In a groundbreaking judgment, the Supreme Court has clarified the National Company Law Tribunal's (NCLT) authority to recall orders and decide questions of law. The court emphasized the importance of adhering to norms in the insolvency resolution process, highlighting the adverse consequences of errors in collating claims and withholding information.
A] The Challenges under the Insolvency Process:
Insolvency and Bankruptcy Code, 2016 (the Code) was implemented in India in the 2016 to lay down a comprehensive and time bound process for addressing insolvency in the corporate sector in India. The Code laid down a strict timeline for completion of the process which by any standard was extremely optimistic given the complexities of the judicial process and past experience in dealing with corporate insolvency in India. But the euphoria and expectations generated by the strict timeline under the Code, disappeared quickly due to delays at all the stages of the process and more specifically in admission and approval of the resolution plans.
As per the "Report of the Expert Committee on a Creditor-Led Resolution Approach published by IBBI in May 2023", the admission process by the Adjudicating Authority (AA) usually takes over a year to commence the CIRP in certain instances. As of December 2022, the 611 CIRPs which have yielded in orders for resolution, took an average of 482 days (after excluding the time excluded by the AA) for conclusion of process. Similarly, the 1901 CIRPs, which ended up in orders for commencement of liquidation, took on average 445 days for conclusion1. With respect to Financial Creditor (FC) initiated CIRPs that closed with resolution plans in 2022, a decreased value realisation of approximately 32% was recorded2. By any standard such delays destroy value.
The Hon'ble Supreme Court has consistently underscored the importance of adhering to timelines set forth in the Code. However, in the case of Arcelor Mittal3, it was clarified that these timelines for the judicial process are not obligatory. Consequently, the sense of urgency gradually diminished, leading to increase in litigations. Stakeholders, especially professionals and adjudicating authorities, began prioritizing technicalities over substance and the essential requirements of the insolvency process. Despite repeated reminders from the Hon'ble Supreme Court urging The NCLT and the NCLAT to strictly adhere to the timelines stipulated under the IBC and clear pending resolution plans forthwith4, the emphasis on technicalities has persisted.
It is not that delays are only happening at NCLTs level. Lack of proper understanding of the objective and the requirements of law by the professionals and member of the committee of creditors often add to such delays. Admission of claims is one such area which leads to frequent litigations and challenges. Often the resolution professionals get influenced by financial creditors on matter of claims of operational creditors. The assumption of a quasi-judicial role by the Resolution Professional (RP), often neglecting the critical nature of the matter, is noteworthy. It is imperative to provide an accurate portrayal of the corporate debtor's liabilities to potential resolution applicants for a viable and effective resolution. Rejecting claims based on technicalities and delays not only compromises the integrity of the process but also paves the way for unnecessary litigation and subsequent delays.
B] Landmark Judgment - Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr.:
In this significant ruling of February 12, 2024, the Supreme Court has clarified that RPs are obliged to collate data from claims and corporate debtor records, regardless of the form used. The court stressed that commercial wisdom of the Committee of Creditors (COC) in approving a resolution plan may not be justiciable but outlined the Adjudicating Authority's role in addressing plan shortcomings.
The problem in the CIRP of JNC Construction Pvt. Ltd, arose on account of claims of Greater Noida Industrial Development Authority (GNIDA) which had leased the land to the Corporate Debtor (CD) , not be considered to by the RP. GNIDA filed its claim for Rs. 43,40,31,951 as a financial creditor, on account of unpaid instalments towards premium for the lease. GNIDA also had a statutory charge on the leased land under the statute. However, GNIDA was treated as an operational creditor and was advised by the RP to submit a claim in Form B.GNIDA did not submit the form as required by RP and in due course of time a resolution plan was approved under which the Claim of GNIDA was shown to be admitted to the extent of Rs. Rs. 13,47,40,819 and the amount proposed to be paid was just Rs.1,34,74,082/-, that too, payable by conversion of dues into square feet of area to be completed and payment to be made, on square feet basis, at the time of registration of each of the units. The plan received approval on 04.08.2020. However, due to these irregularities and mistakes on GNIDA's claim the plan was contested and eventually resulted in the annulment of the order in February 2024. This audacious approach in handling the admission and processing of claims, particularly those involving statutory bodies, has thus led to a loss of value for stakeholders, notably the financial creditors who face substantial losses due to missed opportunities resulting from the delay in resolution. It is noteworthy that financial creditors themselves bear responsibility for ignoring the mistakes in admission of claim of GNIDA, and they cannot shift blame to judicial authorities. These glaring issues were overlooked by financial creditors when they were involved in the process. In fact, the financial creditors should have urged the RP to address such critical matters, especially considering the involvement of GNIDA which is a statutory authority and also owns the land leased to the CD. This oversight by RP and CoC has occurred despite the Hon'ble Supreme Court's clarification in the Rainbow judgment5 that RPs are obligated to compile claims not solely based on claim forms but also from information within the corporate debtor's records.
