Supreme Court Upholds Resolution Plan, Prioritizing IBC Over SEZ Act: Noida SEZ vs. Manish Agarwal (2024)

Introduction

Date of the Judgment: November 05, 2024

Citation: 2024 INSC 839

Judges: Abhay S. Oka, J., Augustine George Masih, J.

Can a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC) bypass the regulations and dues mandated by the Special Economic Zone Act, 2005 (SEZ Act)? The Supreme Court of India recently addressed this critical question, concerning the hierarchy of these two important legislations. This case revolves around a dispute where a resolution plan, approved by the Committee of Creditors (CoC), significantly reduced the dues owed to the Noida Special Economic Zone Authority (NSEZ), an operational creditor. The court had to decide whether the IBC’s provisions could override the SEZ Act, especially concerning statutory dues and transfer fees. The judgment was delivered by a two-judge bench comprising Justice Abhay S. Oka and Justice Augustine George Masih, with Justice Augustine George Masih authoring the opinion.

Case Background

The case involves a dispute between the Noida Special Economic Zone Authority (NSEZ) and Shree Bhoomika International Limited, the Corporate Debtor. The NSEZ had sub-leased a plot of land to the Corporate Debtor in 1995 for a period of 15 years, expiring on May 31, 2010. However, the Corporate Debtor began defaulting on lease payments in 1999, and there was no activity on the land since 2003-2004, leading to financial losses and violation of Special Economic Zone rules.

In 2018, the Stressed Assets Stabilization Fund initiated a public notice for the sale of the Corporate Debtor’s assets through an e-auction. Due to the defaults, the NSEZ initiated the Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT) in 2019. An Interim Resolution Professional (IRP) was appointed, and a Committee of Creditors (CoC) was formed, consisting of the Stressed Assets Stabilization Fund as the sole financial creditor.

The NSEZ filed a claim of INR 6,29,18,121, which was admitted by the Resolution Professional (RP). The liquidation value of the Corporate Debtor was fixed at INR 4.25 Crores. A resolution plan was submitted by M/s Commodities Trading, which was approved by the CoC. However, the NCLT approved the resolution plan, granting only INR 50 Lakhs to the NSEZ against its admitted claim of INR 6.29 Crores. The NSEZ challenged this decision, but the NCLT dismissed the challenge. The NSEZ then appealed to the National Company Law Appellate Tribunal (NCLAT), which also dismissed the appeals.

Timeline

Course of Proceedings

The Corporate Insolvency Resolution Process (CIRP) was initiated by the Appellant, Noida Special Economic Zone Authority (NSEZ), before the National Company Law Tribunal (NCLT). The NCLT admitted the application and appointed an Interim Resolution Professional (IRP). Subsequently, the Committee of Creditors (CoC) was formed, and a resolution plan was approved. The NCLT approved the resolution plan on 05.10.2020, which allocated a significantly reduced amount to the NSEZ compared to its admitted claim.

Aggrieved by the NCLT’s order, the NSEZ filed an application challenging the approval of the resolution plan, which was rejected by the NCLT on 27.11.2020. The NCLT stated that it lacked the jurisdiction to set aside the resolution plan and advised the NSEZ to file an appeal before the National Company Law Appellate Tribunal (NCLAT).

The NSEZ then filed appeals before the NCLAT, challenging both the orders of the NCLT. The NCLAT dismissed these appeals on 14.02.2022, upholding the resolution plan. Finally, the NSEZ appealed to the Supreme Court, challenging the NCLAT’s judgment.

Legal Framework

The case primarily involves the interpretation and application of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Special Economic Zone Act, 2005 (SEZ Act). The key provisions of the IBC include:

• Section 30 of the IBC: This section deals with the submission of a resolution plan to the Committee of Creditors (CoC) for approval.
• Section 31 of the IBC: This section outlines the process for approval of the resolution plan by the Adjudicating Authority (NCLT).
• Section 35C of the IBC: This section specifies the powers and duties of the liquidator in a liquidation process.
• Section 238 of the IBC: This section provides that the provisions of the IBC shall have an overriding effect over other laws, including the SEZ Act.

The relevant provision of the SEZ Act is:

• Section 34(2)(d) of the SEZ Act, 2005: This provision relates to the powers of the Development Commissioner to recover dues.

The interplay of these provisions is crucial in determining whether the resolution plan, approved under the IBC, can override the dues and regulations established under the SEZ Act. The Supreme Court had to determine the extent to which the IBC’s overriding effect under Section 238 would apply in this case.

