Supreme Court Upholds Resolution Plan, Emphasizes Commercial Wisdom of Creditors: Maharashtra Seamless Ltd. vs. Padmanabhan Venkatesh (22 January 2020)

Date of the Judgment: 22 January 2020
Citation: (2020) ibclaw.in 07 SC
Judges: Rohinton Fali Nariman, J., Aniruddha Bose, J., V. Ramasubramanian, J. (authored by Aniruddha Bose, J.)

Can a resolution plan approved by the Committee of Creditors (CoC) under the Insolvency and Bankruptcy Code, 2016 (IBC) be rejected solely because it doesn’t match the liquidation value of the corporate debtor? This question was at the heart of a recent Supreme Court case. The Court clarified that the commercial wisdom of the CoC is paramount and a resolution plan need not necessarily match the liquidation value. The Court also addressed whether a successful resolution applicant can withdraw from the process after the plan’s approval.

The Supreme Court bench, consisting of Justices Rohinton Fali Nariman, Aniruddha Bose, and V. Ramasubramanian, delivered the judgment. The opinion was authored by Justice Aniruddha Bose.

Case Background

The case revolves around the Corporate Insolvency Resolution Process (CIRP) of United Seamless Tubulaar Private Limited. The company had a total debt of ₹1897 crores, with major term loans from Deutsche Bank entities (₹1652 crores) and working capital borrowing from Indian Bank (₹245 crores). Indian Bank initiated the CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code). Maharashtra Seamless Ltd. (MSL) emerged as the successful Resolution Applicant, proposing an upfront payment of ₹477 crores.

The National Company Law Tribunal (NCLT), Hyderabad Bench, approved MSL’s resolution plan on 21st January 2019, finding it compliant with Section 30(2) of the Code. However, appeals were filed before the National Company Law Appellate Tribunal (NCLAT) by Padmanabhan Venkatesh (a promoter of the corporate debtor) and Indian Bank, challenging the approval. MSL also filed an appeal against an NCLT order regarding the implementation of the resolution plan.

The NCLAT, in its order dated 8th April 2019, directed MSL to increase its upfront payment to ₹597.54 crores, matching the liquidation value, and to pay operational creditors at the same percentage as financial creditors. The NCLAT also directed the Resolution Professional to take possession of the corporate debtor’s assets until the plan was modified. MSL then appealed to the Supreme Court.

Timeline

Course of Proceedings

The CIRP was initiated by Indian Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code). The Resolution Professional invited resolution plans, and four plans were placed before the Committee of Creditors (CoC). MSL’s plan, offering an upfront payment of ₹477 crores, was approved by the financial creditors with 87.10% voting share. The NCLT initially directed a re-determination of the liquidation value, which was revised to ₹597.54 crores. Despite this, the CoC re-approved MSL’s plan. The NCLT approved the resolution plan on 21st January 2019.

Appeals were filed before the NCLAT by Padmanabhan Venkatesh and Indian Bank, challenging the NCLT’s order. MSL also appealed against an NCLT order regarding the implementation of the resolution plan. The NCLAT directed MSL to increase its upfront payment to match the liquidation value and to ensure parity in payments to operational and financial creditors. The NCLAT also directed the Resolution Professional to take over the assets of the corporate debtor. MSL then appealed to the Supreme Court.

Legal Framework

The judgment primarily deals with the interpretation of the following provisions of the Insolvency and Bankruptcy Code, 2016:

• Section 7: This section deals with the initiation of the corporate insolvency resolution process by a financial creditor.
• Section 12-A: This section outlines the conditions for withdrawal of an application admitted under Sections 7, 9, or 10 of the Code. It requires approval of 90% voting share of the Committee of Creditors (CoC). “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.”
• Section 30(2): This section specifies the requirements that a resolution plan must meet, including provisions for payment of insolvency resolution costs and debts of operational creditors. It states that the payment to operational creditors should not be less than the amount they would receive in liquidation under Section 53 of the Code. “(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than- (i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.”
• Section 31: This section deals with the approval of a resolution plan by the Adjudicating Authority (NCLT). It mandates that the Adjudicating Authority must be satisfied that the resolution plan meets the requirements of Section 30(2) of the Code. “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.”

