The National Company Law Appellate Tribunal, Chennai (“NCLAT”) has, in the case of Dr. C. Bharath Chandran v. M/s. Sabine Hospital and Research Centre and Others [Company Appeal (AT) (CH) (Ins) No. 320 of 2022 and IA Nos. 677 and 710/2022], held that the adjudicating authority has no jurisdiction to evaluate the decision of the committee of creditors (“CoC”) to enquire into the justness of the rejection of a resolution plan.

Facts

The present appeal is filed against the order dated June 2, 2022 (“Impugned Order”) passed by the adjudicating authority (“NCLT”), whereby, the NCLT dismissed the petition filed under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Trivandrum International Health Services Limited (“Corporate Debtor”) was admitted into the corporate insolvency resolution process (“CIRP”) by order dated February 7, 2020 under Section 7 (Initiation of CIRP by financial creditor) of the IBC, passed by the NCLT. Raju Palanikkunathil Kesavan (“Second Respondent”) was appointed as resolution professional by the NCLT and later as the liquidator of the Corporate Debtor on the recommendation of the CoC. M/s. Sabine Hospital and Research Centre Private Limited (“First Respondent”) made an application to the NCLT for being permitted to submit a resolution plan after the due date to submit an expression of interest (“EoI”).

The First Respondent’s name was not included in the provisional list or in the final list of the prospective resolution applicants. The Second Respondent published a public announcement in newspapers and verified the claims received and also formed the CoC. Kerala State Financial Corporation, State Bank of India & Dhanlaxmi Bank Limited were, respectively, the third, fourth and fifth respondents in the present appeal who together constituted the CoC of the Corporate Debtor.

Dr. C. Bharath Chandran (“Appellant”), the promoter and erstwhile director of the Corporate Debtor, who along with two other co-applicants, had submitted a resolution plan which was approved by the CoC at its meeting held on October 7, 2021 and a letter of intent was issued to the Appellant and his co-applicants.

The Appellant stated that as per the understanding between him and his co-applicants, the co-applicants were required to make arrangements for depositing a performance bank guarantee with the CoC. However, they failed to make the required arrangements.

In view of their failure to submit the performance bank guarantee, the same being a pre-requisite to file a resolution plan, the CoC in its meeting held on October 21, 2021, authorised the Second Respondent to file for liquidation of the Corporate Debtor. The Appellant stated that he sought permission to replace two original co-applicants with two new applicants and except for replacement of the co-applicants, the resolution plan was retained exactly as approved by the CoC.

At the subsequent meeting of the CoC held on October 30, 2021, two of the financial creditors holding 64.13% stake in the CoC expressed their no-objection, which was still short of required minimum 66% voting rights required to approve a resolution plan.

Three interlocutory applications were filed before the NCLT. First interlocutory application was filed by the Second Respondent, praying for an order of liquidation of the Corporate Debtor. Second interlocutory application was filed by the Appellant, inter alia, praying that the CoC be directed to consider and accept the amendment to the resolution plan in terms of replacement of the existing co-applicants with new co-applicants.

Third interlocutory application was filed by the First Respondent, praying that the First Respondent be permitted to file an EoI and to submit a resolution plan for the Corporate Debtor. They were heard together by the NCLT and an order was passed, whereby it was held that the time for CIRP was to come to an end on February 25, 2022 by excluding the period of time taken in deciding the aforesaid interlocutory applications.

It was pointed out that such time was insufficient to call for a fresh EoI. Further, the Appellant along with the new co-applicants as well as First Respondent were directed to submit their EoI to the Second Respondent forthwith and were also permitted to submit their resolution plan, before the CoC, for its consideration.

The Appellant assailed the order of the NCLT for allowing the First Respondent at a late stage which according to the Appellant was not advisable and permissible under the IBC.

It was brought to the notice of the NCLAT that CoC evaluated the resolution plans of both the parties at their meeting held on February 19, 2022 and were divided on the vote and neither plan received the required minimum votes of 66%. CoC passed the resolution rejecting both the resolution plans.