Arguments

Submissions by the Appellant (Noida Special Economic Zone Authority):

• The Appellant argued that it was not informed about the auction proceedings initiated by the Resolution Professional (RP), thus depriving it of its participation.
• The Appellant contended that once its claim of INR 6,29,18,121 was admitted by the RP, this amount should have been disbursed to it before any other claims, including that of the sole Financial Creditor.
• The Appellant challenged Clause 10.9 of the Resolution Plan, which provided exemptions from NSEZ rules, asserting that this was in direct contravention of the established rules and principles of the NSEZ.
• The Appellant argued that it could not be directed by the RP regarding its functions, especially concerning charges or penalties related to changes in business models or transfer of units.
• The Appellant asserted that bypassing the payment of statutory fees would unjustly enrich the Resolution Applicant, contradicting Section 34(2)(d) of the SEZ Act, 2005.
• The Appellant challenged the fair and liquidation valuation of the Corporate Debtor, arguing that the valuers did not conduct a physical inspection of the property as required by Regulation 35(1)(a) of the IBBI Regulations 2016.
• The Appellant reiterated that it was assigned only INR 50 Lakhs against its admitted claim of INR 6,29,18,121.

Submissions by the Respondents:

• The Respondents argued that the valuation was conducted as per the procedure and the average of two closest estimates given by the valuers were taken into consideration as fair value and liquidation value respectively.
• The Respondents contended that the resolution plan was approved by the Committee of Creditors (CoC) which is the best person to determine their interest.
• The Respondents submitted that the financial decisions taken by the Committee of Creditors (CoC), especially with regard to viability or otherwise, while evaluating the plan would prevail.
• The Respondents argued that the exemptions from NSEZ payments, including any type of fees or penalty for renewal of sub-lease and/or for transfer charges due with regard to the change of directorship or shareholding in favour of the Resolution Applicant has to be dealt with as per Clause 10.9 of the Resolution Plan.
• The Respondents relied on Section 238 of the IBC, which provides for the provisions of IBC 2016 to have an overriding effect over the other laws, including the SEZ Act.
• The Respondents submitted that the Resolution Plan had already been implemented and the dues as found payable under the Resolution Plan have been disbursed to the concerned parties.

The innovativeness of the argument by the Appellant was that the statutory dues payable to the NSEZ should have been given priority over the other dues.

Summary of Arguments

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the Resolution Plan, as approved by the NCLT and NCLAT, was valid and in accordance with the law?
2. Whether the dues of the Appellant, Noida Special Economic Zone Authority (NSEZ), should have been given priority over other claims, considering its status as an operational creditor and the statutory nature of its dues?
3. Whether the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) would override the provisions of the Special Economic Zone Act, 2005 (SEZ Act), especially with regard to the exemptions granted in the Resolution Plan concerning NSEZ payments?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

On Valuation:

• Duncans Industries Ltd. v. State of U.P. and Others, (2000) 1 SCC 633, Supreme Court of India: The Court held that valuation is a question of fact and does not require interference if based on relevant material on record.

On Resolution Plans and Extinguishment of Dues:

• Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Others, (2020) 11 SCC 467, Supreme Court of India: This case was referred to for the evaluation and analysis of Sections 30 and 31 of the IBC which deals with the submission of the Resolution Plan.
• Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited and Others, (2021) 9 SCC 657, Supreme Court of India: This case was cited for the principle that all dues, including statutory dues, not part of the resolution plan, stand extinguished.
• K. Sashidhar v. Indian Overseas Bank and Others, (2019) 12 SCC 150, Supreme Court of India: This case was referred to for the evaluation and analysis of Sections 30 and 31 of the IBC which deals with the submission of the Resolution Plan.

On Overriding Effect of IBC:

• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, (2020) 8 SCC 531, Supreme Court of India: This case was cited for the principle that the IBC has an overriding effect over other laws.
• Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another, (2022) 2 SCC 401, Supreme Court of India: This case was cited for the principle that the IBC has an overriding effect over other laws.
• DBS Bank Limited Singapore v. Ruchi Soya Industries Limited and Another, (2024) 3 SCC 752, Supreme Court of India: This case was cited for the principle that the IBC has an overriding effect over other laws.

Legal Provisions:

• Section 30 of the Insolvency and Bankruptcy Code, 2016: Deals with the submission of a resolution plan.
• Section 31 of the Insolvency and Bankruptcy Code, 2016: Deals with the approval of a resolution plan.
• Section 35C of the Insolvency and Bankruptcy Code, 2016: Specifies the powers and duties of the liquidator.
• Section 238 of the Insolvency and Bankruptcy Code, 2016: Provides for the overriding effect of the IBC over other laws.
• Section 34(2)(d) of the Special Economic Zone Act, 2005: Relates to the powers of the Development Commissioner to recover dues.

