Supreme Court Upholds Withdrawal of CIRP, Prioritizing Corporate Revival: K.N. Rajakumar vs. V. Nagarajan (2021)

Date of the Judgment: 15 September 2021
Citation: Not Available
Judges: L. Nageswara Rao, J., B.R. Gavai, J., and B.V. Nagarathna, J. The judgment was delivered by a three-judge bench.
Can a company undergoing Corporate Insolvency Resolution Process (CIRP) withdraw the process if a majority of the creditors agree? The Supreme Court of India examined this question, focusing on the importance of corporate revival and the procedure for withdrawing CIRP under the Insolvency and Bankruptcy Code (IBC). The court had to determine the validity of a CIRP withdrawal and whether the Committee of Creditors (CoC) was correctly constituted. The judgment was delivered by a three-judge bench consisting of Justices L. Nageswara Rao, B.R. Gavai, and B.V. Nagarathna.

Case Background

The case revolves around M/s Aruna Hotels Ltd. (the Corporate Debtor), which was incorporated in 1960 and engaged in various businesses. By the time of the case, it primarily owned a hotel in Chennai, which had been shut down for over seven years. D. Ramjee, an ex-employee of the Corporate Debtor, had joined as a Junior Assistant in 1964 and officially retired in 2013 after 49 years of service. He claimed that he was not paid his salary dues regularly.

In February 2015, Subasri Realty Limited took over the management of the Corporate Debtor, acquiring the shareholding of the previous promoters. D. Ramjee claimed that the new management disowned the previous management’s admissions regarding the settlement of salary arrears. On 27 February 2017, D. Ramjee issued a demand notice under Section 271(1)(a) of the Companies Act, 2013, read with Section 8(1) of the IBC, demanding payment of Rs. 2,60,68,883 along with interest.

Following the Corporate Debtor’s failure to comply, D. Ramjee filed an application under Section 9 of the IBC on 3 April 2017. The National Company Law Tribunal (NCLT) admitted the application on 13 June 2017 and initiated CIRP against the Corporate Debtor. However, this order was later set aside by the National Company Law Appellate Tribunal (NCLAT) on 2 August 2017, based on an assurance from the Corporate Debtor that they would pay three years’ salary arrears to the employees who had initiated CIRP.

Subsequently, another ex-employee, N. Subramanian, also issued a demand notice and filed an application under Section 9 of the IBC, which was admitted by NCLT on 17 November 2017. This order was initially set aside by NCLAT on 16 July 2018, but the Supreme Court overturned NCLAT’s decision on 3 March 2021, restoring the NCLT order admitting the application filed by N. Subramanian.

In the interim, Subasri Realty Limited sought to compromise with N. Subramanian and was granted liberty by the Supreme Court on 19 March 2021 to approach the Committee of Creditors (CoC) for settlement under Section 12A of the IBC. On 22 April 2021, NCLT directed the Resolution Professional (RP) to convene a meeting of the CoC consisting of the members who were part of the CoC in 2017. This order was challenged by the erstwhile director of the Corporate Debtor, K.N. Rajakumar, but his appeal was dismissed by NCLAT on 30 April 2021.

The CoC, in its 8th meeting on 25 May 2021, unanimously resolved to withdraw the CIRP. The NCLT allowed the withdrawal of CIRP on 4 June 2021 and directed the RP to hand over the management of the Corporate Debtor to the Board of Directors. D. Ramjee’s application to set aside the resolution for withdrawal of CIRP was dismissed by NCLT on 6 July 2021, leading to the current appeals.

Timeline

Course of Proceedings

Initially, the NCLT admitted D. Ramjee’s application under Section 9 of the IBC, initiating CIRP. However, NCLAT set aside this order, which was later restored by the Supreme Court. Subsequently, NCLT directed the RP to convene a meeting of the CoC with its original members from 2017. The CoC then resolved to withdraw the CIRP, which was approved by NCLT. D. Ramjee’s challenge to this withdrawal was dismissed by NCLT. The Supreme Court heard appeals against both the NCLAT order regarding the CoC composition and the NCLT order allowing withdrawal of CIRP.

Legal Framework

The primary legal framework in this case is the Insolvency and Bankruptcy Code, 2016 (IBC), specifically:

• Section 9 of the IBC: This section deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by an operational creditor.
  “Where a corporate debtor commits a default, an operational creditor may, on the expiry of a period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, file an application for initiation of a corporate insolvency resolution process against such corporate debtor before the Adjudicating Authority.”
• Section 12A of the IBC: This section allows for the withdrawal of an application admitted under Section 7, 9, or 10, with the approval of 90% voting share of the Committee of Creditors (CoC).
  “12A. 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.”
• Section 24(6) of the IBC: This section provides that the voting share of the creditors shall be based on the financial debts owed.
• Section 25(2)(e) of the IBC: This section mandates that the Resolution Professional (RP) should maintain an updated list of claims.

The judgment also refers to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, particularly Regulation 16, which deals with the updating of claims by the RP.

Arguments

Arguments on behalf of D. Ramjee:

• The provisions of the IBC require the claims of all creditors to be updated by the Resolution Professional (RP) from time to time.

• Relying on Regulation 16 of the 2016 Regulations, since the matter was settled between the financial creditors and the Corporate Debtor, the Committee of Creditors (CoC) should have been constituted only of the operational creditors.