These provisions are part of the larger framework of the Insolvency and Bankruptcy Code, 2016, which aims to provide a time-bound mechanism for the resolution of corporate insolvency, focusing on the revival of the corporate debtor as a going concern.

Arguments

Arguments by Maharashtra Seamless Ltd. (MSL):

• MSL argued that the NCLAT exceeded its jurisdiction by directing the resolution plan to match the liquidation value. They contended that the final decision on the resolution plan should be left to the commercial wisdom of the Committee of Creditors (CoC).
• MSL submitted that there is no requirement under the Insolvency and Bankruptcy Code, 2016 (the Code) that the resolution plan should match the maximized asset value of the corporate debtor.
• MSL sought a refund of the amount remitted and withdrawal of the resolution plan, citing delays in implementation and the resulting interest burden. They also argued that export orders were cancelled due to implementation delays, making the takeover unworkable.

Arguments by Deutsche Bank (Financial Creditors):

• Deutsche Bank supported MSL’s appeal, arguing that the NCLAT’s direction to match the liquidation value was incorrect.
• They resisted the plea for withdrawal of the resolution plan and refund of the remitted amount, highlighting their exposure of ₹2060 crores, being the primary creditors with 87.10% of the total dues.
• They contended that if the resolution plan did not match the liquidation value, it was the financial creditors who would suffer the loss.

Arguments by Indian Bank and Padmanabhan Venkatesh (Promoter):

• They argued that approving a resolution plan of ₹477 crores for assets valued at ₹597.54 crores would give the Resolution Applicant an unfair advantage.
• They contended that another Resolution Applicant, M/s. Area Projects Consultants Private Limited, had made a revised offer of ₹490 crores, which was higher than MSL’s offer.
• They relied on Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which deals with the determination of liquidation value.

Sub-Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the scheme of the Insolvency and Bankruptcy Code, 2016 (the Code) contemplates that the sum forming part of the resolution plan should match the liquidation value.
2. Whether Section 12-A of the Code is the applicable route through which a successful Resolution Applicant can retreat.

Treatment of the Issue by the Court

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

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Section 7, Insolvency and Bankruptcy Code, 2016: Deals with the initiation of the corporate insolvency resolution process by a financial creditor.
• Section 12-A, Insolvency and Bankruptcy Code, 2016: Specifies the conditions for withdrawal of an application admitted under Sections 7, 9, or 10 of the Code.
• Section 30(2), Insolvency and Bankruptcy Code, 2016: Outlines the requirements that a resolution plan must meet, particularly regarding payments to operational creditors.
• Section 31, Insolvency and Bankruptcy Code, 2016: Deals with the approval of a resolution plan by the Adjudicating Authority.
• Clause 35, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: Defines the procedure for determining the liquidation value of the corporate debtor.

Judgment

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

How each authority was viewed by the Court?

• Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta, (2019 SCC OnLine SC 1478)*: The Supreme Court followed this judgment and reiterated that the commercial wisdom of the Committee of Creditors (CoC) is paramount. It clarified that the Adjudicating Authority’s role is limited to ensuring compliance with Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (the Code), and that the resolution plan need not match the liquidation value. The Court also emphasized the importance of balancing the interests of all stakeholders, including operational creditors, and that the Adjudicating Authority cannot interfere on merits with the commercial decision of the CoC.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the commercial wisdom of the Committee of Creditors (CoC) and the statutory framework of the Insolvency and Bankruptcy Code, 2016 (the Code). The Court emphasized that the Adjudicating Authority’s role is limited to ensuring compliance with Section 30(2) of the Code, and it cannot reassess the resolution plan based on its valuation or direct that it match the liquidation value. The Court also highlighted that the Code aims to revive the corporate debtor as a going concern, and the CoC’s decision should be respected as long as it complies with the statutory requirements.

The Court also took note of the fact that the successful Resolution Applicant had agreed to clear the dues of the operational creditors in percentage at par with the financial creditors. Additionally, the Court considered that no operational creditor had come before the Court questioning the resolution plan.

