On February 5, 2019, the Supreme Court (“SC”) passed its order in the case of K. Sashidhar v. Indian Overseas Bank & Ors. (Civil Appeal No. 10673 of 2018) wherein the SC, inter alia, has held that the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) have no jurisdiction and authority to analyse or evaluate the commercial decisions taken by the committee of creditors (“CoC”).

The present case arose as a result of appeal against the order of the NCLAT recording the rejection of the resolution plans of Innoventive Industries Limited (“IIL”) and Kamineni Steel & Power Private Limited (“KSPIPL”) and directing the initiation of liquidation process against the two companies under the Insolvency and Bankruptcy Code, 2016 (“IBC”). 

Interpretation of the word ‘may’ used in section 30(4) of the IBC

One of the contentions before the SC was that the stipulation in section 30(4) of the IBC (as it existed at the time of approval of the resolution plans by the CoC in October 2017) is only directory and not mandatory because of the use of the word ‘may’. The SC observed that the word ‘may’ is ascribable to the discretion of the CoC – to approve or reject the resolution plan. The SC noted that the stipulation in section 30(4) is mandatory for the approval of the resolution plan. Further, it observed that the resolution plan needs to be approved by a vote of not less than 75% of voting share of the financial creditors. To ascertain this voting share, the ‘percent of voting share of the financial creditors’ approving vis-à-vis the dissenting financial creditors is required to be reckoned and the approving votes must fulfill the threshold percent of voting share of the financial creditors.

Commercial decision of the CoC are not justiciable

The SC observed that the legislature has not endowed the NCLT with the jurisdiction or the authority to analyse or evaluate the commercial decisions of the CoC muchless to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. The commercial wisdom of the CoC has been given paramount importance under the IBC without any judicial intervention for ensuring completion of the resolution process within the timelines prescribed under the IBC. Further, even the jurisdiction of the NCLAT would be circumscribed in this regard on account of section 32 read with section 61(3) of the IBC. Thus, the provisions of the IBC investing jurisdiction and authority in the NCLAT or the NCLT have not made the commercial decisions of the CoC, like approval or rejection of the resolution plan, justiciable. The NCLT and the NCLAT are endowed with limited jurisdiction, as specified in the IBC, and cannot act as courts of equity or exercise plenary powers. The scope of enquiry and the grounds on which the decision of approval of the resolution plan by the CoC can be interfered with by the NCLT have been set out in section 31(1) read with section 30(2) of the IBC and by the NCLAT under section 32 read with section 61(3) of the IBC.

The SC further noted that the NCLT on receipt of a rejected resolution plan is not expected to do anything more but is obligated under section 33(1) of the IBC to initiate liquidation process against the corporate debtor. 

Non-recording of reasons by the CoC

The SC observed that under the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), as applicable in October 2017, there was no requirement for dissenting financial creditors to record the reasons for disapproving or rejecting the resolution plan. Further, there is no provision in the IBC which empowers the NCLT to oversee the justness of the approach of the dissenting financial creditors in rejecting the proposed resolution plan or engage in judicial review thereof. 

The SC then took note of the amendments to the CIRP Regulations in July 2018, which, inter alia, provide that the CoC shall record the reasons for approving or rejecting the resolution plan. It observed that the aforesaid amendment to the CIRP Regulations cannot have a retrospective effect so as to impact the decisions of the CoC taken before the amendment. 

Further, even assuming that the amendment to the CIRP Regulations were applicable to the present case, non-recording of reasons for approval or rejection of the resolution plan by a financial creditor during the voting in the meeting of the CoC, would not render the final collective decision of the CoC nullity per se. Further, since the commercial or business decisions of the CoC are non-justiciable, non-recording of any reason for taking such a commercial decision would be of no avail.

Clarification on amendments to section 30(4) of the IBC

The Insolvency and Bankruptcy Code (Amendment) Act, 2017, which is deemed to have been in force from November 23, 2017, inserted the words ‘after considering its feasibility and viability, and such other requirements as may be specified by the Board’ in section 30(4), in addition to the three provisos. 

The SC observed that the insertion of the above quoted words does not alter the requirement of a vote of not less than 75% of voting share of the financial creditors for the approval of the resolution plan. The amendment only clarified that the financial creditors should consider the feasibility and viability and such other requirements as may be specified, while exercising their option to approve or reject the resolution plan. The amended provision merely restates as to what the financial creditors are expected to bear in mind whilst expressing their opinion on the proposed resolution plan and that the opinion so expressed by voting is non-justiciable.

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 reduced the threshold requirement under section 30(4) for the approval of a resolution plan from 75% to 66%. The SC observed that the reduction of this threshold requirement introduced a new norm and qualifying standard for the approval of a resolution plan and the same cannot be treated as a clarification or a stricto senso procedural matter. The SC therefore held that the aforesaid amendment will have prospective application and will be applicable only to the decisions of the CoC taken on or after the date of coming into force of the amendment.

The SC upheld the decision of the NCLAT and concluded that the resolution plans of IIL and KSPIPL had not been approved by the requisite percent of voting share of the financial creditors and in the absence of any alternative resolution plan within the statutory period of 270 days, the liquidation process of the two corporate debtors should be initiated under section 33 of the IBC.