Between the Lines | Supreme Court: Prayer for reference to arbitration can be declined if the dispute does not correlate to the existing arbitration agreement

The Hon’ble Supreme Court (“SC”) has in its judgment dated September 22, 2021 in the matter of DLF Home Developers Limited v. Rajapura Homes Private Limited & Another [Arbitration Petition No. 17 of 2020] and DLF Home Developers Limited v. Begur OMR Homes Private Limited & Another [Arbitration Petition No. 16 of 2020] (“Judgement”), held that the prayer for reference to arbitration can be declined if the dispute does not correlate to the existing arbitration agreement under the Arbitration and Conciliation Act, 1996 (“Act”).

Facts

DLF Home Developers Limited (“Petitioner”) is a limited liability company involved in the business of providing development, management, and investment services concerning real estate projects. The Petitioner and Ridgewood Holdings Limited (“Ridgewood”) entered into a joint venture, in the year 2007-2008, wherein Ridgewood invested in four special purpose vehicles, including Rajapura Homes Private Limited (“Respondent No. 1”) and Begur OMR Homes Private Limited (“Begur Company”), for developing residential projects in various cities across India. Respondent No. 1 is a company engaged in the construction, development, operations, and maintenance of residential projects in Karnataka (“Rajapura Project”). Similarly, the Begur Company is engaged in the business of construction, development, operations, and maintenance of residential projects, in Tamil Nadu and Karnataka (“Southern Homes Project”).

In June 2008, Ridgewood transferred its stake in the joint venture to its affiliates, Resimmo PCC (“Respondent No. 2”), a company incorporated under the laws of Mauritius and engaged in the business of providing investment management services. Respondent No. 1, Respondent No. 2 and Begur Company are collectively referred to as “Respondents”. In 2015, the parties agreed to a negotiated settlement, in terms of which, Respondent No. 2 was to acquire sole ownership and control of Respondent No. 1 and the Begur Company. To effect the change in ownership, a share purchase agreement was also executed between the Petitioner, Respondent No. 1 and Respondent No. 2 on July 8, 2016 (“Rajapura SPA”). Likewise, a share purchase agreement dated January 25, 2017 was also executed between the Petitioner, the Begur Company and Respondent No. 2. Both the share purchase agreements are collectively referred to as “Share Purchase Agreements”. The Share Purchase Agreements consisted of an identical arbitration clause which laid down that arbitration was to be conducted in accordance with the rules of the Singapore International Arbitration Centre (“SIAC Rules”), with the seat and venue of the arbitration being Singapore.

In pursuance to the conditions of the Share Purchase Agreements, on January 25, 2017, the DLF-Rajapura Homes Construction Management Services Agreement and the DLF-Southern Homes Construction Management Services Agreement, collectively referred to as “Construction Management Agreements”, were executed. To further clarify the modalities of the fee payable to the Petitioner under the Construction Management Agreements, a Fee Computation Agreement dated January 25, 2017 was also executed between Respondent No. 1, the Begur Company and Respondent No. 2 ( “Fee Agreement”). The Petitioner issued a written notice dated August 16, 2019 certifying the completion of the Southern Homes Project, which Begur Company refused to accept as a valid notice of completion and cited reasons of delay and non-completion of the Southern Homes Project, incomplete notice, amongst others. The Petitioner also issued written notice dated October 25, 2019, certifying the completion of the Rajapura Project, which Respondent No. 1 by its reply dated January 27, 2020 again refused to accept as a valid notice of completion and cited reasons of delay and non-completion of the Rajapura Project, incomplete notice, amongst others.

Due to non-resolution of the differences, the Petitioner invoked the arbitration clause under Construction Management Agreements, which contemplated the seat and venue of arbitration to be New Delhi. The Petitioner further referred all disputes arising out of the Construction Management Agreements to a common and composite arbitral tribunal comprising a sole arbitrator (“Arbitral Tribunal”), and proposed two names, for one of them to be appointed as the sole arbitrator. The Respondents claimed that the differences between the parties have arisen under the Share Purchase Agreements and not under the Construction Management Agreements. The Respondents further refused to have the disputes consolidated into a common and composite tribunal and instead asserted that the same would have to be resolved under separate arbitration proceedings. Aggrieved by the refusal of the Respondents to appoint an arbitrator under the Construction Management Agreements, the Petitioner preferred two separate petitions under Section 11(6) of the Act read with Section 11(12) of the Act, to the SC, praying for appointment of a sole arbitrator for resolution of all disputes arising from the Construction Management Agreements.

