Supreme Court Sets Aside Resolution Plan Due to Procedural Lapses: Greater Noida Industrial Development Authority vs. Prabhjit Singh Soni (2024)

Date of the Judgment: 12 February 2024

Citation: 2024 INSC 102

Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J. B. Pardiwala, J., Manoj Misra, J.

Can a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC) be challenged if there are procedural irregularities and non-compliance with statutory requirements? The Supreme Court of India recently addressed this crucial question in a case involving the Greater Noida Industrial Development Authority (the appellant) and a corporate debtor. This judgment clarifies the extent of judicial review in insolvency cases and emphasizes the importance of adhering to the IBC’s procedural safeguards. The three-judge bench, consisting of Chief Justice Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra, delivered the judgment.

Case Background

The Greater Noida Industrial Development Authority (the appellant), a statutory body, leased a plot of land to M/s. JNC Construction (P) Ltd (the Corporate Debtor) on 28 October 2010 for a residential project. The lease was for 90 years, with a premium payable in installments starting from 29 October 2012, after an initial moratorium of 24 months, subject to interest and penal interest. The Corporate Debtor defaulted on payments, leading to a demand cum pre-cancellation notice from the appellant.

A Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor, and it was admitted on 30 May 2019. The appellant submitted a claim of Rs. 43,40,31,951 in January 2020, for unpaid lease premium installments, claiming to be a financial creditor. However, the Resolution Professional (RP) treated the appellant as an operational creditor and requested the claim in Form B. The appellant did not resubmit the claim, and the Committee of Creditors (COC) approved a resolution plan, which was approved by the National Company Law Tribunal (NCLT) on 4 August 2020.

The appellant, upon learning of the plan’s approval on 24 September 2020, filed applications before the NCLT on 6 October 2020 and 15 March 2021. These applications questioned the resolution plan, the RP’s decision to treat the appellant as an operational creditor, and sought recall of the NCLT order approving the plan.

Timeline:

Course of Proceedings

The National Company Law Tribunal (NCLT) dismissed the applications filed by the appellant on 5 April 2021, stating that the appellant did not take action against the RP despite being aware of the CIRP. The NCLT held that it was not permissible to decide on the appellant’s claim after the CIRP was complete.

Aggrieved by the NCLT order, the appellant appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT dismissed the appeal on 24 November 2022, agreeing with the NCLT’s findings. The NCLAT also held that the appellant was an operational creditor and not a financial creditor, relying on the Supreme Court’s decision in New Okhla Development Authority vs. Anand Sonbhadra. The NCLAT further noted that the appellant had not been diligent in pursuing its rights.

The appellant then appealed to the Supreme Court of India against the NCLAT order.

Legal Framework

The judgment refers to several key provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and the U.P. Industrial Area Development Act, 1976. These include:

• Section 3(30) of the IBC: Defines “secured creditor” as a creditor in whose favor a security interest is created.
• Section 3(31) of the IBC: Defines “security interest” as a right, title, or interest in a property securing payment or performance of an obligation.
• Section 5(8) of the IBC: Defines “financial debt” as a debt disbursed against the consideration for the time value of money.
• Section 21(2) of the IBC: States that the Committee of Creditors (COC) must comprise all financial creditors of the corporate debtor.
• Section 24(3) of the IBC: Requires the RP to give notice of COC meetings to operational creditors if their aggregate dues are not less than ten percent of the debt.
• Section 30(2) of the IBC: Outlines the requirements that a resolution plan must meet, including provisions for payment of debts of operational creditors and financial creditors.
• Section 31(1) of the IBC: States that if the Adjudicating Authority is satisfied that the resolution plan approved by the COC meets the requirements of Section 30(2), it shall approve the resolution plan.
• Section 60(5) of the IBC: Empowers the NCLT to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor.
• Section 13 of the U.P. Industrial Area Development Act, 1976: Deals with the imposition of penalties and recovery of arrears.
• Section 13A of the U.P. Industrial Area Development Act, 1976: States that any amount payable to the Authority under Section 13 shall constitute a charge over the property and may be recovered as arrears of land revenue.
• Section 14 of the U.P. Industrial Area Development Act, 1976: Deals with the forfeiture for breach of conditions of transfer.

The Court also refers to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, particularly Regulations 7, 8, 12, 13, 14, 19, 36, 37 and 38, which deal with the submission and verification of claims, the constitution of the COC, and the contents of the resolution plan.