• In recognition of the principle that a creditor must have a valid claim to be a member of the CoC, Section 25(2)(e) of the IBC mandates that the RP should maintain an updated list of claims.

• Section 24(6) of the IBC provides that the voting share shall be based on the financial debts owed.

• The composition of the CoC must change based on the updated claims of the creditors. Since the Corporate Debtor had no financial creditors, the CoC should have been constituted of operational creditors, where D. Ramjee would have had a substantial voting right.

• The finance taken from HDFC Bank was only an ‘interim finance’ and not a financial debt. Therefore, HDFC Bank could not be termed a financial creditor.

• The view taken by both NCLT and NCLAT that the CoC should consist only of financial creditors as on the date of initiation of CIRP proceedings is untenable.

Arguments on behalf of K.N. Rajakumar:

• The new management of the Corporate Debtor has successfully revived the business by settling the claims of the members of the CoC, amounting to Rs. 46,31,16,650.

• The order dated 13 June 2017 passed by NCLT admitting the Section 9 application of D. Ramjee was challenged by the Corporate Debtor before NCLAT, which allowed the appeal and set aside the said order. D. Ramjee did not challenge this order, which attained finality.

• D. Ramjee had received an amount of Rs. 18,50,000 as arrears of salary. The Supreme Court rejected D. Ramjee’s application for permission to file an appeal.

• Having not challenged the order dated 2 August 2017 passed by NCLAT, D. Ramjee did not have any locus in the proceedings initiated by the Corporate Debtor for withdrawal of CIRP.

• The new management of the Corporate Debtor has taken a loan from HDFC Bank, which fact has also been acknowledged by NCLT while permitting withdrawal of CIRP proceedings under Section 12A of the IBC.

• The CoC should consist only of HDFC Bank, which is now the sole financial creditor.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues for determination. However, the core issue revolved around:

• Whether the withdrawal of CIRP was valid under Section 12A of the IBC, given the composition of the CoC.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court referred to the following authorities:

Judgment

The Supreme Court held that the withdrawal of the CIRP was valid, as it had been approved by the requisite 90% voting share of the CoC, as required under Section 12A of the IBC. The Court emphasized that the primary objective of the IBC is to revive the Corporate Debtor and make it a going concern.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the Committee of Creditors (CoC) had approved the withdrawal of the Corporate Insolvency Resolution Process (CIRP) with the requisite 90% majority, as mandated by Section 12A of the Insolvency and Bankruptcy Code (IBC). The court emphasized that the IBC’s main objective is to revive the corporate debtor and ensure it continues as a going concern. The court also noted that the Corporate Debtor had settled with its erstwhile financial creditors, and the withdrawal of CIRP would allow the Corporate Debtor to continue as a going concern.

The Court did not delve into the arguments regarding the reconstitution of the CoC or the nature of the HDFC Bank loan, as it was not necessary to decide the case. The Court relied on the fact that the withdrawal was approved by the requisite majority, and the objective of the IBC is to revive the Corporate Debtor.

The Court quoted from Ghanashyam Mishra and Sons Private Limited:

“one of the principal objects of I&B Code is, providing for revival of the Corporate Debtor and to make it a going concern. I&B Code is a complete Code in itself.”

The Court also noted that:

“Every attempt has to be first made to revive the concern and make it a going concern, liquidation being the last resort.”

The Court further stated that:

“NCLT has rightly disposed of the application filed by D.Ramjee having rendered infructuous.”

There were no minority opinions in this case. The decision was unanimous.

Key Takeaways

• The Supreme Court emphasized that the primary objective of the IBC is to revive the Corporate Debtor and make it a going concern.
• Withdrawal of CIRP is permissible under Section 12A of the IBC if approved by 90% of the CoC.
• Courts should not delve into academic issues when not necessary for deciding a case.
• The decision highlights the importance of adhering to the procedural requirements of the IBC while also keeping the larger objective of corporate revival in mind.

Directions

The Supreme Court did not give any specific directions. It upheld the NCLT order allowing the withdrawal of CIRP and dismissed the appeal filed by D. Ramjee.

Development of Law

The ratio decidendi of this case is that the withdrawal of the Corporate Insolvency Resolution Process (CIRP) under Section 12A of the Insolvency and Bankruptcy Code (IBC) is valid if it is approved by 90% of the Committee of Creditors (CoC), and the court should not delve into academic issues when it is not necessary for deciding the case. This case reaffirms the principle that the primary objective of the IBC is to revive the Corporate Debtor and make it a going concern. There is no change in the previous position of law, but the court has reiterated the importance of corporate revival and the procedural aspects of withdrawal under Section 12A of the IBC.

Conclusion

The Supreme Court upheld the withdrawal of the Corporate Insolvency Resolution Process (CIRP) of M/s Aruna Hotels Ltd., emphasizing the importance of corporate revival and adherence to the procedural requirements of the Insolvency and Bankruptcy Code (IBC). The court dismissed the appeal by D. Ramjee, an ex-employee, and allowed the withdrawal of the appeal by K.N. Rajakumar, the erstwhile director, thereby prioritizing the revival of the company as a going concern. The judgment reaffirms that the primary objective of the IBC is to facilitate the revival of corporate debtors and that the withdrawal of CIRP is permissible if approved by the requisite majority of the CoC.