Issue

• Whether the nature of dispute sought to be referred for arbitration fall under the arbitration clauses of Construction Management Agreements, governed by the Act, with the seat and venue for arbitration at New Delhi, or whether such disputes can be arbitrated only in terms of the dispute resolution mechanism specified in the Share Purchase Agreements, that is, under the SIAC Rules, with the seat and venue of the arbitration at Singapore.
• Whether the disputes should be referred to a consolidated and composite tribunal or should there be two different arbitral tribunals to resolve the same.

Arguments

Contentions raised by the Petitioner:

The Petitioner contended that Begur Company and Respondent No. 1 had acted unreasonably in not accepting the notice of completion. It was alleged that the rejection of the notice certifying the completion of Rajapura Project and Southern Homes Project was done to avoid Respondent No. 2’s obligation to pay fees to the Petitioner. It was argued that the contention of the Respondents that the disputes in question cannot be arbitrated under the Construction Management Agreements was legally and factually misconceived. The Petitioner argued that courts while dealing with an application under Section 11(6) of the Act have a narrow scope of examination, confined only to trace out whether there exists an ‘arbitrable dispute’ and a ‘written contract’ providing arbitration as the dispute resolution mechanism.

It was submitted that since the parties had not disputed the existence of arbitration agreement or its core contractual ingredients contained in Construction Management Agreements, the present dispute, in terms of the settled law, should be referred to arbitration. Once the existence of the arbitration agreement was established, all other incidental issues should be left to be decided by the arbitrator as prescribed under Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Act, which enshrines the principle of “kompetenz-kompetenz”. The doctrine of kompetenz-kompetenz indicates that an arbitral tribunal has the competence to rule on its own jurisdiction, including determining all jurisdictional issues, and the existence or validity of an arbitration agreement.

It was further argued that the Arbitral Tribunal would eventually rule whether or not the disputes between the parties fell under the terms of the Construction Management Agreements. Although the Construction Management Agreements were two separate agreements, they were inextricably interlinked, and since the dispute in question related to payment of fees to the Petitioner for its services under both the Construction Management Agreements, the disputes should be referred to a common and consolidated arbitral tribunal, and the proceedings ought to be consolidated to avoid multiplicity of arbitrations and conflicting decisions, which would potentially cause injustice.

Contentions raised by the Respondent:

The Respondents vehemently controverted the case of the Petitioner and reiterated that the dispute sought to be raised in the present arbitration petitions exclusively fell within the ambit of Share Purchase Agreements, and, therefore, the differences between the parties could not be referred to arbitration under the Construction Management Agreements. It was argued that the Share Purchase Agreements were the principal agreements governing the transaction between the parties, and the Construction Management Agreements were subsequently executed only to operationalize the manner in which the Petitioner would fulfill its construction obligation as per the Share Purchase Agreements.

It was contended that the instant disputes could only be arbitrated as per the dispute resolution mechanism specified in the Share Purchase Agreements, namely, by the SIAC Rules, with seat and venue of arbitration at Singapore. It was urged that if the seat of arbitration were to be found outside India, that is, Singapore, the instant applications under Section 11(6) of Act were not maintainable. Citing the decisions of the SC in Duro Felgura, S.A. v. Gangavaram Port Limited [(2017) 9 SCC 729] and Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1] (“Vidya Drolia”), the Respondents contended that while deciding an application under Section 11(6) of the Act, the SC could not act cursorily, and an absolute ‘hands off’ approach would be counterproductive. The Respondents relied on to the judgement in Olympus Superstructure Private Limited v. Meena Vijay Khetan and Others [(1999) 5 SCC 651] (“Olympus Judgement”), wherein, SC had held that in a situation where there were disputes and differences in connection with the main agreement and also disputes regarding other matters connected thereto, the arbitration would be governed by the general arbitration clause of the main agreement.

Lastly, it was submitted that in the event the instant arbitration petitions were allowed, the SC should appoint separate arbitral tribunals under the Construction Management Agreements, though it may comprise of the same sole arbitrator.

Observations of the Supreme Court

The SC observed that the jurisdiction of the SC under Section 11 (Appointment of arbitrators) of the Act is primarily to find out whether there existed a written agreement between the parties for resolution of disputes through arbitration and whether the aggrieved party had made out a prima facie arbitrable case. The SC emphasized that the limited jurisdiction, however, did not denude the SC of its judicial function to look beyond the bare existence of an arbitration clause to cut the deadwood. The SC considered the decision of the three-judge bench in Vidya Drolia, which had eloquently clarified that the SC, with a view to prevent wastage of public and private resources, may conduct ‘prima facie review’ at the stage of reference to weed out any frivolous or vexatious claims. The SC opined that courts are not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator. Contrarily, the courts are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6A) of the Act. Such a review is not intended to usurp the jurisdiction of the Arbitral Tribunal but is aimed at streamlining the process of arbitration. The SC thus clarified that even when an arbitration agreement exists, it would not prevent the court to decline a prayer for reference if the dispute in question does not correlate to the said agreement.