Judgment

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

How each authority was viewed by the Court?

• Duncans Industries Ltd. v. State of U.P. and Others [CITATION]: The Court followed this authority, stating that valuation is a question of fact and does not require interference if based on relevant material on record.
• Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Others [CITATION]: The Court followed this authority for the evaluation and analysis of Sections 30 and 31 of the IBC.
• Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited and Others [CITATION]: The Court followed this authority for the principle that all dues, including statutory dues, not part of the resolution plan, stand extinguished.
• K. Sashidhar v. Indian Overseas Bank and Others [CITATION]: The Court followed this authority for the evaluation and analysis of Sections 30 and 31 of the IBC.
• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others [CITATION]: The Court followed this authority, reiterating the principle that the IBC has an overriding effect over other laws.
• Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another [CITATION]: The Court followed this authority, reiterating the principle that the IBC has an overriding effect over other laws.
• DBS Bank Limited Singapore v. Ruchi Soya Industries Limited and Another [CITATION]: The Court followed this authority, reiterating the principle that the IBC has an overriding effect over other laws.

What weighed in the mind of the Court?

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

• Overriding Effect of IBC: The Court emphasized the supremacy of the Insolvency and Bankruptcy Code, 2016 (IBC) over other laws, including the Special Economic Zone Act, 2005 (SEZ Act), as mandated by Section 238 of the IBC. This was a crucial factor in upholding the resolution plan.
• Commercial Wisdom of the Committee of Creditors (CoC): The Court reiterated that the commercial decisions of the CoC are paramount and not subject to judicial interference, except in cases of clear violation of legal provisions.
• Extinguishment of Dues: The Court relied on established precedents to affirm that all dues, including statutory dues, which are not part of the resolution plan, stand extinguished upon its approval.
• Valuation Process: The Court accepted the valuation process followed by the valuers, noting that it was based on relevant material and did not require judicial intervention.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s reasoning was heavily influenced by legal principles and precedents, with a lesser emphasis on the factual aspects of the case.

Logical Reasoning

Judgment

The Supreme Court upheld the decision of the National Company Law Appellate Tribunal (NCLAT), dismissing the appeals filed by the Noida Special Economic Zone Authority (NSEZ). The Court reiterated that the resolution plan, as approved by the Committee of Creditors (CoC) and the Adjudicating Authority (NCLT), was valid and in accordance with the law.

The Court emphasized that the commercial wisdom of the CoC is paramount and not subject to judicial interference, except as provided by Section 30(2) of the IBC. It further stated that all dues, including statutory dues, which are not part of the resolution plan, stand extinguished upon its approval.

The Court held that Section 238 of the IBC provides that the provisions of the IBC have an overriding effect over other laws, including the SEZ Act. Therefore, the exemptions granted in the resolution plan concerning NSEZ payments were valid, as the IBC provisions would prevail over the SEZ Act.

The Supreme Court also noted that the resolution plan had already been implemented and the dues payable under the plan had been disbursed to the concerned parties. The amount payable to the NSEZ was disbursed via Demand Draft dated 22.10.2020, which was received and accepted by the Appellant.

The Court stated, “the financial decisions as have been taken by Committee of Creditors, especially with regard to viability or otherwise, while evaluating the plan would thus prevail.”

The Court further clarified, “the obvious effect is that the same would prevail, leading to the provisions as contained in the SEZ Act 2005 giving way to IBC 2016.”

The Court concluded, “The Orders dated 05.10.2020 and 27.11.2020, as have been passed by the NCLT and approved by the NCLAT vide its impugned Judgment dated 14.02.2022, do not call for any interference in the present Appeals. The appeals being devoid of merit, stand dismissed.”

There were no dissenting opinions in this case.

Key Takeaways

• The Insolvency and Bankruptcy Code, 2016 (IBC) has an overriding effect over other laws, including the Special Economic Zone Act, 2005 (SEZ Act), as per Section 238 of the IBC.
• The commercial wisdom of the Committee of Creditors (CoC) is paramount and not subject to judicial interference, except as provided under Section 30(2) of the IBC.
• All dues, including statutory dues, which are not part of the resolution plan, stand extinguished upon its approval.
• Resolution plans approved under the IBC can override the dues and regulations established under the SEZ Act.
• The financial decisions taken by the Committee of Creditors (CoC), especially with regard to viability or otherwise, while evaluating the plan would prevail.