VALLAL RCK vs. M/S SIVA INDUSTRIES AND HOLDINGS LIMITED

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION  CIVIL APPEAL NOS. 1811­1812 OF 2022 VALLAL RCK            ...APPELLANT(S) VERSUS M/S SIVA INDUSTRIES AND HOLDINGS  LIMITED AND OTHERS     ...RESPONDENT(S) J U D G M E N T B.R. GAVAI, J. 1. These   appeals   challenge   the   common   judgment th dated   28   January   2022   passed   by   the   learned   National Company Law Appellate Tribunal, Chennai Bench, Chennai (hereinafter referred to as the “NCLAT”) in Company Appeal (AT)(CH)(Insolvency)   Nos.   211   and   212   of   2021,   thereby dismissing the appeals filed by the present appellant, which th were   in   turn   filed,   challenging   the   two   orders   dated   12 Signature Not Verified August 2021 passed by the learned National Company Law Digitally signed by Anita Malhotra Date: 2022.06.03 16:18:17 IST Reason: Tribunal, Division Bench­II, Chennai (hereinafter referred to 1 as the “NCLT”), thereby rejecting the application filed by the Resolution Professional (“RP” for short) under Section 12A of the Insolvency and Bankruptcy Code, 2016 (“IBC” for short) read with Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)   Regulations,   2016   (hereinafter   referred   to   as   the “2016 Regulations”), for withdrawal of the application filed under Section 7 of the IBC in view of the Settlement Plan submitted   by   the   appellant.   The   appellant   has   also challenged the order passed by the learned NCLAT of the even   date   vide   which   the   appeal   filed   by   the   present appellant   against   the   order   passed   by   the   learned   NCLT directing initiation of liquidation proceedings in respect of M/s Siva Industries and Holdings Limited­respondent No.1 herein   (hereinafter   referred   to   as   the   “Corporate   Debtor”), was dismissed. A short question that falls for consideration in the 2. present appeal is as to whether the adjudicating authority (NCLT)   or   the   appellate   authority   (NCLAT)   can   sit   in   an 2 appeal   over   the   commercial   wisdom   of   the   Committee   of Creditors (hereinafter referred to as the “CoC”) or not. 3. The facts in brief giving rise to the present appeals are as under: IDBI   Bank   Limited   had   filed   an   application   under Section 7 of the IBC for initiation of Corporate Insolvency Resolution Process (hereinafter referred to as the “CIRP”) in respect of the Corporate Debtor.  The learned NCLT, vide its th order dated 4  July 2019, admitted the said application.  As a result of which, CIRP in respect of the Corporate Debtor was initiated.  The RP had presented a Resolution Plan before the CoC, submitted by one M/s Royal Partners Investment Fund Limited.   However, since the said Plan received only 60.90% votes of the CoC and could not meet the requirement of receiving 66% votes, the said Plan could not be approved. th The RP, on 8  May 2020, filed an application being 4. IA/837/IB/2020 under Section 33(1)(a) of the IBC seeking initiation of liquidation process of the Corporate Debtor.  The appellant, who is the promoter of the Corporate Debtor, filed 3 a settlement application being IA/647/IB/2020 before the NCLT under Section 60(5) of the IBC, showing his willingness to   offer   one­time   settlement   plan.     The   appellant   sought necessary   directions   to   the   CoC   to   consider   the   terms   of Settlement Plan as proposed by him.   From the month of th th th October to December 2020, the 13 , 14  and 15  meetings of the   CoC   were  held   to  consider   the  Settlement  Plan  as submitted by the appellant.  