The Hon’ble National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated January 27, 2022, in the matter of Union Bank of India v. Kapil Wadhawan and Others [Company Appeal (AT) (Insolvency) No. 370, 376-377 & 393 of 2021] (“Judgement”) held that once the resolution plan is approved by the Committee of Creditors (“CoC”), the jurisdiction of the adjudicating authority is confined by the provisions of Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC.

Facts

In the instant case, the Union Bank of India (“Appellant”) filed the appeal on behalf of the CoC of Dewan Housing Finance Limited (“DHFL”/”Corporate Debtor”) against the order of the NCLT, Mumbai (“NCLT”) dated May 19, 2021 (“Impugned Order”) whereby the NCLT directed the administrator of DHFL to place the letter dated December 29, 2021 (“Second Settlement Proposal”) sent by Kapil Wadhwan (“Respondent No. 1”), erstwhile promoter and director of DHFL, before the CoC for its consideration, and to inform the NCLT the outcome of the same within 10 days from the date of Impugned Order. The NCLT noted that the Respondent No. 1 had addressed various letters to the administrator, the CoC and also submitted a settlement proposal dated December 13, 2020 (“First Settlement Proposal”) but did not receive any reply and, therefore, submitted the Second Settlement Proposal. The Fist Settlement Proposal and the Second Settlement Proposal are hereinafter collectively referred to as “Settlement Proposals”. Respondent No. 1, DHFL and the Reserve Bank of India (“RBI”) are hereinafter collectively referred to as “Respondents”.

Subsequently, the Appellant had orally requested the NCLT for a stay of the Impugned Order, which was set aside (“Second Impugned Order”). The Impugned Order and the Second Impugned Order are hereinafter collectively referred to as “Impugned Orders”.

Aggrieved, the Appellant raised the appeal in the instant case against the Impugned Orders, before the NCLAT.

Issues

Whether after the CoC’s approval of the resolution plan as submitted by the Piramal Group (“Resolution Plan”), and pending approval of the NCLT, the NCLT can direct the CoC to convene a meeting and place the Second Settlement Proposal as offered for consideration, decision and voting.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the CoC by the Impugned Orders was being compelled to consider the Second Settlement Proposal without any provision of law requiring the CoC to consider such offer, which is in direct contravention of the IBC and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). The NCLT had acknowledged that there is no provision in the IBC or the CIRP Regulations by which it is empowered to pass the Impugned Orders. Hence, the adjudicating authority has passed the Impugned Orders by exercising its inherent power under Rule 11 (Inherent Powers) of the National Company Law Tribunal Rules, 2017 and Section 60(5) of the IBC.

Further, Respondent No. 1, throughout the corporate insolvency resolution process (“CIRP”), sent various letters and proposals, all of which had been placed before the CoC, who felt that such proposals cannot be considered. The Second Settlement Proposal was nothing but the First Settlement Proposal in a different form. An order compelling the CoC to consider every offer by the promoter, who was once in control of the corporate debtor, would gravely hamper the CIRP causing inordinate delays, and materially impacting the sanctity of the process in which the CIRP has been conducted.

The Appellant contended that the NCLT by the Impugned Orders has asked the CoC to consider the Second Settlement Proposal, which has neither been submitted in compliance with the Request for Resolution Plan (“RFRP”) nor in compliance with Section 12A (Withdrawal of application admitted under section 7, 9 or 10) of the IBC (and related regulations), and that such a direction of the NCLT was passed after the CoC had, by an overwhelming majority, approved the Resolution Plan, and the administrator had already filed the plan approval application, which had been heard and reserved for orders by the NCLT. Moreover, the RBI had granted its no-objection certificate regarding the Resolution Plan contemplated in Rule 5(d)(iii) of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. Therefore, it was submitted that these directions of the NCLT were without jurisdiction, and prejudicial to the stakeholders’ interests and are very likely to adversely impact the timely conclusion of the CIRP.

The Appellant contended that only a Resolution Plan compliant with the provisions of the IBC or an application under Section 12A of the IBC could be placed before the CoC. The Second Settlement Proposal was neither a compliant Resolution Plan nor an application under Section 12A of the IBC. The Appellant further contended that inherent powers could not override express provisions of the law. The provisions in relation to settlement proposals are codified under Section 12A of the IBC and Regulation 30A (Withdrawal of application) of the CIRP Regulations. The Appellant argued that there was no provision of law that permits the NCLT to compel the CoC to consider an offer that is not a settlement under Section 12A of the IBC nor even a proposal as per the provisions of the IBC.

Contentions raised by Respondents:

The Respondents submitted that the Second Settlement Proposal is different from the First Settlement Proposal and that on a perusal of the minutes of the meeting of the CoC, wherein the First Settlement Proposal was purportedly discussed, would show that the said proposal was never considered on merits and was rejected on hyper technicalities.

They argued that objections by the Appellant alleging lack of jurisdiction on the part of the NCLT are misconceived. It was further argued that the objection by the Appellant that the Impugned Order will interfere with the commercial wisdom of the CoC was incorrect as the adjudicating authority had merely directed consideration of the Second Settlement Proposal and not interfere with the commercial wisdom of the CoC. The Respondents further argued that the Resolution Plan is not in the interest of creditors and, therefore, the Second Settlement Proposal must be considered.

