Supreme Court Upholds Commercial Wisdom of CoC in IBC Withdrawal: Vallal RCK vs. Siva Industries (2022)

Date of the Judgment: June 3, 2022

Citation: 2022 INSC 502

Judges: B.R. Gavai, J. and Hima Kohli, J.

Can the National Company Law Tribunal (NCLT) or the National Company Law Appellate Tribunal (NCLAT) second-guess the commercial decisions of the Committee of Creditors (CoC)? The Supreme Court of India recently addressed this crucial question in a case concerning the withdrawal of the Corporate Insolvency Resolution Process (CIRP). This judgment clarifies the extent to which the NCLT and NCLAT can interfere with the CoC’s decisions, particularly when a settlement is reached. The bench consisted of Justice B.R. Gavai and Justice Hima Kohli, with the majority opinion authored by Justice B.R. Gavai.

Case Background

The case revolves around M/s Siva Industries and Holdings Limited (the Corporate Debtor), which faced Corporate Insolvency Resolution Process (CIRP) proceedings initiated by IDBI Bank Limited under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT admitted the application on July 4, 2019, thus commencing CIRP. A resolution plan submitted by M/s Royal Partners Investment Fund Limited failed to secure the required 66% votes from the CoC.

Subsequently, on May 8, 2020, the Resolution Professional (RP) filed an application for the liquidation of the Corporate Debtor. Meanwhile, the promoter of the Corporate Debtor, the appellant, proposed a one-time settlement plan under Section 60(5) of the IBC. The CoC deliberated on this settlement plan during its 13th, 14th, and 15th meetings between October and December 2020. Initially, the settlement plan received 70.63% votes in the 16th meeting held on January 18, 2021. However, International Assets Reconstruction Co. Ltd. (IARCL), holding a 23.60% voting share, later approved the plan.

On March 29, 2021, the NCLT directed the RP to reconvene the CoC meeting. In the 17th CoC meeting on April 1, 2021, the settlement plan was approved with a 94.23% majority. Following this, the RP applied to the NCLT for withdrawal of the CIRP. However, the NCLT rejected the application on August 12, 2021, deeming the settlement plan a “Business Restructuring Plan” rather than a simple settlement under Section 12A of the IBC. The NCLT also initiated liquidation proceedings. The appellant then appealed to the NCLAT, which dismissed the appeals on January 28, 2022, leading to the present appeals before the Supreme Court.

Timeline:

Course of Proceedings

The NCLT initially admitted the CIRP application. After a resolution plan failed, the promoter of the Corporate Debtor proposed a settlement. Despite the CoC approving the settlement with a 94.23% majority, the NCLT rejected the withdrawal application, categorizing the settlement as a “Business Restructuring Plan” not covered under Section 12A of the IBC. The NCLT also initiated liquidation proceedings. The NCLAT upheld the NCLT’s decision, leading to the appeals before the Supreme Court.

Legal Framework

The core legal provision in this case is Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC), which allows for the withdrawal of an application admitted under Sections 7, 9, or 10 of the IBC. It states:

“12-A. Withdrawal of application admitted under Section 7, 9 or 10.—The Adjudicating Authority may allow the withdrawal of application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.”

This section was introduced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (Act No. 26 of 2018). The Statement of Objects and Reasons (SOR) for this amendment highlights that it was enacted based on recommendations from an Insolvency Law Committee to allow for the withdrawal of CIRP applications post-admission, provided 90% of the CoC approves.

Further, Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, provides the procedure for such withdrawals. It specifies that the application for withdrawal must be made through the RP, and if made after the invitation for expression of interest, the applicant must justify the withdrawal. The CoC must consider the application within seven days, and if approved by 90% voting share, the RP submits it to the Adjudicating Authority.

