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]

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