The SC observed that the Share Purchase Agreements and the Construction Management Agreements, had distinct and different objects and fields of operation. The SC found it difficult to accept that the respective Share Purchase Agreements were the ‘principal agreements governing the transaction’ between the parties or that the present disputes could be resolved solely under the arbitration clause contained therein. The dispute sought to be referred to arbitration by the Petitioner pertained to non-deposit of agreed amount by Respondent No. 2 and the resultant payment thereof as fees which the Petitioner claimed in terms of the Construction Management Agreements. The SC determined that whether or not the Petitioner had complied with the condition precedent under the Rajapura SPA, thereby becoming entitled to the fees, was a question of fact to be determined by the Arbitral Tribunal.

The SC referred to the Olympus Judgement, where it was held that in a situation where there were disputes and differences in connection with the main agreement and also disputes regarding other matters connected thereto, the arbitration would be governed by the general arbitration clause of the main agreement. Noting that the nature of the arbitration clauses in the instant case were substantially different when compared with the dispute resolution clause of the main agreement in Olympus Judgement, the SC observed that the arbitration clause of the Share Purchase Agreements did not have any overriding effect and was not broader or wider when compared to the Construction Management Agreements. The SC found it difficult to construe that arbitration clause of the Share Purchase Agreements contemplated adjudication of the issues that were “connected with” or were “in relation” to the subject matter of the Share Purchase Agreements.

Thus, the SC noted that the scope of the arbitration clause in Share Purchase Agreements was limited to issues relating to the agreement’s primary subject matter, that is, any dispute arising out of the transaction of sale and purchase of shares. The provisions of the Construction Management Agreements, and the arbitration clause therein, would be applicable to any dispute or difference concerning the performance of the construction related obligations and deposit of agreed amount by Respondent No. 2 or payment thereof to the Petitioner. Since the Respondent No. 2 was not aggrieved by non-compliance, deviation or breach of promise to sell its shares by the Petitioner, the SC took the view that, when neither party pleaded the infringement of the core provisions of the Share Purchase Agreements, it could not be said that the controversy fell within the ambit of the arbitration clause of the Share Purchase Agreements and could be adjudicated only under the SIAC Rules, with seat and venue at Singapore.

Considering that the primary twin-test envisioned under Section 11(6) of the Act had been satisfied by the Petitioner, the SC noted that the instant applications were maintainable. The SC observed that the Construction Management Agreements, though interlinked and connected, are two separate agreements. The SC considered the contention of the Respondents that the Petitioner had committed breaches under both Construction Management Agreements, and that the genesis of the disputes lay in separate and distinct facts. The SC observed that save where the parties have resolved to the contrary, it would be inappropriate to consolidate the proceedings originating out of two separate agreements. However, the SC believed that since the Fee Agreement provided that the fee can only be calculated after taking into consideration various financial components of both the Rajapura Homes Projects and the Southern Homes Project, it would be necessary for the sake of avoiding wastage of time and resources, and to avoid any conflicting awards, that the disputes under petitions be referred to a sole arbitrator.

Decision of the Supreme Court

The SC ruled that the disputes between the parties could be adjudicated in the arbitral proceedings under the Construction Management Agreements, and if on appreciation of the facts and law, the arbitrator discovered that the ‘real dispute’ between the parties arose from the Share Purchase Agreements, the arbitrator would be free to wind up the proceedings with liberty to the parties to seek redressal under the SIAC Rules.

The SC referred the disputes under the arbitration petitions to a sole arbitrator and left it to the wisdom of the sole arbitrator to decide whether the disputes should be consolidated and adjudicated under one composite award or otherwise. The SC allowed both the instant arbitration petitions and appointed Mr. Justice (Retd.) R.V. Raveendran, former judge, Supreme Court of India as the sole arbitrator to resolve all disputes and differences between the parties.