Arguments

Appellant’s Arguments:

• Dr. Abhishek Manu Singhvi, the learned Senior Counsel appearing for the appellant, argued that the NCLT and NCLAT cannot sit in appeal over the commercial wisdom of the CoC.
• He submitted that since the CoC had approved the settlement plan with a 94.23% majority, the NCLT and NCLAT erred in rejecting the settlement plan and the withdrawal of CIRP.
• He contended that the IBC aims to allow the Corporate Debtor to continue as an ongoing concern while maximizing creditor payments. The impugned judgments, he argued, were contrary to the spirit of the IBC.

Respondents’ Arguments:

• The respondent No. 1 did not appear and the respondent No. 2 did not wish to contest the matter.

Summary of Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the Adjudicating Authority (NCLT) or the Appellate Authority (NCLAT) can sit in an appeal over the commercial wisdom of the Committee of Creditors (CoC).

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Swiss Ribbons Pvt. Ltd. v. Union of India [(2019) 4 SCC 17] – Supreme Court of India: The court referred to this case to highlight that while Section 12A of the IBC requires a 90% approval from the CoC for withdrawal, the NCLT and NCLAT can still intervene if the CoC’s decision is arbitrary.
• K. Sashidhar v. Indian Overseas Bank [(2019) 12 SCC 150] – Supreme Court of India: This case was cited to emphasize that the commercial wisdom of the CoC has paramount status, with minimal judicial intervention.
• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [(2020) 8 SCC 531] – Supreme Court of India: The court reiterated the principle that the commercial wisdom of the CoC is paramount.
• Maharashtra Seamless Limited v. Padmanabhan Venkatesh [(2020) 11 SCC 467] – Supreme Court of India: The court again emphasized the importance of the CoC’s commercial wisdom and minimal judicial interference.
• Kalpraj Dharamshi v. Kotak Investment Advisors Limited [(2021) 10 SCC 401] – Supreme Court of India: This case was cited to reinforce the principle of minimal judicial interference in the CoC’s decisions.
• Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Limited [(2022) 1 SCC 401] – Supreme Court of India: The court reiterated the importance of the CoC’s commercial wisdom.
• Arun Kumar Jagatramka v. Jindal Steel and Power Limited [(2021) 7 SCC 474] – Supreme Court of India: This case was cited to emphasize the need for minimal judicial interference by the NCLT and NCLAT in the framework of the IBC.

Legal Provisions:

• Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows for the withdrawal of CIRP applications with 90% approval from the CoC.
• Section 30(4) of the Insolvency and Bankruptcy Code, 2016 (IBC): This section specifies that the voting share of CoC for approving the Resolution Plan is 66%.
• Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation provides the procedure for withdrawal of CIRP applications under Section 12A.

Authorities Considered by the Court

Judgment

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

How each authority was viewed by the Court?

• Swiss Ribbons Pvt. Ltd. v. Union of India [(2019) 4 SCC 17]*: The court used this case to establish that while a 90% CoC approval is needed for withdrawal, the NCLT/NCLAT can intervene if the decision is arbitrary.
• K. Sashidhar v. Indian Overseas Bank [(2019) 12 SCC 150]*: The court cited this case to emphasize the paramount status of the commercial wisdom of the CoC.
• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [(2020) 8 SCC 531]*: The court used this case to reiterate the principle that the commercial wisdom of the CoC is paramount.
• Maharashtra Seamless Limited v. Padmanabhan Venkatesh [(2020) 11 SCC 467]*: The court used this case to emphasize the importance of the CoC’s commercial wisdom and minimal judicial interference.
• Kalpraj Dharamshi v. Kotak Investment Advisors Limited [(2021) 10 SCC 401]*: The court cited this case to reinforce the principle of minimal judicial interference in the CoC’s decisions.
• Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Limited [(2022) 1 SCC 401]*: The court reiterated the importance of the CoC’s commercial wisdom.
• Arun Kumar Jagatramka v. Jindal Steel and Power Limited [(2021) 7 SCC 474]*: The court used this case to emphasize the need for minimal judicial interference by the NCLT and NCLAT in the framework of the IBC.
• Section 12A of the IBC: The court explained the provision for withdrawal of CIRP applications with 90% approval from the CoC.
• Section 30(4) of the IBC: The court used this provision to contrast the voting share of CoC for approving the Resolution Plan is 66%.
• Regulation 30A of the 2016 Regulations: The court explained the procedure for withdrawal of CIRP applications under Section 12A.