Arguments

Appellant’s Submissions:

• The appellant submitted its claim with proof on 30 January 2020 as a financial creditor with a security interest over the Corporate Debtor’s assets. Even if not a financial creditor, the resolution plan should have recognized the claim as a secured creditor.
• The appellant was not notified of the Committee of Creditors (COC) meetings, invalidating the resolution plan.
• The Adjudicating Authority failed to consider the appellant’s claim, statutory charge, and ownership rights over the land, rendering the approval order flawed.
• There was no delay on the part of the appellant in pursuing remedies, as applications were filed promptly after receiving information about the plan’s approval and after the lifting of the suspension of limitation period.

Respondents’ Submissions:

• The issue of whether dues payable to an Industrial Area Development Authority are a financial debt is not res integra, as it was settled in Anand Sonbhadra that it is not a financial debt.
• The appellant had no voting rights in the COC.
• The appellant pressed its case only on the ground that it is a financial creditor.
• The commercial wisdom of the COC is not justiciable.
• Once the resolution plan is approved, it cannot be questioned through a recall application.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the Adjudicating Authority (NCLT) can recall an order of approval passed under Section 31(1) of the IBC, in exercise of powers under Section 60(5) of the IBC?
2. Whether the application for recall of the order was barred by time?
3. Whether the resolution plan put forth by the resolution applicant did not meet the requirements of Section 30(2) of the IBC read with Regulations 37 and 38 of the CIRP Regulations, 2016?
4. What relief, if any, the appellant is entitled to?

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeals, set aside the NCLAT order, and the NCLT order approving the resolution plan. The Court directed the resolution plan be sent back to the COC for re-submission after satisfying the parameters set out by the IBC.

How each authority was viewed by the Court:

• New Okhla Development Authority vs. Anand Sonbhadra [(2023) 1 SCC 724]:* The court relied on this case to conclude that the appellant was not a financial creditor.
• Ghanashyam Mishra & Sons (P) Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. [(2021) 9 SCC 657]:* The court used this case to explain the CIRP scheme under the IBC.
• Jaypee Kensington Boulevard Apartments Welfare Association vs. NBCC (India) Ltd. [(2022) 1 SCC 401]:* The court referred to this case to define the scope of judicial review by the Adjudicating and Appellate Authorities.
• Manohar Lal Chopra vs. Rai Bahadur Rao Raja Seth Hiralal [AIR 1962 SC 527]:* The court cited this case to highlight the inherent powers of the court.
• Grindlays Bank Ltd. vs. Central Govt. Industrial Tribunal [1980 Supp SCC 420]:* The court used this case to support the view that a tribunal has the power to recall its order.
• State of Punjab vs. Davinder Pal Singh Bhullar [(2011) 14 SCC 770]:* The court relied on this case to explain when inherent powers can be exercised to recall an order.
• New India Assurance Co. Ltd. vs. Krishna Kumar Pandey [(2021) 14 SCC 683]:* The court approved the passage from Davinder Pal Singh Bhullar.
• Budhia Swain vs. Gopinath Deb [(1999) 4 SCC 396]:* The court referred to this case to list the conditions under which a court may recall an order.
• Union Bank of India vs. Dinakar T. Vekatasubramanian & Ors.:* The court relied on this to hold that the power to recall is inherent in the Tribunal.
• Union Bank of India vs. Financial Creditors of M/s Amtek Auto Ltd. & Ors.:* The court relied on this to uphold the NCLAT decision in Union Bank of India vs. Dinakar T. Vekatasubramanian & Ors.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the procedural lapses and the failure of the resolution plan to comply with the statutory requirements of the IBC and the CIRP Regulations. The Court emphasized the following points:

• The appellant’s claim was not properly considered, despite being submitted with proof.
• The appellant was not given notice of the COC meetings, violating its right to participate in the process.
• The resolution plan did not recognize the appellant’s statutory charge over the assets of the Corporate Debtor.
• The feasibility of the resolution plan was questionable, as it involved the use of land owned by the appellant, a statutory body.
• The NCLT and NCLAT failed to address these critical issues, rendering their orders vulnerable to judicial review.

The Court’s reasoning reflects a strong emphasis on ensuring fairness, transparency, and adherence to the statutory framework of the IBC. The Court highlighted that even though the commercial wisdom of the COC is generally not justiciable, the Adjudicating Authority and the Appellate Authority must ensure that the resolution plan meets the mandatory requirements under Section 30(2) of the IBC and the CIRP Regulations.