The Court also held that the exit route prescribed in Section 12-A of the Code was not applicable to a Resolution Applicant, and that the procedure envisaged in the said provision only applies to applicants invoking Sections 7, 9 and 10 of the Code.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The Supreme Court rejected the NCLAT’s view that the resolution plan must match the liquidation value, emphasizing that the commercial wisdom of the CoC is paramount. The Court held that the Adjudicating Authority’s role is limited to ensuring compliance with Section 30(2) of the Code, and it cannot reassess the resolution plan based on its valuation. The Court also rejected the idea that a successful Resolution Applicant can withdraw from the process via Section 12-A of the Code.

The Court’s reasoning was based on the statutory framework of the Insolvency and Bankruptcy Code, 2016 (the Code), the principle of commercial wisdom of the CoC, and the need to revive the corporate debtor as a going concern. The Court also clarified that while the Adjudicating Authority can ensure that the CoC has considered the interests of all stakeholders, it cannot interfere on merits with the commercial decision of the CoC.

The Court quoted from the judgment in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta, (2019 SCC OnLine SC 1478): “There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors.”

The Court further observed: “The Appellate Authority has, in our opinion, proceeded on equitable perception rather than commercial wisdom. On the face of it, release of assets at a value 20% below its liquidation value arrived at by the valuers seems inequitable. Here, we feel the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.”

The Court also noted: “The exit route prescribed in Section 12-A is not applicable to a Resolution Applicant. The procedure envisaged in the said provision only applies to applicants invoking Sections 7, 9 and 10 of the code.”

Key Takeaways

• Commercial Wisdom of CoC: The Supreme Court has firmly established that the commercial wisdom of the Committee of Creditors (CoC) is paramount in approving resolution plans. The Adjudicating Authority should not interfere with this commercial decision unless it violates the provisions of Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (the Code).
• No Requirement to Match Liquidation Value: A resolution plan is not required to match the liquidation value of the corporate debtor. The focus should be on the viability and feasibility of the plan and its compliance with the statutory requirements.
• Limited Role of Adjudicating Authority: The Adjudicating Authority’s role is limited to ensuring that the resolution plan meets the requirements of Section 30(2) and has provisions for its effective implementation. It cannot reassess the plan based on its valuation or direct that it match the liquidation value.
• Withdrawal by Resolution Applicant: A successful Resolution Applicant cannot withdraw from the process using Section 12-A of the Code. This provision is only applicable to applicants who initiated the insolvency process under Sections 7, 9, or 10 of the Code.
• Parity in Payment to Operational Creditors: The resolution plan should provide for the payment of debts to operational creditors in a manner that is fair and equitable, as per Section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 (the Code).

Potential Future Impact: This judgment reinforces the importance of the commercial wisdom of the CoC in the resolution process and limits the scope of judicial interference. It will have a significant impact on future insolvency cases by clarifying that the focus should be on the feasibility of the resolution plan rather than its alignment with the liquidation value. It also clarifies the exit route available to a resolution applicant.

Directions

The Supreme Court directed the Resolution Professional to take physical possession of the assets of the corporate debtor and hand them over to Maharashtra Seamless Ltd. (MSL) within four weeks. The police and administrative authorities were directed to assist the Resolution Professional in carrying out these directions. MSL was also directed to remit an additional sum of ₹50,72,237/- to the Resolution Professional for remittance to the operational creditors.

Development of Law

The ratio decidendi of this case is that the commercial wisdom of the Committee of Creditors (CoC) is paramount in approving a resolution plan, and the Adjudicating Authority cannot interfere with this commercial decision unless it violates the provisions of Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (the Code). Additionally, the resolution plan is not required to match the liquidation value of the corporate debtor. This judgment clarifies that the exit route under Section 12-A of the Code is not available to a Resolution Applicant.

This judgment reaffirms the principles laid down in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta, (2019 SCC OnLine SC 1478) and reinforces the importance of the commercial wisdom of the CoC in the resolution process. It also clarifies the limited role of the Adjudicating Authority and the inapplicability of Section 12-A to Resolution Applicants.