C] Role of the Resolution Professional in Collation of Claims:
The judgement in Greater Noida Industrial Development Authority case has clarified that the RP is under a statutory obligation to collate the data obtained from the claim(s) made before it and information gathered from the records including those maintained by the Corporate Detor (CD) and a claim cannot be overlooked by RP just because a different from is used. Form in which a claim is to be submitted under the CIRP Regulations 2016 is directory and not mandatory. What is important is, the claim must be supported by proof.
It was also clarified that the use of words "a person claiming to be an operational creditor" in the opening part of CIRP Regulation 7, and the words "a person claiming to be a financial creditor" in CIRP Regulation 8, indicate that the category in which the claim is submitted is based on the own understanding of the claimant. Thus, there could be a situation where the claimant, in good faith, may place itself in a category to which it does not belong. However, what is important is, the claim so submitted must be with proof. The Form in which a claim is to be submitted under the CIRP Regulations 2016 is directory and not mandatory. What is important is, the claim must be supported by proof.
D] The Apex Court has also enlarged the responsibility of the Adjudicating Authority as regards approval of the plans:
The Apex Court observed that "though commercial wisdom of the COC in approving a resolution plan may not be justiciable in exercise of the power of judicial review, the Adjudicating Authority can always take notice of any shortcoming in the resolution plan in terms of the parameters specified in sub-section (2) of Section 30 of the IBC coupled with Regulations 37 and 38 of the CIRP Regulations 2016." The Court further observed that "If any such shortcoming appears in the resolution plan, it may send the resolution plan back to the COC for re-submission after satisfying the parameters so laid down. Likewise, the appellate authority can also interfere upon noticing any shortcoming in the resolution plan while exercising its powers under Section 32 read with Section 61 (3) of the IBC".
D] Misconception about number of times a resolution plan could be modified:
There is a prevalent misconception among practitioners that a resolution plan can only be modified once. This misunderstanding stems from the assumption that, according to regulation 39(1A)(a) of the CIRP Regulations, the RP can permit modification of the resolution plan only once if the RFRP allows for it. This confusion arises from a misunderstanding of the RP's role in handling the resolution. The regulations are effective until the scrutiny stage and as long as the plans are under the RP's purview and not yet submitted to the CoC. Since regulation 39(1A)(a) pertains to the RP's authority, it remains applicable until the plan is submitted to the CoC. Once the resolution plan is before the CoC, it is the CoC that retains authority over the resolution plan, not the RP. The CoC has the prerogative to negotiate and renegotiate with the resolution applicants to maximise the value, which may necessitate various modifications in the plans. This legal position now also gets clarified in the above judgement where it observed that "the resolution plan(s) undergo deep scrutiny by RP as well as COC; in the negotiations that may be held between COC and the resolution applicant, various modifications may be made so as to ensure that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders".
The Apex Court has also laid to rest other controversies regarding the appropriate forum to address personal insolvency (as some experts still view that Debt Recovery Tribunals are the Adjudicating Authority to deal with personal guarantors to Corporate Debtors) and the authority of NCLT to handle and decide questions of law, including the power to recall their orders:
The Apex Court has also set to rest such controversies by observing "Section 60 of the IBC specifies that the Adjudicating Authority in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the NCLT having territorial jurisdiction over the place where the registered office of the corporate person is located. Sub-section (5) of Section 60 provides that notwithstanding anything to the contrary contained in any other law for the time being in force, the NCLT shall have jurisdiction to entertain or dispose of: (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the IBC. Further, Rule 11 of the NCLT Rules, 2016 preserves the inherent power of the Tribunal. Therefore, even in absence of a specific provision empowering the Tribunal to recall its order, the Tribunal has power to recall its order. However, the Court has put a word of caution that such power is to be exercised sparingly, and not as a tool to re-hear the matter. Ordinarily, an application for recall of an order is maintainable on limited grounds, inter alia, where: (a) the order is without jurisdiction; (b) the party aggrieved with the order is not served with notice of the proceedings in which the order under recall has been passed; and (c) the order has been obtained by misrepresentation of facts or by playing fraud upon the Court /Tribunal resulting in gross failure of justice.
Conclusion:
The realization of the Code's objectives hinges on the unwavering commitment of all entities engaged in the CIRP — be it resolution professionals, committees of creditors, or adjudicatory authorities — to uphold the Code's core principles. Delays serve no one's interests. Consistent challenges to the resolution process, claims admission, and the approval of resolution plans cast shadows on the efficacy of the system and the overall process. Simultaneously, it is imperative to curtail frivolous litigation, discouraging any efforts by unrelated parties to disrupt the process. Swift action, coupled with imposing exemplary costs, is essential to staunch such attempts and prevent consequential delays.
Footnotes
1. https://ibbi.gov.in/uploads/resources/ede9252b24c28166ea95602ca3c214b1.pdf
2. https://ibbi.gov.in/uploads/resources/ede9252b24c28166ea95602ca3c214b1.pdf
3. CIVIL APPEAL NOs.9402-9405 OF 2018 judgement delivered on 4th October 2014.
4. Ebix Singapore Private Limited vs. Committee of Creditor
5. CIVIL APPEAL NO. 1661 OF 2020 decided on 6th September 2022.
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