VA View:

The SC by this landmark Judgement has elucidated the importance of synchronizing conflicting arbitration clauses in different agreements entered into between the parties. The SC has unequivocally clarified that the courts cannot act in a mechanical fashion, by merely referring the dispute raised to arbitration, basis the arbitration agreement produced before it. The SC has expanded the scope of judicial inquiry under Section 11 of the Act, and has explained that the exercise of a limited prima facie review does not intend to usurp the jurisdiction of the arbitral tribunal, or negate the doctrine of kompetenz-kompetenz, but rather, is aimed at streamlining the process of arbitration and with a view to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

The SC has clarified that courts are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6A) of the Act. The SC has expressly laid down that despite the existence of an arbitration agreement, the courts are empowered to decline a prayer for reference to arbitration, if the dispute in question fails to correlate to such arbitration agreement.

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

Between the Lines | Supreme Court: Once the resolution plan is approved by the Committee of Creditors and submitted to the Adjudicating Authority, a successful resolution applicant cannot withdraw or modify the resolution plan

The Hon’ble Supreme Court (“SC”) has held in its judgment dated September 13, 2021, in the matter of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another (Civil Appeal No. 3224 of 2020) that a submitted resolution plan is binding and irrevocable as between the Committee of Creditors (“CoC”) and the successful resolution applicant in terms of the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. (“CIRP Regulations”) and that once the resolution plan is approved by the CoC and submitted to the adjudicating authority; the successful resolution applicant cannot withdraw or modify the resolution plan.

Facts
The National Company Law Tribunal (“Adjudicating Authority”) by way of its order dated May 30, 2017, admitted the petition filed by Educomp Solutions Limited (“Educomp”) under Section 10 of the IBC for the initiation of voluntary Corporate Insolvency Resolution Process (“CIRP”) and thereafter, Ebix Singapore Private Limited was declared as the successful resolution applicant (“Ebix/ Appellant”). However, during the pendency of the application for approval of resolution plan, Ebix filed two applications for withdrawal of the resolution plan (“First Withdrawal Application” and “Second Withdrawal Application”) which were both dismissed by the Adjudicating Authority. In the First Withdrawal Application under Section 60(5) of the IBC, Ebix sought the direction of the Adjudicating Authority to grant sufficient time to re-evaluate its proposals contained in the resolution plan and suitably revise/modify and/or withdraw its resolution plan and the Adjudicating Authority dismissed the First Withdrawal Application. The Second Withdrawal Application was also dismissed and Ebix was given the liberty to file a fresh application on the same cause of action.

Pursuant to this, Ebix filed another withdrawal application (“Third Withdrawal Application”) and the Adjudicating Authority by order dated January 2, 2020, allowed the Third Withdrawal Application and held that a resolution plan becomes binding only after it is approved by the Adjudicating Authority and in the present circumstances on account of the pending SFIO and CBI investigations, an unwilling successful resolution applicant would be unable to effectively implement the resolution plan (“NCLT Order”). Thereafter, an appeal was preferred by the CoC of Educomp before the National Company Law Appellate Tribunal (“NCLAT”), against the NCLT Order, and the NCLAT, by way of its order dated July 29, 2020, set aside the NCLT Order allowing the Third Withdrawal Application (“NCLAT Order”). Thereafter, Ebix filed the present Appeal (“Appeal”) before the SC under Section 61 of the IBC against the NCLAT Order.

Issues
Whether a resolution applicant is entitled to withdraw or modify its resolution plan once it has been submitted by the resolution professional to the Adjudicating Authority and before it is approved by the latter under Section 31(1) of the IBC.

Arguments
Contentions raised by the Appellant:

• The Appellant is not bound by the resolution plan until it is approved by the Adjudicating Authority, in terms of the CIRP documents read with the scheme of the IBC and that Section 31(1) of the IBC provides that the resolution plan is “binding…on all stakeholders” only upon the approval of the Adjudicating Authority.
• The CIRP documents, that is, invitation of Expression of Interest (“EOI”), the Request for Resolution Plan (“RFRP”), sanction letter and resolution plan take effect of a binding contract only upon the approval of the Adjudicating Authority and the terms of the resolution plan indicate that the resolution plan is valid only for a period of six months.
• Events after the submission of the resolution plan like inordinate lapse of time and that the affairs of Educomp were also being investigated by the SFIO and the CBI, provided further evidence that the affairs of Educomp were severally mismanaged and hence susceptible to criminal investigations.
• The resolution plan was based on certain considerations that were fundamental to the Appellant’s bid for the business of Educomp. However, due to the inordinate delay in the completion of the CIRP, the tenure of the government contracts awarded to Educomp, which were crucial to its functioning, may have ended, leading to an erosion of its substratum.
• The Appellant was not provided with material information relating to the financial position of Educomp after the submission of the resolution plan, as a consequence of which, there was an impairment of a fair process in the conduct of a commercial transaction. Section 29(2) of the IBC provides that all relevant information should be provided to the resolution applicant and that the resolution applicant’s right to complete and accurate information relating to the Corporate Debtor has been recognized under the UNCITRAL Legislative Guide on Insolvency Laws (“UNCITRAL Guide”).
• The Adjudicating Authority is empowered under the IBC to permit the withdrawal of a resolution plan prior to its approval under Section 31 of the IBC.