Conclusion

The Supreme Court allowed the appeal of Maharashtra Seamless Ltd. (MSL), setting aside the order of the NCLAT and affirming the order of the Adjudicating Authority. The Court held that the resolution plan need not match the liquidation value and emphasized the commercial wisdom of the Committee of Creditors (CoC). The Court also clarified that a successful Resolution Applicant cannot withdraw from the process using Section 12-A of the Insolvency and Bankruptcy Code, 2016 (the Code). The Court directed the Resolution Professional to take possession of the assets of the corporate debtor and hand them over to MSL, and also directed MSL to remit an additional sum of ₹50,72,237/- to the Resolution Professional for remittance to the operational creditors.

Category

• Insolvency and Bankruptcy Code, 2016
  • Section 7, Insolvency and Bankruptcy Code, 2016
  • Section 12-A, Insolvency and Bankruptcy Code, 2016
  • Section 30, Insolvency and Bankruptcy Code, 2016
  • Section 31, Insolvency and Bankruptcy Code, 2016
  • Corporate Insolvency Resolution Process (CIRP)
  • Committee of Creditors (CoC)
  • Liquidation Value
  • Resolution Plan
  • Commercial Wisdom
  • Operational Creditors
  • Financial Creditors

FAQ

Q: What is the main issue in the Maharashtra Seamless Ltd. vs. Padmanabhan Venkatesh case?

A: The main issue was whether a resolution plan under the Insolvency and Bankruptcy Code, 2016 (the Code) must match the liquidation value of the corporate debtor and whether a successful resolution applicant can withdraw from the process after the plan’s approval.

Q: What did theSupreme Court decide regarding the requirement for a resolution plan to match the liquidation value?

A: The Supreme Court held that a resolution plan is not required to match the liquidation value of the corporate debtor. The Court emphasized the commercial wisdom of the Committee of Creditors (CoC) and stated that the Adjudicating Authority’s role is limited to ensuring compliance with Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (the Code), not to reassess the plan based on its valuation.

Q: Can a successful resolution applicant withdraw from the process after the plan’s approval?

A: The Supreme Court clarified that a successful Resolution Applicant cannot withdraw from the process using Section 12-A of the Code. This provision is only applicable to applicants who initiated the insolvency process under Sections 7, 9, or 10 of the Code.

Q: What is the role of the Committee of Creditors (CoC) in the resolution process?

A: The Committee of Creditors (CoC) plays a crucial role in the resolution process. The Supreme Court emphasized that the commercial wisdom of the CoC is paramount in approving resolution plans. The Adjudicating Authority should not interfere with this commercial decision unless it violates the provisions of Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (the Code).

Q: What is the significance of this judgment?

A: This judgment reinforces the importance of the commercial wisdom of the CoC in the resolution process and limits the scope of judicial interference. It clarifies that the focus should be on the feasibility of the resolution plan rather than its alignment with the liquidation value. It also clarifies the exit route available to a resolution applicant.

Q: What did the Supreme Court direct regarding possession of the assets of the corporate debtor?

A: The Supreme Court directed the Resolution Professional to take physical possession of the assets of the corporate debtor and hand them over to Maharashtra Seamless Ltd. (MSL) within four weeks. The police and administrative authorities were directed to assist the Resolution Professional in carrying out these directions.

Q: What is the meaning of “commercial wisdom” in the context of this case?

A: In this context, “commercial wisdom” refers to the business judgment and decision-making authority of the Committee of Creditors (CoC). The Supreme Court has emphasized that the CoC is best positioned to assess the viability of a resolution plan and make decisions that maximize the value of the corporate debtor’s assets, within the framework of the Insolvency and Bankruptcy Code, 2016 (the Code).

Q: What are operational creditors and financial creditors in the context of the Insolvency and Bankruptcy Code, 2016?

A: Financial creditors are those to whom a financial debt is owed, such as banks and other lending institutions. Operational creditors are those to whom an operational debt is owed, such as suppliers, employees, and other vendors. The Insolvency and Bankruptcy Code, 2016 (the Code) treats these two categories of creditors differently in the resolution process, with financial creditors generally having more say in the decision-making.