Sentiment Analysis of Reasons Given by the Supreme Court:

Ratio: Fact vs. Law

Logical Reasoning Flowchart:

The Court considered alternative interpretations of the IBC and CIRP Regulations, particularly regarding the mandatory nature of submitting claims in specific forms. However, it rejected a strict interpretation of the form requirements, emphasizing that the substance of the claim and its supporting proof are more critical. The Court also considered the argument that the commercial wisdom of the COC is not justiciable, but clarified that the Adjudicating Authority and the Appellate Authority must ensure that the resolution plan meets the statutory requirements.

The Court concluded that the resolution plan was flawed due to the failure to consider the appellant’s claim, the failure to recognize the appellant as a secured creditor, and the failure to ensure the feasibility of the plan considering the appellant’s ownership of the land. The Court’s decision was based on ensuring compliance with the statutory requirements of the IBC and upholding the principles of natural justice.

“The inherent power has not been conferred upon the court; it is a power inherent in the Court by virtue of its duty to do justice between the parties before it.”

“The expression “review” is used in the two distinct senses, namely ( 1) a proceduraldevice to correct an error in the judgment, and (2) a substantive power to re-examine the case on merits.”

Implications of the Judgment

This judgment has significant implications for insolvency proceedings and the rights of creditors under the Insolvency and Bankruptcy Code, 2016. Key implications include:

• Procedural Compliance: The judgment underscores the importance of strict adherence to the procedural requirements of the IBC and the CIRP Regulations. It emphasizes that resolution plans must not only be commercially viable but also procedurally sound.
• Rights of Creditors: The judgment clarifies that all creditors, whether financial or operational, have a right to be heard and their claims must be duly considered. Even if a creditor is not considered a financial creditor, their status as a secured creditor and their claims must be factored into the resolution plan.
• Judicial Review: The judgment clarifies the extent of judicial review exercisable by the Adjudicating Authority and the Appellate Authority over resolution plans approved by the Committee of Creditors. It emphasizes that while the commercial wisdom of the COC is respected, the Adjudicating Authority must ensure that the resolution plan meets the mandatory requirements of the IBC.
• Recall of Orders: The judgment affirms the inherent powers of the NCLT to recall orders passed under Section 31(1) of the IBC, in cases where there are procedural irregularities, lack of jurisdiction, or violation of natural justice. This power is crucial to prevent abuse of process and ensure justice.
• Feasibility of Resolution Plans: The judgment highlights the need for resolution plans to be feasible and implementable, particularly when they involve assets owned by third parties. Resolution plans must consider the rights of all stakeholders and ensure that the plan can be executed without infringing on the rights of others.
• Form vs. Substance: The judgment emphasizes that the substance of a claim and its supporting proof are more critical than the form in which the claim is submitted. This approach ensures that genuine claims are not rejected on technical grounds.

In essence, this judgment reinforces the need for a balanced approach in insolvency proceedings, where the commercial wisdom of the COC is respected, but the statutory rights of all stakeholders are protected. It also underscores the importance of ensuring that resolution plans are not only commercially viable but also legally sound and procedurally compliant.

Conclusion

The Supreme Court’s decision in Greater Noida Industrial Development Authority vs. Prabhjit Singh Soni (2024) is a landmark judgment that reaffirms the importance of procedural compliance and the protection of creditors’ rights under the Insolvency and Bankruptcy Code, 2016. The Court’s decision to set aside the resolution plan highlights the need for a balanced approach in insolvency proceedings, where the commercial wisdom of the Committee of Creditors (COC) is respected, but the statutory rights of all stakeholders are protected. The judgment underscores the following key points:

• Adherence to Statutory Requirements: The resolution plan must comply with the mandatory requirements of Section 30(2) of the IBC and the CIRP Regulations, including the proper consideration of all claims, the recognition of secured creditors, and the feasibility of the plan.
• Protection of Creditors’ Rights: All creditors, whether financial or operational, have a right to be heard and their claims must be duly considered. Even if a creditor is not a financial creditor, their status as a secured creditor must be recognized.
• Inherent Powers of the NCLT: The NCLT has inherent powers to recall orders passed under Section 31(1) of the IBC, in cases where there are procedural irregularities, lack of jurisdiction, or violation of natural justice.
• Judicial Review: The Adjudicating Authority and the Appellate Authority must ensure that the resolution plan meets the mandatory requirements of the IBC, even though the commercial wisdom of the COC is generally respected.

This judgment serves as a reminder that insolvency proceedings must be conducted in a fair, transparent, and legally sound manner, ensuring that the rights of all stakeholders are protected. The Supreme Court’s decision is a significant step towards strengthening the integrity and effectiveness of the IBC, promoting a more balanced and equitable insolvency resolution process.