The Supreme Court of India ("Supreme Court"), in a recent judgment in the matter of Maharashtra Seamless Steel Ltd. v. Padmanabhan Venkatesh & Ors.1, upheld the primacy of 'commercial wisdom' of the Committee of Creditors and held that the approved resolution plan can provide for payment of amounts lower than the liquidation value of the Corporate Debtor if it complies with the provisions of Section 30 (2) (b) of the IBC.
The matter arose out of the corporate insolvency resolution process of United Seamless Tabulaar Private Limited ("United Seamless"), having a total debt of INR 1897 crores. The National Company Law Tribunal, Hyderabad Bench ("NCLT") by its order dated January 21, 2019, approved the resolution plan of Maharashtra Seamless Ltd. ("MSL"), stating that the Committee of Creditors ("CoC") in its 'commercial wisdom' has approved the resolution plan despite the value offered under the resolution plan being lower than the liquidation value. The NCLT held that the resolution plan was in conformity with provisions of Section 30 (2) of the Insolvency and Bankruptcy Code, 2016 ("IBC"), which lays down the mandatory contents of a resolution plan.
This order of the NCLT was appealed before the National Company Law Appellate Tribunal ("NCLAT") by the original promoters of United Seamless.
The appeal before the NCLAT was primarily on the ground that MSL would get the assets of United Seamless at a much lower amount than the liquidation value, giving MSL a windfall.
By its order dated April 8, 2019, the NCLAT held that, MSL has agreed to pay the same percentage to both the operational creditors and the financial creditors, and even if such an offer is accepted; the amount is much less than the liquidation value of United Seamless. NCLAT further held that MSL should increase its offer to make it at par with the average liquidation value of United Seamless. NCLAT directed that if MSL does not increase its offer, the approval of the resolution plan would be set aside.
The reasoning applied by the NCLAT was that the resolution plan of MSL was against the statement of objects and reasons of the IBC and the payment to the operational creditors was lower than the proportionate liquidation value; therefore the resolution plan as approved by NCLT was against Section 30(2)(b) of the IBC. This reasoning of the NCLAT is overturned by the Supreme Court in its present judgment for the following reasons.
Grounds of appeal before the Supreme Court:
Aggrieved by the order of NCLAT, MSL filed an appeal before the Supreme Court.
MSL contended that the NCLAT exceeded its jurisdiction in directing the resolution applicant to match the liquidation value in the resolution plan. It further contended that the financial decision on the resolution plan should be left to the commercial wisdom of the CoC; and that there is no requirement under the IBC for the resolution plan to match the maximized asset value of United Seamless.
Supreme Court's Judgment:
One of the questions of law analysed by the Supreme Court was whether the scheme of the IBC contemplates whether the sum forming part of the resolution plan should match the liquidation value or not.
The Supreme Court observed that the manner of dealing with operational creditor dues is provided for under Section 30 of the IBC which was further crystallised in the Supreme Court Essar judgment2.
In the Essar judgment, the Supreme Court expanded upon the Preamble to the IBC and held that maximization of value of assets of the corporate debtors so as to run them efficiently as going concerns, is an important objective of the IBC. When the committee of creditors exercises its commercial wisdom to arrive at business decisions, it must take into account key features of the IBC. So long as the provisions of the IBC and its regulations have been met, it is the commercial wisdom of the requisite majority of the committee of creditors which holds sway.
The Supreme Court observed that MSL had agreed to clear the dues of the operational creditors at par with the financial creditors and this complied with Section 30 (2) (b). The Supreme Court also observed that none of the operational creditors had come before the Supreme Court questioning the legality of the resolution plan.
It further observed that there is no provision in the IBC or its regulations requiring the bid of any resolution applicant to match the liquidation value arrived at in the manner provided under Clause 53 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The object of these regulations is to assist the CoC and once a plan is approved by the CoC, the adjudicating authority's mandate is to ascertain if the plan meets the requirement under Section 30(2) and (4).
In the present matter, there is no violation of these provisions and therefore the NCLAT must cede ground to the commercial wisdom of the CoC rather than assess the resolution plan on a quantitative analysis when there is no violation of Section 30(2) (b).
Earlier, it was a general understanding that resolution plans should offer an amount more than the liquidation value. However, it seems that the intent is to only grant a negotiating power to the CoC by keeping the liquidation value in mind and to ascertain the amounts applicable to operational creditors.
It is now settled that the resolution plans need not match the liquidation value and the CoC is fully within its rights to accept such a resolution plan in its commercial wisdom as long as the provisions of the Section 30 (2) (b) are complied with. It will be interesting to judge the impact of this on ongoing CIRPs.
1 Civil Appeal No. 4242 of 2019
2 Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta (2019 SCC OnLine SC 1478 at para 53, 54, 70 and 124)
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