The NCLT passed an interim order, in the interlocutory application filed by the Second Respondent, directing the CoC to re-vote only on the resolution plan which received the highest percentage of votes and extended the time for CIRP by another 20 days for the said purpose and directed the Second Respondent to file a report on the outcome. The CoC in their meeting held on April 11, 2022, voted in divergent manner and none of the resolution plans received the requisite 66% of the votes.

In the interim, the Appellant had filed an intervention application, seeking to be heard before the matter was finally adjudicated upon. In the next hearing, the NCLT gave the Appellant one last chance to submit his resolution plan in co-operation with First Respondent in order to save the Corporate Debtor from liquidation. However, due to failure of negotiation, no joint resolution plan could be submitted by the Appellant and the First Respondent. The NCLT disposed of the matter by admitting the Corporate Debtor into liquidation.

The Appellant contended that if he would have been allowed to replace original two co-applicants with new two co-applicants rather than allowing First Respondent also to submit a resolution plan, the matter would have been resolved long back. The Appellant had also made a case that provisions of the IBC had not been complied with fully because the initial decision/ commercial wisdom of the CoC was by-passed by the NCLT.

Observations of the NCLAT

The NCLAT noted that it was quite evident from the Impugned Order that the NCLT did everything under its command within the purview of the IBC to avoid liquidation of the Corporate Debtor. The NCLT gave fair and equal chances to both the resolution applicants to the extent that a resolution plan of both the parties could be submitted in tandem, however the parties could not do so.

Towards the end of the CIRP, a resolution applicant proposes a resolution plan which is placed before the CoC by the resolution professional and upon several deliberations by the CoC, the crucial decision pertaining to the approval or rejection of a resolution plan is taken. Thereafter, if a rejected plan is placed before the adjudicating authority, the adjudicating authority is expected to do nothing more, but to initiate the liquidation process under the IBC.

Only if the plan is approved by at least 66% voting share of the CoC and is placed before the adjudicating authority for its approval, the adjudicating authority has to look into two basic check boxes. Firstly, whether or not the plan meets the requisite voting share by the CoC and secondly, whether or not the requirements stated under Section 30(2) (Submission of resolution plan) of the IBC are being complied with. However, there are no provisions under the IBC which authorizes the adjudicating authority to modify or interfere with the merits of the resolution plan.

Similarly in the present case, since the CoC did not approve the resolution plan by a minimum vote of 66% as required under the IBC, hence, it was considered that the resolution plan has failed. Therefore, in such a situation if a rejected plan was placed before the NCLT, the NCLT was expected to do nothing more but to initiate liquidation process under the IBC.

The NCLAT also observed that the Appellant was given all possible opportunities to submit the resolution plan, including extension of time, replacement of co-applicant and opportunity to submit joint resolution plan with the First Respondent. Unfortunately, the Appellant was not able to come up with a resolution plan acceptable to the CoC. The NCLAT also noted that there was clear divergent view among the members of the CoC and on last two occasions, the CoC could not muster minimum stipulated voting right to approve the resolution plan. However, the CoC unanimously recommended for liquidation of the Corporate Debtor.

Not only has the legislature been clear with primacy of CoC over the adjudicating authority for approval of the resolution plan, but even the judiciary through several judgments has stated that no adjudicating authority or appellate authority has been empowered to question the decision makers of the resolution plan. Hence, the NCLT/NCLAT have to abide by the commercial wisdom of the CoC and do generally nothing else, except approve or reject the resolution plan, after ensuring that the plan fulfils the criteria under Section 30(2) of the IBC.

In the present case, the NCLT had taken all the precautions and actions to ensure that the Corporate Debtor was kept as a going concern. However, as the last resort, NCLT had to issue an order for liquidation.

Decision of the NCLAT

Basis the aforesaid observations, the NCLAT held that the NCLT was right in ordering liquidation of the Corporate Debtor. Accordingly, the present appeal was dismissed.

VA View:

It is clear from the above discussion that the adjudicating authority has no jurisdiction and/or authority to analyse or evaluate the decision of the CoC to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors.

As held by the landmark judgment, K. Sashidhar v. Indian Overseas Bank [Civil Appeal No. 10673 of 2018], “the legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority.” The NCLAT has reinforced the said principle by re-iterating that the commercial wisdom of the CoC is supreme and there should be minimum judicial intervention by the adjudicating and appellate authorities under the IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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