Supreme Court Upholds 75% Voting Share for Resolution Plans under IBC: K. Sashidhar vs. Indian Overseas Bank (2019)

Introduction

Date of the Judgment: 5 February 2019
Citation: (2019) ibclaw.in 05 SC
Judges: A.M. Khanwilkar, J., Ajay Rastogi, J.

What happens when a company can’t pay its debts? The Insolvency and Bankruptcy Code, 2016 (IBC) provides a framework for this situation. A key question is: how many creditors need to agree on a plan to revive the company? The Supreme Court addressed this in a case involving two companies, clarifying that a resolution plan needs the support of at least 75% of the financial creditors’ voting share.

The Supreme Court bench, comprising Justices A.M. Khanwilkar and Ajay Rastogi, delivered this judgment. There was no dissenting opinion.

Case Background

This judgment consolidates appeals from two separate cases, both dealing with the insolvency resolution process under the IBC. The two companies involved are:

• Kamineni Steel & Power India Pvt. Ltd. (KS&PIPL), a steel company based in Hyderabad.
• Innoventive Industries Ltd. (IIL), a company with a registered office in Pune.

Both companies faced financial difficulties and underwent Corporate Insolvency Resolution Processes (CIRP) under the IBC. The core issue in both cases was whether the resolution plans had been approved by the required percentage of financial creditors.

KS&PIPL, incorporated in 2008, faced operational losses and filed with the Board for Industrial and Financial Reconstruction (BIFR) in 2016. After the BIFR was repealed, they initiated CIRP under the IBC. A resolution plan was submitted, but it did not receive the support of 75% of the creditors. The National Company Law Tribunal (NCLT), Hyderabad, initially approved the plan, but this was overturned by the National Company Law Appellate Tribunal (NCLAT).

IIL, after suffering losses, underwent Corporate Debt Restructuring (CDR) in 2013. In 2016, an insolvency application was filed against them under the IBC. A resolution plan was submitted, but it only received 66.57% of the votes, failing to reach the 75% threshold. The NCLT, Mumbai, rejected the plan, which was upheld by the NCLAT.

Timeline:

Legal Framework

The core of this judgment revolves around the interpretation of Section 30(4) of the Insolvency and Bankruptcy Code, 2016. This section, at the time of the CoC meetings, stated:

“The committee of creditors may approve a resolution plan by a vote of not less than seventy-five per cent of voting share of the financial creditors.”

Additionally, Section 31 of the IBC outlines the process for approval of a resolution plan:

“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 30(2) specifies the requirements a resolution plan must meet, including payment of insolvency costs, repayment of operational creditors’ debts, and management of the corporate debtor’s affairs.

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, also play a crucial role. Regulation 39 deals with the approval of resolution plans, and Regulations 25 and 26 outline the procedures for voting by the Committee of Creditors (CoC).

Arguments

The appellants argued that:

• The 75% voting share requirement was not mandatory, and the votes of creditors who abstained should be ignored when calculating the percentage.
• The NCLAT should have considered the amendments to the IBC, which reduced the voting threshold to 66% and mandated reasons for approval or rejection of a plan.
• The dissenting financial creditors did not act in good faith and failed to provide reasons for rejecting the resolution plan.
• The object of the I&B Code is resolution rather than liquidation as also the maximization of value of assets of such persons, to promote entrepreneurship.

The respondents countered that:

• The 75% voting share requirement was mandatory, and the NCLT could not disregard it.
• The amendments to the IBC should not have a retroactive effect.
• The financial creditors’ commercial wisdom should not be questioned by the NCLT or NCLAT.
• The dissenting financial creditors were not required to give reasons for rejecting the resolution plan.
• The timelines specified in the Code are mandatory and cannot be extended.

The workers’ union for IIL argued that the company was viable and should be revived, not liquidated.

The following table demonstrates the sub-submissions categorized by main submissions of all sides pertaining to the issue.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

1. Whether the approval of a resolution plan by the CoC requires a vote of not less than 75% of the voting share of the financial creditors.
2. Whether the adjudicating authority/appellate authority can consider factors other than those specified in Sections 30(2) or 61(3) of the I&B Code.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court considered the following authorities:

Judgment

The following table demonstrates as to how the submissions made by the Parties were treated by the Court:

The following table demonstrates as to how the authorities were viewed by the Court:

What weighed in the mind of the Court?

The Supreme Court emphasized the following points:

• Legislative Intent: The primary objective of the IBC is to provide a swift and efficient framework for resolving insolvency, with a focus on timelines.
• Commercial Wisdom: The commercial decisions of the financial creditors are paramount and not subject to judicial review.
• Mandatory Threshold: The 75% (later 66%) voting share requirement is a mandatory threshold for approval of a resolution plan.
• Limited Jurisdiction: The NCLT and NCLAT have limited jurisdiction and cannot interfere with the commercial decisions of the CoC.
• Prospective Application: Amendments to the IBC reducing the voting threshold and requiring reasons for rejection are prospective and do not apply to cases decided before the amendments.

The following table demonstrates the ranking of sentiment analysis of reasons given by the Supreme Court:

Fact:Law Ratio

The court’s decision was heavily influenced by the legal provisions and their interpretation, with less emphasis on the specific factual aspects of the cases.

Logical Reasoning:

The Supreme Court considered alternative interpretations, particularly regarding the retrospective application of amendments and the mandatory nature of the 75% voting share. However, it rejected these interpretations, emphasizing the prospective nature of the amendments and the mandatory threshold for approval of a resolution plan. The Court also rejected the argument that the dissenting financial creditors needed to provide reasons for their decision, noting that the commercial wisdom of financial creditors is not subject to judicial review.

The Court concluded that the NCLAT was correct in holding that the resolution plans for both KS&PIPL and IIL were not approved by the required percentage of financial creditors. Consequently, the liquidation process was the only option.

The Court stated, “The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC muchless to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors.”

The Court also clarified, “The opinion so expressed by voting is non-justiciable.”

Further, the Court stated, “The inevitable outcome of voting by not less than requisite percent of voting share of financial creditors to disapprove the proposed resolution plan, de jure, entails in its deemed rejection.”

Key Takeaways

• Mandatory Voting Threshold: Resolution plans under the IBC require approval by at least 75% (now 66% after amendment) of the voting share of financial creditors.
• Limited Judicial Review: The NCLT and NCLAT cannot question the commercial wisdom of the CoC in approving or rejecting resolution plans.
• Prospective Amendments: Amendments to the IBC are generally prospective, unless explicitly stated otherwise.
• Timelines are Crucial: The timelines prescribed in the IBC are mandatory and must be adhered to.
• Dissenting Creditors’ Rights: The opinion of even dissenting financial creditors is non-justiciable, and they are not required to provide reasons for rejecting a resolution plan.

Practical Implications:

• Creditor Power: Financial creditors have significant power in the insolvency resolution process, as their commercial decisions are largely insulated from judicial review.
• Resolution Plan Approval: Resolution applicants must secure the required voting share of financial creditors to ensure approval of their plans.
• Importance of Negotiation: Resolution applicants need to negotiate with financial creditors to secure their support.
• Liquidation Risk: Failure to secure the required voting share increases the risk of liquidation.

Future Impact:

• Clarity on Voting: The judgment provides clarity on the mandatory nature of the voting threshold for resolution plans.
• Reduced Judicial Intervention: The judgment limits the scope for judicial intervention in the commercial decisions of financial creditors.
• Focus on Timelines: The judgment reinforces the importance of adhering to timelines in the IBC.
• Balance of Power: The judgment clarifies the balance of power between financial creditors and other stakeholders in the insolvency process.