Contentions raised by the respondents:

• The IBC is a complete code as held by the SC in M/s Embassy Property Developments Private Limited v. State of Karnataka & Others [(2020) 13 SCC 308] and M/s Innoventive Industries Limited v. ICICI Bank & Another [(2018) 1 SCC 407]. It does not envisage withdrawal of resolution plans after mutual negotiations between the resolution applicant and the CoC, which culminates into a binding agreement.
• Non-implementation of resolution plans after approval from the Adjudicatory Authority under Section 31 attracts prosecution under Section 74(3) of the IBC.
• Permitting the withdrawal would push Educomp towards liquidation, which would in turn risk thousands of crores of public monies owed to the public sector banks during the economic crisis caused by the Covid-19 pandemic.
• The Appellant had conducted its own due diligence in accordance with the RFRP and hence its arguments that the substratum or commercial viability has eroded due to the subsequent circumstances is facetious.
• The scope of judicial review with the Adjudicatory Authority under Section 31 of the IBC is confined to parameters delineated in Section 30(2) of the IBC, which does not envisage the withdrawal or unwillingness of the resolution applicant to continue with a CoC approved resolution plan.

Observations of the Supreme Court
Statutory period of 330 days prescribed under the IBC:

The SC noted its decision in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [2020) 8 SCC 531] which, while reiterating the rationale of the IBC for ensuring timely resolution of stressed assets as a key factor, had to defer to the principles of actus curiae neminem gravabit, that is, no person should suffer because of the fault of the court or the delay in the procedure. The SC observed that the previous statutory experiments for insolvency had failed because of delay as a result of extended legal proceedings and hence it chose to only strike down the word ‘mandatorily’, keeping the rest of Section 12(3) of the IBC intact. Therefore, the SC held that the law as it stands, mandates the conclusion of the CIRP – including time taken in legal proceedings, within 330 days with a short extension to be granted only in exceptional cases.

Adverting to the issue of withdrawal or modification of resolution plan by a successful resolution applicant under the IBC, the SC observed:

Absence of clear legislative provision:

The SC observed that in absence of a clear legislative provision, the SC will not, by a process of interpretation, confer on the Adjudicating Authority a power to direct an unwilling CoC to re-negotiate a submitted resolution plan or agree to its withdrawal, at the behest of the resolution applicant. The Adjudicating Authority can only direct the CoC to re-consider certain elements of the resolution plan to ensure compliance under Section 30(2) of the IBC, before exercising its powers of approval or rejection under Section 31 of the IBC. The absence of any exit routes being stipulated under the statute for a successful resolution applicant is indicative of the IBC’s proscription of any attempts at withdrawal at its behest. The rule of casus omissus is an established rule of interpretation, which provides that an omission in a statute cannot be supplied by judicial construction.

Commercial Wisdom of the CoC and judicial restraint:

The SC observed that in Essar Steel India Limited (supra), a three judge Bench of the SC, affirmed a two judge Bench decision in K Sashidhar v. India Overseas Bank [2019) 12 SCC 150], prohibiting the Adjudicating Authority from second-guessing the commercial wisdom of the parties or directing unilateral modification to the resolution plans. Thus, judicial restraint must be exercised while intervening in a law governing substantive outcomes through procedure, such as the IBC. If resolution applicants are permitted to seek modifications after subsequent negotiations or a withdrawal after a submission of a resolution plan to the Adjudicating Authority 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.

Impact of Covid-19 Pandemic:

In the wake of the Covid-19 Pandemic, since several resolution plans remained pending before adjudicating authorities, the legislature had provided relief by way of imposing temporary suspension on the initiation of CIRP under Sections 7, 9 and 10 of the IBC for defaults arising for six months from March 25, 2020 (extendable by one year). This was followed by an amendment through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 which provided for a carve-out for the purpose of defaults arising during the suspended period. The delays on account of the lockdown were also mitigated by the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020, which inserted Regulation 40C on April 20, 2020, with effect from March 29, 2020, and excluded such delays for the purposes of adherence to the otherwise strict timeline. In view of the above, the SC noted that there has been a clamour on behalf of successful resolution applicants who no longer wish to abide by the terms of their submitted resolution plans that are pending approval under Section 31 of the IBC, on account of the economic slowdown that impacted every business in the country. However, no legislative relief for enabling withdrawals or re-negotiations has been provided, in the last eighteen months. Thus, in the absence of any provision under the IBC allowing for withdrawal of the resolution plan by a successful resolution applicant, vesting the Appellant with such a relief through a process of judicial interpretation would be impermissible.