Deliberations took place in the said meetings with regard to the said Settlement Plan and the final settlement proposal which was submitted by the th appellant   came   to   be   considered   by   the   CoC   in   its   16 th meeting   held   on   18   January   2021.     Initially,   the   said Settlement   Plan   received   only   70.63%   votes.     However subsequently,   one   of   the   Financial   Creditors   viz. International   Assets   Reconstruction   Co.   Ltd.   (hereinafter referred   to   as   “IARCL”)   having   voting   share   of   23.60%, decided to approve the said Settlement Plan and intimated the RP about the same. 5. Since the said Settlement Plan stood approved by more   than   90%   voting   share,   the   RP   filed   an   application 4 before the learned NCLT seeking necessary directions based th on the request of IARCL.   Vide its order dated 29   March 2021,   the   learned   NCLT   ordered   the   RP   to   reconvene   a meeting   of   CoC   and   place   the   e­mail   of   IARCL   before   it. th st Accordingly, the 17  CoC meeting was convened on 1  April 2021, wherein the said Settlement Plan was approved with a voting   majority   of   94.23%.     Accordingly,   the   RP   filed   an application   being   MA/43/CHE/2021   in   IBA/453/2019 before the learned NCLT seeking withdrawal of CIRP initiated against the Corporate Debtor in view of the approval of the said Settlement Plan by CoC. th 6. The learned NCLT, vide its order dated 12   August 2021, while holding that the said Settlement Plan was not a settlement simpliciter under Section 12A of the IBC but a “Business Restructuring Plan”, rejected the application for withdrawal   of   CIRP   and   approval   of   the   Settlement   Plan. Vide another order of even date, the learned NCLT initiated liquidation   process   of   the   Corporate   Debtor   in IA/837/IB/2020   as   well.     Being   aggrieved   thereby,   the appellant preferred two appeals before the learned NCLAT. 5 th Vide the common impugned judgment dated 28   January 2022, the same came to be dismissed. Hence, the present appeals. Notice   was   issued   by   this   Court   in   the   present 7. th appeals on 11  March 2022.  While issuing notice, this Court also granted stay of the impugned judgment.  Insofar as the respondent   No.1   is   concerned,   no   one   appeared.     Shri Abhishek Swaroop, learned counsel appearing on behalf of the respondent No.2 also does not wish to contest the matter. As such, we could have very well allowed the appeals as being uncontested.   However, since an important question with regard to interpretation of Section 12A of the IBC arises, we are inclined to consider the matter for deciding the said issue. 8. We have heard Dr. Abhishek Manu Singhvi, learned Senior Counsel appearing on behalf of the appellant. 9. Dr. Singhvi submits that it is more than well­settled that   the   adjudicating   authority   or   the   appellate   authority cannot sit in an appeal over the commercial wisdom of CoC. 6 He submitted that the CoC, having accepted the Settlement Plan with the voting majority of 94.23%, the learned NCLT and the learned NCLAT have grossly erred in rejecting the Settlement Plan and withdrawal of CIRP. Dr. Singhvi submitted that one of the main objects of 10. the IBC is permitting the Corporate Debtor to continue as an on­going concern and at the same time, paying the dues of the   creditors   to   the   maximum.     He   submits   that   the th impugned judgment dated 28  January 2022 passed by the th learned   NCLAT   and   the   orders   dated   12   August   2021 passed by the learned NCLT are totally contrary to the spirit behind the IBC. 11. For   considering   these   submissions,   it   will   be apposite to refer to Section 12A of the IBC, which reads thus:

7 12. It is relevant to note that Section 12A of the IBC was

The Statement of Objects and Reasons (for short “SOR”) of the Act No. 26 of 2018 would reveal that after the IBC was enacted in 2016, it had emerged that further fine tuning of the   IBC   would   be   required.     The   Government   therefore constituted   an   Insolvency   Law   Committee   (hereinafter referred to as the “said Committee”) to review the functioning and implementation of the IBC.  The SOR would further reveal that   the   recommendations   of   the   said   Committee   were examined by the Government and it was accordingly decided to amend the IBC. One of the amendments proposed was for making a provision for withdrawal of application for initiation of   CIRP   admitted   by   Adjudicating   Authority.     It   was recommended that such an exit should be allowed provided the CoC approves such action by 90% voting share.  13. It will be relevant to refer to Clause (vii) of the key recommendations in the Report of the said Committee dated th 26  March 2018, which reads thus: 8 “(vii)     in   order   to   cater   to   exceptional circumstances   warranting   withdrawal   of   an application for CIRP post­admission, it has been recommended to allow such exit provided the CoC approves such action by ninety per cent of voting share;” It will also be relevant to refer to paragraph (29) of 14. the Report of the said Committee, which reads thus: “ 29.   WITHDRAWAL   OF   CIRP   PROCEEDINGS PURSUANT TO SETTLEMENT   29.1 Under rule 8 of the CIRP Rules, the NCLT may permit withdrawal of the application on a request   by   the   applicant   before   its   admission. However, there is no provision in the Code or the CIRP   Rules   in   relation   to   permissibility   of withdrawal post admission of a CIRP application. It was observed by the Committee that there have been instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission for withdrawal of CIRP was   granted.   This   practice   was   deliberated   in light of the objective of the Code as encapsulated in the BLRC Report, that the design of the Code is based on ensuring that “ all key stakeholders will participate to collectively assess viability. The law must   ensure   that   all   creditors   who   have   the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated   solution. ”   Thus,   it   was   agreed   that once   the   CIRP   is   initiated,   it   is   no   longer   a proceeding   only   between   the   applicant   creditor and the corporate debtor but is envisaged to be a 9 proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions   for   enforcement   and   settlement   to   the exclusion of the general benefit of all creditors.  29.2     On   a   review   of   the   multiple   NCLT   and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and   not   only   the   applicant   creditor   and   the debtor. On this basis read with the intent of the Code,  the Committee unanimously agreed that the relevant rules may be amended to provide for   withdrawal   post   admission   if   the   CoC approves of such action by a voting share of ninety   per   cent.   It   was   specifically   discussed that   rule   11   of   the   National   Company   Law Tribunal Rules, 2016 may not be adopted for this aspect of CIRP at this stage (as observed by the Hon’ble   Supreme   Court   in   the   case   of   Uttara Foods   and   Feeds   Private   Limited   v.   Mona Pharmacem ) and even otherwise, as the issue can be specifically addressed by amending rule 8 of the CIRP Rules.”  15. It could thus be seen from the Report of the said Committee that, the said Committee had observed that there have been instances where on account of settlement between the   applicant   creditor   and   the   corporate   debtor,   judicial permission for withdrawal of CIRP was granted.  The Report would further reveal that it refers to Banking Law Reforms 10 Committee   Report   which   emphasizes   that   the   law   must ensure that  all creditors who  have the  capability and  the willingness to restructure their liabilities must be part of the negotiation process. It also emphasizes that the liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution.  The said Committee states   that   once   the   CIRP   is   initiated,   it   is   no   longer   a proceeding   only   between   the   applicant   creditor   and   the corporate debtor but is envisaged to be a proceeding involving all   creditors   of   the   debtor.   The   intent   of   the   IBC   is   to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors.   The Report would further reveal that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. The said Committee therefore recommended that   the   relevant   rules   may   be   amended   to   provide   for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent.  11 16. It could thus be seen that Section 12A of the IBC was brought   in   the   statute   book   on   the   basis   of   the   said Committee’s Report. It could be noticed that though by the Amendment Act No. 26 of 2018, the voting share of 75% of CoC for approval of the Resolution Plan was brought down to 66%,   Section   12A   of   the   IBC   which   was   brought   in   the statute book by the same amendment, requires the voting share of 90% of CoC for approval of withdrawal of CIRP.  It could thus clearly be seen that a more stringent provision has been made insofar as withdrawal of CIRP is concerned. 17. It is further to be noted that after Section 12A of the IBC was brought in the statute book, Regulation 30A of the 2016 Regulations came to be inserted vide notification dated rd 3   July   2018.     The   same   came   to   be   substituted   vide th notification dated 25  July 2019.  Regulation 30A of the 2016 Regulations reads thus:

12

13 ninety   percent   voting   share,   the   resolution professional shall submit such application along with   the   approval   of   the   committee,   to   the Adjudicating Authority on behalf of the applicant, within three days of such approval. (6)   The   Adjudicating   Authority   may,   by   order, approve   the   application   submitted   under   sub­ regulation (3) or (5). (7) Where the application is approved under sub­ regulation   (6),   the   applicant   shall   deposit   an amount, towards the actual expenses incurred for the purposes referred to in clause ( a ) or clause ( b ) of sub­regulation (2) till the date of approval by the Adjudicating Authority, as determined by the interim   resolution   professional   or   resolution professional,   as   the   case   may   be,   within  three days of such approval, in the bank account of the corporate   debtor,   failing   which   the   bank guarantee received under sub­regulation (2) shall be invoked, without prejudice to any other action permissible   against   the   applicant   under   the Code.” 18. A perusal of the said Regulation would reveal that where an application for withdrawal under Section 12A of the IBC   is   made   after   the   constitution   of   the   Committee,   the same   has   to   be   made   through   the   interim   resolution professional or the resolution professional, as the case may be.  The application has to be made in Form­FA.  It further provides that when an application is made after the issue of invitation for expression of interest under Regulation 36A, the 14 applicant   is   required   to   state   the   reasons   justifying withdrawal of the same.  The RP is required to place such an application   for   consideration   before   the   Committee.     Only after such an application is approved by the Committee with 90% voting share, the RP shall submit the same along with the approval of the Committee to the adjudicating authority. It could thus be seen that a detailed procedure is prescribed under Regulation 30A of the 2016 Regulations as well. 19. In the case of  Swiss Ribbons Privated Limited and 1 ,   one   of   the Another   v.   Union   of   India   and   Others challenges made was with regard to validity of Section 12A of the IBC.  It was argued that the figure of 90% voting share was   arbitrary.   It   was   the   contention   that   though   the withdrawal was just and proper, the CoC could exercise the power arbitrarily to reject such a settlement. While rejecting the said contention, this Court observed thus:

1 (2019) 4 SCC 17 15

It could thus be seen that this Court has found that 20. if   the   CoC   arbitrarily   rejects   a   just   settlement   and/or withdrawal   claim,   the   learned   NCLT   and   thereafter   the learned NCLAT can always set aside such decision under the provisions of the IBC. This Court has consistently held  that the commercial 21. wisdom of the CoC has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the IBC. It has been held that there is an intrinsic assumption, that financial 16 creditors   are   fully   informed   about   the   viability   of   the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts.  A reference in this respect could be made to the

Creditors   of   Essar   Steel   India   Limited   through Authorised   Signatory   v.   Satish   Kumar   Gupta   and

4 Padmanabhan   Venkatesh   and   Others ,   Kalpraj Dharamshi and Another v. Kotak Investment Advisors

Apartments   Welfare   Association   and   Others   v.   NBCC 6 (India) Limited and Others . 2 (2019) 12 SCC 150 3 (2020) 8 SCC 531 4 (2020) 11 SCC 467 5 (2021) 10 SCC 401 6 (2022) 1 SCC 401 17 22. No doubt that the aforesaid observations have been made by this Court while considering the powers of the CoC while granting its approval to the Resolution Plan. 23. As already stated hereinabove, the provisions under Section 12A of the IBC have been made more stringent as compared to Section 30(4) of the IBC.  Whereas under Section 30(4) of the IBC, the voting share of CoC for approving the Resolution Plan is 66%, the requirement under Section 12A of the IBC for withdrawal of CIRP is 90%. 24. When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stake­holders 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 interference would be warranted only when the adjudicating authority or the appellate authority finds the decision   of   the   CoC   to   be   wholly   capricious,   arbitrary,

Rules. 18

wide deliberations amongst the members of the CoC while considering   the   Settlement   Plan   as   submitted   by   the appellant.   Not only that, the proceedings would also reveal that after suggestions were made by some of the members of the   CoC,   suitable   amendments   were   carried   out   in   the Settlement Plan by the appellant.  One of the members of the CoC having voting share of 23.60%, though initially opposed the Settlement Plant, subsequently decided to support the

March 2021, directed the RP to reconvene the CoC meeting.

meeting of the CoC was reconvened, wherein the Settlement Plan was approved by 94.23% votes.   It is  thus  clear  that the  decision of  the   CoC  was 26. taken after the members of the CoC, had due deliberation to consider the pros and cons of the Settlement Plan and took a decision   exercising   their   commercial   wisdom.     We   are therefore   of   the   considered   view   that   neither   the   learned 19 NCLT nor the learned NCLAT were justified in not giving due weightage to the commercial wisdom of CoC. 27. This Court has, time and again, emphasized the need for minimal judicial interference by the NCLAT and NCLT in the framework of IBC.  We may refer to the recent observation

7 : v. Jindal Steel and Power Limited and Another

28. In the result, we pass the following order: 7 (2021) 7 SCC 474 20 (i) The appeals are allowed; th (ii) The   impugned   judgment   dated   28   January   2022 delivered by the learned NCLAT in Company Appeal (AT)(CH)(Insolvency) Nos. 211 and 212 of 2021 and th the   orders   dated   12   August  2021   passed   by   the learned   NCLT   in   MA/43/CHE/2021   in IBA/453/2019   and   in   IA/837/IB/2020   in IBA/453/2019 are quashed and set aside; and  (iii) The   application   bearing   No.   MA/43/CHE/2021   in IBA/453/2019   filed   by   the   Resolution   Professional before the learned NCLT for withdrawal of CIRP is allowed. 29. Pending application(s), if any, shall stand disposed of in the above terms.  No order as to costs. …..….......................J. [B.R. GAVAI]                   …….........................J. [HIMA KOHLI] NEW DELHI; JUNE 03, 2022. 21