCC OnLine SC 717, to support the binding nature of a resolution plan approved by the CoC.
• They referred to Arun Kumar Jagatramka v Jindal Steel and Power Limited, (2021) 7 SCC 474 and Committee of Creditors of Essar Steel India Ltd. (supra), to argue that judicial intervention should be minimal and should not disturb the foundational principles of the Code.
• They contended that the NCLT does have powers under Section 60(5) of the Code to decide disputes relating to valuation but that should be exercised judiciously.
• They also submitted that the pendency of avoidance applications does not affect the approval of a resolution plan if the plan provides that the proceeds of such transactions will go to the FCs.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. What is the extent of the jurisdiction and powers of the Adjudicating Authority to order a revaluation of assets, especially when no objection was raised by any party regarding the resolution plan?

Treatment of the Issue by the Court

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

Authorities

The Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal, setting aside the orders of the NCLT and NCLAT. The Court held that the NCLT had exceeded its jurisdiction by ordering a revaluation of assets, as the CoC had already approved the resolution plan with a significant majority. The Court emphasized that the NCLT’s power is limited to ensuring compliance with the provisions of the Code and that it cannot interfere with the commercial wisdom of the CoC.

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

How each authority was viewed by the Court?

• Pratap Technocrats Private Limited v Monitoring Committee of Reliance Infratel Limited, (2021) 10 SCC 623: The Court followed this authority to reiterate that the jurisdiction of the NCLT is limited to the statutory requirements under Section 30(2) of the Code and cannot extend to equity-based jurisdiction.
• Maharashtra Seamless Limited v Padmanabhan Venkatesh, (2020) 11 SCC 467: The Court relied on this authority to emphasize that valuation of a corporate debtor is not open to judicial scrutiny by the NCLT.
• M K Rajagopalan v Dr Periasamy Palani Gounder, 2023 SCC OnLine SC 574: The Court followed this precedent to hold that when the CoC is satisfied with the valuation, the NCLAT should not interfere.
• K Sashidhar v Indian Overseas Bank, (2019) 12 SCC 150: The Court reiterated that the commercial wisdom of the CoC is supreme, as held in this case.
• Committee of Creditors of Essar Steel India Ltd. v Satish Kumar Gupta, (2020) 8 SCC 531: The Court reaffirmed the supremacy of the commercial wisdom of the CoC, relying on this authority.
• Ebix Singapore (P) Ltd. v Committee of Creditors of Educomp Solutions Limited, 2021 SCC OnLine SC 707: The Court relied on this case to emphasize that the NCLT can only examine the validity of the resolution plan based on Section 30(2) of the Code.
• Vallal RCK v Siva Industries and Holdings Limited, 2022 SCC OnLine SC 717: The Court used this authority to support the binding and final nature of a resolution plan after due approval by the CoC.
• Arun Kumar Jagatramka v Jindal Steel and Power Limited, (2021) 7 SCC 474: The Court relied on this case to emphasize that judicial intervention should be minimal and should not disturb the foundational principles of the Code.
• Tata Steel BSL Limited v Venus Recruiter Pvt. Ltd., 2023 SCC OnLine Del 155: The Court relied on this authority to support that any benefits from avoidance transactions should go to the creditors.
• Innoventive Industries Ltd. v ICICI Bank, (2018) 1 SCC 407 and Swiss Ribbons Private Limited v Union of India, (2019) 4 SCC 17: The Court referred to these authorities to emphasize that the Code was introduced for ensuring quick and time-bound resolution of insolvency.
• Kalpraj Dharamshi v Kotak Investment Advisors Limited, (2021) 10 SCC 401: The Court followed this authority to hold that the NCLAT was not correct in law in interfering with the commercial decision taken by CoC by a thumping majority.
• Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (India) Limited, (2022) 1 SCC 401: The Court relied on this authority to state that the adjudicating authority has limited jurisdiction in the matter of approval of a resolution plan.
• Kranti Associates Private Limited v Masood Ahmed Khan, (2010) 9 SCC 496 and Manoj Kumar Khokhar v State of Rajasthan, (2022) 3 SCC 501: The Court cited these authorities to emphasize the duty of courts and quasi-judicial authorities to record reasons for their decisions.
• Raj Kishore Jha v State of Bihar, (2003) 11 SCC 519: The Court used this case to emphasize that ‘Reason is the heartbeat of every conclusion. Without the same, it becomes lifeless.’
• Embassy Property Developments Private Limited v State of Karnataka, (2020) 13 SCC 308 and Gujarat Urja Vikas Nigam Limited v Amit Gupta, (2021) 7 SCC 209: The Court relied on these authorities to emphasize that the NCLT has to exercise power strictly within the domain permitted by the Code.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Commercial Wisdom of the CoC: The Court emphasized that the commercial wisdom of the CoC is paramount and should not be interfered with unless there are clear violations of the Code or Regulations.
• Limited Jurisdiction of NCLT: The Court reiterated that the NCLT’s jurisdiction is limited to ensuring compliance with the statutory requirements under Sections 30 and 31 of the Code and does not extend to interfering with the CoC’s commercial decisions.
• Valuation Process: The Court noted that the Code and CIRP Regulations provide a specific mechanism for valuation through registered valuers and that the NCLT should not have directed the Official Liquidator to conduct a revaluation.
• Time-Bound Resolution: The Court emphasized the importance of a time-bound resolution process as envisioned by the Code and that any interference by the NCLT should not cause undue delay.
• Lack of Objections: The Court noted that no objections were raised by any party regarding the resolution plan, indicating that the plan was acceptable to all stakeholders.
• Reasoned Decision Making: The Court emphasized that any decision by a judicial or quasi-judicial body should be supported by valid reasons, which were lacking in the NCLT’s order.

Key Takeaways

• The NCLT cannot order a revaluation of assets after the CoC has approved a resolution plan, unless there is a clear violation of the Code or Regulations.
• The commercial wisdom of the CoC is paramount and should not be interfered with by the NCLT.
• The NCLT’s jurisdiction is limited to ensuring compliance with Sections 30 and 31 of the Code.
• The Code and CIRP Regulations provide a specific mechanism for valuation through registered valuers, and the NCLT should not direct revaluation by the Official Liquidator.
• The resolution process should be time-bound, and any interference should not cause undue delay.

Flowchart of CIRP Process

Resolution Ratio

Sentiment Analysis