Further, regarding the contention of the Appellant that the clauses under RFRP accepted by the CoC were binding on the CoC and the CoC approved resolution plan was voidable at the instance of the Appellant on account of inordinate delay in the approval of the submitted plan with the Adjudicating Authority; the SC rejected the argument of the Appellant and observed that the 6 months’ time period under the RFRP relates to the validity of the resolution plan for the period of negotiation with the CoC and not for a period after the resolution plan is submitted for the approval of the Adjudicating Authority. The court held that parties cannot indirectly impose a condition on a judicial authority to accept or reject its plan within a specified time period, failing which the CIRP process will inevitably come to an end. The time which may be taken before the Adjudicating Authority is an imponderable which none of the parties can predict.

The SC also rejected the argument of the Appellant that its position changed manifestly because of new allegations which came up in relation to the financial conduct of Educomp and observed that the Appellant was responsible for conducting its own due diligence of Educomp and could not use that as a reason to revise/modify the approved resolution plan. In any event, Section 32A of the IBC grants immunity to the corporate debtor for offences committed prior to the commencement of the CIRP and it cannot be prosecuted for such offences from the date the resolution plan has been approved by the Adjudicating Authority under Section 31 of the IBC, if the resolution plan results in a change of management or control of the corporate debtor, subject to certain conditions.

Decision of the Supreme Court

The SC while dismissing the present Appeal held that the residuary powers conferred on the Adjudicating Authority under the IBC cannot be exercised to create procedural remedies which have substantive outcomes on the process of insolvency. Enabling withdrawals or modifications of the resolution plan at the behest of the successful resolution applicant, once it has been submitted to the Adjudicating Authority, would create another tier of negotiations and trigger litigations not akin to the object of the IBC, and thereby would risk delaying the insolvency process under the IBC.

VA View:

The existing insolvency framework in India provides no scope for effecting further modifications or withdrawals of CoC-approved resolution plans, at the behest of the successful resolution applicant, once the plan has been submitted to the Adjudicating Authority. The existing framework only enables Adjudicating Authority to permit withdrawals from the CIRP under Section 12A of the IBC and Regulation 30A of the CIRP Regulations.

Even the UNCITRAL Guide does not contain any provisions for withdrawal of a submitted plan, and it only discusses the possibilities of amending a resolution plan. The UNCITRAL Guide indicates that the legislature should choose if it wants to allow any amendments to a submitted resolution plan. In the event, it does, it should lay down the detailed steps of proposing amendments to a submitted resolution plan. If the legislature intended to permit parties to amend the resolution plan after submission to the Adjudicating Authority, based on its specific terms of the resolution plan, it would have adopted the critical safeguards highlighted by the UNCITRAL. Since the IBC does not provide for the withdrawal of a resolution plan by the successful resolution applicant; providing a resolution applicant with such a relief through a process of judicial interpretation would bring in the evils which the IBC sought to obviate.

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

Between the Lines | Supreme Court: Neither the NCLT nor the NCLAT have an unchartered jurisdiction in equity in dealing with resolution plans approved by the CoC.

The Hon’ble Supreme Court (“SC”) has in its judgement dated August 10, 2021, in the matter of Pratap Technocrats (P) Limited and Others v. Monitoring Committee of Reliance Infratel Limited and Another [Civil Appeal No 676 of 2021] held that the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) are duty bound to abide by the discipline of statutory provisions envisaged under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and once the requirements of the IBC have been duly fulfilled, the decisions of NCLT and the NCLAT are in conformity with law and there is no residual equity based jurisdiction with them.

Facts
The Corporate Insolvency Resolution Process (“CIRP”) of Reliance Infratel Limited (“Corporate Debtor”) was initiated by an order dated May 15, 2018 of the NCLT. The resolution plan submitted by Reliance Digital Platform and Project Services Limited (“Resolution Applicant”) was approved by the Committee of Creditors (“CoC”) with a 100% voting share and, the NCLT by an order dated December 03, 2020, had approved the resolution plan (“NCLT Order”).