What weighed in the mind of the Court?

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

• Commercial Wisdom of the CoC: The court emphasized that the CoC’s decision, made after thorough deliberation and with a 94.23% majority, should be given due weightage.
• Stringent Requirements of Section 12A: The court noted that Section 12A of the IBC requires a 90% voting share for withdrawal of CIRP, which is more stringent than the 66% required for approving a resolution plan under Section 30(4).
• Minimal Judicial Interference: The court reiterated the need for minimal judicial intervention by the NCLT and NCLAT in the framework of the IBC.
• Objectives of IBC: The court highlighted that one of the main objectives of the IBC is to allow the Corporate Debtor to continue as an ongoing concern while maximizing payments to creditors.

Ranking of Sentiment Analysis of Reasons:

Fact:Law Ratio

Logical Reasoning

Judgment

The Supreme Court allowed the appeals, setting aside the judgments of the NCLAT and NCLT. The court held that when the CoC, after due deliberation, approves a settlement plan with a 90% or more voting share, the adjudicating authority or the appellate authority cannot interfere unless the decision is wholly capricious, arbitrary, irrational, or de hors the provisions of the statute or the Rules.

The court emphasized that:

“When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stake-holders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC.”

The court further observed that:

“The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the CoC to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.”

The court also highlighted the need for minimal judicial interference by the NCLAT and NCLT in the framework of the IBC, stating:

“Consequently, the need for judicial intervention or innovation from NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC.”

The court found that the CoC’s decision in this case was taken after due deliberation, and therefore, the NCLT and NCLAT were not justified in not giving due weightage to the commercial wisdom of the CoC. The application for withdrawal of CIRP was allowed.

Key Takeaways

• Upholding Commercial Wisdom: The judgment reinforces the principle that the commercial wisdom of the Committee of Creditors (CoC) is paramount in insolvency proceedings, especially in cases of withdrawal under Section 12A of the IBC.
• Limited Judicial Interference: The NCLT and NCLAT should exercise minimal judicial interference in the decisions of the CoC, particularly when the CoC has approved a settlement with a 90% or more voting share.
• Stringent Withdrawal Requirements: Section 12A of the IBC requires a higher threshold (90% voting share) for withdrawal of CIRP compared to the approval of a resolution plan (66%), indicating a legislative intent for stricter scrutiny of withdrawals.
• Importance of Deliberation: The CoC’s decision must be based on thorough deliberation and consideration of the pros and cons of the settlement plan.
• Future Impact: The judgment provides clarity on the extent to which adjudicating and appellate authorities can interfere with the CoC’s decisions, promoting a more efficient and less interventionist insolvency resolution process.

Directions

The Supreme Court quashed the orders of the NCLAT and NCLT and allowed the application for withdrawal of CIRP.

Specific Amendments Analysis

There is no specific amendment discussed in this judgment.

Development of Law

Ratio Decidendi: The ratio decidendi of this case is that the adjudicating authority (NCLT) and the appellate authority (NCLAT) cannot interfere with the commercial wisdom of the Committee of Creditors (CoC) when the CoC approves a settlement plan with a 90% or more voting share, unless the decision is wholly capricious, arbitrary, irrational, or de hors the provisions of the statute or the Rules.

Change in Previous Positions: This judgment reinforces the position that the commercial wisdom of the CoC is paramount, especially in the context of Section 12A of the IBC. Itclarifies that the NCLT and NCLAT should not act as appellate authorities over the CoC’s decisions, thereby limiting judicial intervention in the insolvency resolution process. The Supreme Court has consistently held that the commercial wisdom of the CoC is paramount, and this case further solidifies that position, especially in the context of withdrawals under Section 12A.