1. Corporate insolvency resolution process — Approval of resolution plan by NCLT — Rejection by NCLAT — Appeals challenging resolution applicant eligibility and procedural irregularities under IBC. (Para 1 , 6 , 11 )
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2023 Supreme(SC) 462
SUPREME COURT OF INDIA
DINESH MAHESHWARI, VIKRAM NATH, JJ.
M.K. Rajagopalan – Appellants
VERSUS
Dr. Periasamy Palani Gounder & Anr. – Respondents
Civil Appeal Nos. 1682-1683 OF 2022 With C.A. No. 1756/2022, C.A. No. 1759/2022, C.A. No. 1757/2022, C.A. No. 1807/2022, C.A. No. 1810/2022, C.A. No. 1827/2022
Decided On : 03-05-2023
Advocates appeared:
For the Appellant(s) : Mr. Vijay Narayan, Sr. Adv. Mr. T. Ravichandran, Adv. Mr. K. V. Mohan, AOR Mr. K.V. Balkrishnan, Adv. Mr. Rahul Kumar Sharma, Adv. Mr. Devashish Bharuka, AOR Mrs. Jaya Bharuka, Adv. Mr. Ravi Bharuka, Adv. Ms. Sarvshree, Adv. Mr. Justine George, Adv. Mr. Shobhit Dwivedi, Adv.
For the Respondent(s): Mrs. Haripriya Padmanabhan, Adv. Mr. Kuriakose Varghese, Adv. Mr. V. Shyamohan, Adv. Mr. Akshat Gogna, Adv. Mr. Martin Geomin George, Adv. M/S. Kmnp Law, AOR Mr. Balaji Srinivasan, AOR Mr. Sanjay Kapur, AOR Ms. Megha Karnwal, Adv. Mr. Surya Prakash, Adv. Mrs. Shubhra Kapur, Adv. Mr. Arjun Bhatia, Adv. Mr. Devesh Dubey, Adv. Ms. Mahima Kapur, Adv. Mr. Lalit Rajput, Adv. Mr. Goutham Shivshankar, AOR Mrs. Pragya Baghel, AOR Mr. K. V. Mohan, AOR Mr. Dheeraj Nair, AOR Ms. Vishrutyi Sahni, Adv.
For the Appellant(s) : Mr. Vijay Narayan, Sr. Adv. Mr. T. Ravichandran, Adv. Mr. K. V. Mohan, AOR Mr. K.V. Balkrishnan, Adv. Mr. Rahul Kumar Sharma, Adv. Mr. Devashish Bharuka, AOR Mrs. Jaya Bharuka, Adv. Mr. Ravi Bharuka, Adv. Ms. Sarvshree, Adv. Mr. Justine George, Adv. Mr. Shobhit Dwivedi, Adv.
For the Respondent(s): Mrs. Haripriya Padmanabhan, Adv. Mr. Kuriakose Varghese, Adv. Mr. V. Shyamohan, Adv. Mr. Akshat Gogna, Adv. Mr. Martin Geomin George, Adv. M/S. Kmnp Law, AOR Mr. Balaji Srinivasan, AOR Mr. Sanjay Kapur, AOR Ms. Megha Karnwal, Adv. Mr. Surya Prakash, Adv. Mrs. Shubhra Kapur, Adv. Mr. Arjun Bhatia, Adv. Mr. Devesh Dubey, Adv. Ms. Mahima Kapur, Adv. Mr. Lalit Rajput, Adv. Mr. Goutham Shivshankar, AOR Mrs. Pragya Baghel, AOR Mr. K. V. Mohan, AOR Mr. Dheeraj Nair, AOR Ms. Vishrutyi Sahni, Adv.
Commercial wisdom of the committee of creditors is paramount and non-justiciable but remains subject to mandatory statutory compliance; failure to present a final revised plan to the committee for approval and the presence of disqualifying fiduciary conflicts regarding the resolution applicant constitute material irregularities nullifying the plan.
Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Sections 12-A, 21, 29-A, 30, 31, 61, 238 - Companies Act, 2013 - Sections 164, 166 - Indian Trusts Act, 1882 - Section 88 - Insolvency Resolution Process - Commercial wisdom of Committee of Creditors - Primacy of commercial wisdom is subject to mandatory statutory compliance - Non-compliance with essential procedural requirements like approval of final revised resolution plan by Committee of Creditors vitiates the process (Paras 47-50) - Ineligibility of resolution applicant due to conflict of interest and breach of fiduciary duties - Operation of statutory prohibitions regarding fiduciary gain under trust and company law acts as an absolute bar to eligibility (Paras 44, 45).
(B) Corporate Insolvency Resolution Process - Valuation - Procedural regularity - Where valuation reports and processes met minimum regulatory threshold, detailed individual asset verification and technical challenges regarding valuation methodology do not necessarily constitute material irregularity - Procedural provisions not governing core rights or mandates may be read as directory rather than mandatory (Paras 41-42).
(C) Insolvency Resolution - Settlement proposal - Section 12-A of the Code - Withdrawal of application - Mechanism for withdrawal is subject to approval by the Committee of Creditors - Eleventh-hour settlement tactics lacking transparency or consensus in the committee of creditors are subject to judicial scrutiny, and mere subsequent events do not automatically mandate the acceptance of late-stage withdrawal proposals (Paras 57-66).