Thereafter, Pratap Technocrats Private Limited and others (“Appellants”), who were the operational creditors of the Corporate Debtor challenged the NCLT Order before the NCLAT, inter alia, on the ground that the claims of the Appellants had not received fair and equitable treatment. The NCLAT by an order dated January 04, 2021, rejected the appeal and held that equitable treatment can be claimed only by similarly situated creditors (“NCLAT Order”). Aggrieved by the NCLAT Order, the Appellants filed the present appeal before the SC under Section 62 of the IBC (“Appeal”).

Issue
Whether the NCLT and the NCLAT have a jurisdiction in equity in the approval of a resolution plan within the ambit of the IBC.

Arguments
Contentions raised by the Appellants:
The object and purpose of the IBC is to balance the interest of all stakeholders and to maximize the value of assets. Further, it is essential that the CIRP must be just, fair and equitable to all stakeholders and the interest of the financial creditors cannot be placed at a higher pedestal at the cost of other stakeholders. The CIRP was conducted in a secretive manner, in violation of the principles of natural justice. Further that, it was only after the NCLT Order, that the Appellants became aware of the specifics of the resolution plan.

It was claimed that, the operational debts owed to the Appellants constituted over 90 % of the total operational debts of the Corporate Debtor and the Appellants’ interests had not been given due regard by the CoC and had placed certain assets of the Corporate Debtor outside the resolution plan. It was contended that, the approved resolution plan reserved a portion of the Corporate Debtor’s assets amounting to INR 800 crores realizable from preference shares held by Reliance Bhutan Limited, a wholly owned subsidiary of the Corporate Debtor, for distribution to financial creditors alone, thereby vitiating the object of the IBC. Since the IBC mandates that the CoC must consist only of financial creditors while the operational creditors are only allowed to attend the meeting without voting rights, the operational creditors are left unaware of the process and the entire decision making is left to the commercial wisdom of the CoC.

It was further contended that, on an application filed by Doha Bank, a financial creditor of the Corporate Debtor, the NCLT by an order dated March 02, 2021, had set aside the inclusion of certain financial creditors from the CoC without considering the implication on the distribution of funds under the resolution plan. Such an exclusion resulted in increasing the rate of recovery for the financial creditors from 10.32 % to 91.98 % whereas operational creditors had a mere recovery of 19.62 %.

Contentions raised by the Respondent:
The Respondent while submitting that the provisions of the IBC provide for specific stipulations in respect of operational creditors stated that if the aggregate dues of the operational creditors are not less than 10 % of the debt of the Corporate Debtor, the representation of their views in the CoC is envisaged under Section 24(3)(c) of the IBC through the operational creditors themselves or their representatives. It was further submitted that under Section 30(2)(b) of the IBC, the payment of debts to the operational creditors in the resolution plan shall not be less than the amount to be paid in the event of a liquidation under Section 53 of the IBC as per the priority in terms of the water fall mechanism.

In view of the above, it was contended that if the proceedings were to take place in strict accordance with the provisions of the IBC, the liquidation value would be zero, however, it was pertinent to note that the resolution plan provided a 19.62 % rate of recovery for the operational creditors as opposed to the financial creditors who were to receive only 10.32 % of their dues.

It was further submitted that the exclusion of certain financial creditors from the CoC was stayed by the NCLAT, however, the issue was a non sequitur as the exclusion of any financial creditor had no significance to the requisite majority required for passing a resolution plan.

The principle of equitable treatment only applies between creditors belonging to the same class and that there is a fundamental difference between the position of operational creditors and financial creditors which is emphasised by Explanation 1 to Section 30(2)(b) of the IBC and in the decision of the SC in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [2020) 8 SCC 531]. It was further contended that there was a fundamental error on the part of the Appellants in overlooking that INR 800 crores, which was the realisable value of preference shares had already been duly considered and was a part of the liquidation value.

The CoC had approved the resolution plan based on its commercial wisdom and the NCLT did not have the jurisdiction to scrutinize the commercial wisdom of the CoC and, thus, the NCLT acted in accordance with the provisions of the IBC.

Observations of the Supreme Court
The SC while dealing with the issue of the jurisdiction of the NCLT and the NCLAT while approving a resolution plan, also clarified three factual aspects which had a bearing on the outcome of the Appeal:

1. Valuation of preference shares
It was the contention of the Appellants that INR 800 crores which was the realisable value of preference shares held by Reliance Bhutan Limited had not been included in the liquidation value. The SC observed that the contention was factually incorrect since the realisable value for the Corporate Debtor on account of any proceeds from the preference shares was included in the determination of its liquidation value and it was supported by relevant excerpts from valuation reports by appointed valuers.