Observations of the NCLAT

The NCLT by the Impugned Order had directed the COC to consider the Second Settlement Proposal of Respondent No. 1 when the Resolution Plan after approval from the CoC was pending adjudication under Section 31 (Approval of Resolution Plan) of the IBC. The CoC contends that the Second Settlement Proposal was neither submitted in compliance with the RFRP nor with Section 12A of the IBC and related regulations. Such a direction of the NCLT was passed despite the fact that the CoC of the corporate debtor had by an overwhelming majority approved the Resolution Plan. The administrator had already filed the plan approval application, and that application was heard and reserved for orders by the learned NCLT.

It is pertinent to mention that the Supreme Court (“SC”) in the case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, [2021 SCC online SC 707] (“Ebix Judgement”), has very recently dealt with the same issue which has arisen in this appeal. In the Ebix Judgement, the SC had observed that “CoC-approved Resolution Plans, before the Approval of the Adjudicating Authority under Section 31, are a function and product of the IBC’s mechanisms. Their validity, nature, legal force and content is regulated by the procedure laid down under the IBC, and not the Contract Act. The voting by the CoC also occurs only after the R.P. has verified the contents of the Resolution Plan and confirmed that it meets the conditions of the IBC and the regulations therein.

[…]

The Court held that there was no scope for negotiations between the parties once the Resolution Plan has been approved by the CoC. Thus, contractual principles and common law remedies, which do not find a tether in the wording or the intent of the IBC, cannot be imported in the intervening period between the acceptance of the CoC and the Approval by the Adjudicating Authority.
[…]

We cannot afford to be swayed by abstract conceptions of equity and ‘contractual freedom’ of the parties to freely negotiate terms of the Resolution Plan with unfettered discretion, that are not grounded in the intent of the IBC.”

Further, in the case of Pratap Technocrats Private Limited v. Monitoring Committee of Reliance Infratel Limited [2021 SCC Online SC 569], the SC held that “neither the adjudicating Authority (NCLT) nor the appellate Authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors.”

Based on the law laid down in the cases mentioned above, the NCLAT, in the instant case observed that once the Resolution Plan was approved by a 100% voting share of the CoC, the jurisdiction of the NCLT was confined by the provisions of Section 31(1) of the IBC to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC. Once the requirements of the IBC have been fulfilled, the NCLT and the NCLAT are duty-bound to abide by the discipline of the statutory provisions. Neither the NCLT nor the NCLAT has an unchartered jurisdiction in equity. The jurisdiction arises within and as a product of a statutory framework. The jurisdiction of the adjudicating authority is confined by the provisions of Section 31(1) of the IBC to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC. There was no scope for negotiations between the parties once the CoC had approved the Resolution Plan.

It was further observed that the principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan, however, remedies that are specific to the Indian Contract Act, 1872 (“Contract Act”) cannot be applied, de hors the over-riding principles of the IBC. It was also observed that if resolution applicants are permitted to seek modifications after subsequent negotiations or a withdrawal after a submission of a resolution plan to the NCLT as a matter of law, it would dictate the commercial wisdom and bargaining strategies of all prospective resolution applicants who are seeking to participate in the process and the successful resolution applicants who may wish to negotiate a better deal, owing to myriad factors that are peculiar to their own case. The broader legitimacy of this course of action can be decided by the legislature alone, since any other course of action would result in a flurry of litigation which would cause the delay that the IBC seeks to disavow.

Decision of the NCLAT

In the instant case, the NCLAT noted that after approval of the Resolution Plan by the CoC, the application was pending before the NCLT under Section 31 of the IBC, for approval of the Resolution Plan, during which the NCLT directed the CoC to consider the Second Settlement Proposal within 10 days and take an appropriate decision. The NCLAT concluded that the Impugned Order was liable to be set aside. Relying on the ratio of the Ebix Judgement, which expressly laid down that there was no scope for negotiations between the parties once the CoC has approved the resolution plan, the NCLAT set aside the Impugned Order deeming it to be unsustainable.

VA View:
The NCLAT through this Judgement re-emphasised on the postulate that commercial or business decisions of the financial creditors are not open to any judicial review by the NCLT or NCLAT. The NCLAT upheld the law laid down by the SC in the Ebix Judgement that once the resolution plan is approved by the CoC, the plan cannot be revisited and modified. The NCLAT rightly upheld the principle that a resolution plan cannot be construed purely as a contract governed by the Contract Act, in the period intervening its acceptance. Even during such intervening period, the resolution plan is binding owing to the IBC framework. Through this Judgement, the NCLAT has reiterated that CIRP proceedings should not be taken lightly by those intending to submit resolution plans for approval.

Thus, when the plan has been approved by the CoC and pending the NCLT’s approval, the jurisdiction of the NCLT is limited to the extent of verifying the compliance of the plan with regard to the provisions laid down under the IBC and the NCLT should not interfere with the CoC’s decision, thereby second guessing its commercial wisdom.

For more information please write to Mr. Bomi Daruwala at [email protected]

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