2. Liquidation value
With reference to the contention of the Appellants that the resolution plan reserved a sum of INR 800 crores exclusively for distribution to the financial creditors, the SC clarified that even if the liquidation value of the realisable value of the preference shares were to be considered in isolation for distribution amongst all operational creditors, in terms of the priority contained in Section 53(1) of the IBC, the liquidation value due to the Appellants would remain at nil.

3. The impact of exclusion of certain financial creditors
The exclusion of certain financial creditors has no implication on the operational creditors for two reasons, firstly, the resolution plan continued to be approved with a 100% majority even after their exclusion and, secondly, the only consequence would be the inter se distribution between financial creditors which had no consequence for the operational creditors.

4. The exercise of jurisdiction to approve a resolution plan
The SC revisited various provisions of the IBC in relation to the submission and approval of a resolution plan and observed that Section 30(1) of the IBC provides for the submission of resolution plan by a resolution applicant and the resolution professional is required to ensure that the plan is in accordance with the statutory requirements in clauses (a) to (f) of Section 30(2) of the IBC. Thereafter, the resolution professional presents the resolution plan to the CoC for its approval and the CoC may approve a resolution plan with a voting percentage of not less than 66 % of the voting shares of the financial creditors as enshrined under Section 30 (4) of the IBC.

The SC observed that, in view of the above, the jurisdiction of the NCLT under Section 31 of the IBC is limited to determining whether the resolution plan as approved by the CoC under Section 30(4) of the IBC meets the requirements under Section 30(2) of the IBC. This jurisdiction is statutorily defined, recognised and conferred and cannot be equated with a jurisdiction in equity that operates independently of the provisions of the statute. Similarly, the jurisdiction of the NCLAT under Section 61(3) of the IBC, while considering an appeal against an order approving a resolution plan is limited to the grounds specified therein.

The SC observed that the perusal of the definitions of ‘financial creditor’, ‘financial debt’, ‘operational creditor’ and ‘operational debt’ along with Section 30(2)(b) of the IBC, indicates that the ambit of the NCLT is to determine whether the amount payable to operational creditors under the resolution plan is consistent with the requirements of Section 30(2)(b) of the IBC. The SC further clarified that Explanation 1 to clause (b) of Section 30(2) of the IBC provides that a distribution “shall be fair and equitable” to such creditors. Fair and equitable treatment, in other words, is what is fair and equitable between operational creditors as a class and not different classes of creditors.

Thereafter, the SC proceeded to examine the nature of jurisdiction exercised by the NCLT and the NCLAT by relying on the consistent principle of law laid down in K Sashidhar v. India Overseas Bank [(2019) 12 SCC 150] and Essar Steel India Limited (supra) that, neither the NCLT nor the NCLAT can enter into the commercial wisdom underlying the approval granted by the CoC to the resolution plan. The SC further observed that, the decision in Essar Steel India Limited (supra) emphasised that, equitable treatment of creditors is “equitable treatment” only within the same class and that the decision in Swiss Ribbons Private Limited. v. Union of India [(2019) 4 SCC 17] highlights the principle that financial creditors belong to a class distinct from operational creditors.

The SC observed that, the IBC is a complete code in itself and it defines what is fair and equitable by constituting a comprehensive framework. Further, to argue that a residuary jurisdiction must be exercised to alter the delicate economic coordination that is envisaged by the statute would do violence on its purpose and would be an impermissible exercise of the NCLT’s power of judicial review.

Decision of the Supreme Court
The SC while dismissing the Appeal held that, since the resolution plan was approved by the requisite majority of the CoC in conformity with Section 30(4) of the IBC, the exclusion of certain financial creditors was of no consequence and that the jurisdiction of the NCLT and the NCLAT was confined by the provisions of Section 31(1) of the IBC, that is to determine whether the requirements of Section 30(2) of the IBC have been fulfilled in the resolution plan as approved by the CoC.

VA View:
Financial creditors, from the very beginning of the CIRP, are involved with assessing the viability of the corporate debtor, preserving the corporate debtor as a going concern while maximising the value of its assets and hence there exists an intelligible differentia between financial creditors and operational creditors which is directly related to the objects sought to be achieved by the IBC. Even though certain foreign jurisdictions allow resolution plans to be challenged on the grounds of fairness and equity, a conscious choice has been made by the legislature not to confer any independent equity-based jurisdiction on the NCLT.

Further, the precedents laid down by the SC are consistent with the recommendations given in the UNCITRAL’s Legislative Guide on Insolvency Law which states that it is desirable that a court does not review the economic and commercial basis of the decision of creditors. The SC has time and again reiterated that the commercial or business decisions of financial creditors are not open to judicial review by the NCLT or the NCLAT.

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