Facts of the case:
The corporate insolvency resolution process was initiated against a defaulting company. A resolution plan was approved by the committee of creditors and subsequently by the adjudicating authority. The appellate tribunal reversed this approval, citing the ineligibility of the resolution applicant, improper valuation, procedural irregularities regarding public advertisement, and failure to consider a settlement proposal. The resolution applicant and professional appealed against this reversal, while the promoter filed for settlement under the relevant insolvency provisions.
Findings of Court:
The court held that commercial wisdom of the committee of creditors is paramount but cannot override mandatory procedural requirements, such as the necessity of placing a finally revised resolution plan before the committee of creditors for approval. The resolution applicant was deemed ineligible due to conflicts of interest arising from fiduciary breaches. However, the court disagreed that all procedural irregularities (such as valuation method details and minor publication issues) rendered the entire process void, categorizing some as directory.
Issues: Whether the commercial wisdom of the committee of creditors justifies overlooking mandatory statutory compliance; whether the resolution applicant was ineligible based on fiduciary conflicts; and whether the failure to place a revised plan before the committee of creditors constitutes a material irregularity.
Ratio Decidendi: The decision establishes that commercial wisdom is non-justiciable only when the resolution process complies with all mandatory statutory requirements. A failure to present a final revised plan to the committee of creditors for approval is a material irregularity that renders the plan void. Furthermore, an applicant in breach of fiduciary duties under established commercial or trust laws is ineligible to participate in the corporate insolvency resolution process.
Result: Appeals disposed of; the rejection of the resolution plan by the appellate tribunal is upheld on the grounds of applicant ineligibility and procedural failure in plan approval, while other findings on valuation and directory procedures are set aside. Subsequent settlement proposals are left for consideration by the adjudicating authority.
Judgement Key Points
Key Points: - Supreme Court partially upholds NCLAT's rejection of the resolution plan due to resolution applicant's ineligibility under Section 88 of Trusts Act and Section 166(4) of Companies Act, and failure to place revised plan before CoC (!) (!) (!) . - Valuation process complied with Regulations 27 and 35 of CIRP Regulations as CoC was provided fair and liquidation values after confidentiality undertakings (!) (!) . - Non-publication of Form G on designated website was a directory requirement with no proven prejudice, not vitiating the CIRP (!) (!) . - Resolution applicant ineligible under Section 88 Trusts Act for relying on credentials of ineligible trust "Sri Balaji Vidyapeeth" while submitting individual plan (!) (!) (!) . - Revised resolution plan after ninth CoC meeting not placed before CoC for final approval, rendering it void as per Sections 30 and 31 of IBC (!) (!) . - No mandate under IBC for parity payment to related parties in resolution plans; differential treatment upheld as per CoC's commercial wisdom (!) (!) . - Settlement proposals of promoter under Section 12-A properly considered and rejected by CoC earlier; fresh proposal after new EOIs left open for NCLT (!) (!) . - Increase in RP fees not linked to procedural irregularities; NCLAT's observations thereon set aside (!) . - CoC's commercial wisdom paramount but presupposes full information and final plan approval (!) (!) .
What is the effect of Section 164(2)(b) of the Companies Act on eligibility to submit a resolution plan under Section 29A(e) of the IBC?
What is the impact of Section 88 of the Trusts Act on a resolution applicant's eligibility when acting as alter ego of an ineligible trust?
What are the requirements for presenting a revised resolution plan to the CoC after conditional approval?
Legal Category Hierarchy
- insolvency and bankruptcy law
- company law
-
trust law
- fiduciary duties (Para 44)
Table of Contents
2. Resolution applicant disputes ineligibility and procedural errors — Promoter alleges undervaluation and non-consideration of settlement offer — Related party claims discriminatory treatment in payment. (Para 3 , 28 , 29 , 30 , 31 , 33 , 34 )
3. Valuation and Form G publication were not material irregularities — Resolution applicant ineligible under Trusts Act and Companies Act — Revised plan filed without CoC vote is a material irregularity. (Para 41 , 42 , 43 , 44 , 45 , 46 , 47 , 48 , 51 , 52 , 53 , 54 , 55 , 56 , 57 , 58 , 59 , 60 , 61 , 62 , 63 , 64 , 65 , 66 )
4. Commercial wisdom of CoC requires a considered decision on the final resolution plan; filing a revised plan without CoC approval is a material irregularity. (Para 47 , 49 )
5. Resolution plan rejected due to resolution applicant's ineligibility and lack of CoC approval for revised plan — Subsequent settlement offer left for Adjudicating Authority's consideration. (Para 67 , 68 , 70 )
6. Does non-publication of Form G on the designated website or disputes over valuation reports constitute material irregularities sufficient to void a resolution plan?
No. If the CoC is satisfied with the valuation and the process is substantially followed, technical non-compliance with website publication or valuation disputes are not material irregularities that would annul the process. (Para 41 , 42 )
7. Can a trustee of an ineligible charitable trust submit a resolution plan in an individual capacity?
No. If the individual acts as an alter ego of the ineligible trust to gain pecuniary advantage, the submission is barred under Section 88 of the Trusts Act, as the individual cannot bypass the trust's ineligibility. (Para 44 )
8. Is it permissible to file a revised resolution plan with the Adjudicating Authority without a fresh vote from the Committee of Creditors?
No. Any change in the financial layout of a plan requires a considered decision and approval by the CoC. Filing a revised plan without such approval is a material irregularity that renders the plan void. (Para 47 , 49 )
9. Must related party creditors be treated with parity to unrelated creditors in a resolution plan?
No. There is no mandate in the IBC for parity between related and unrelated parties; differential payment to related parties is subject to the commercial wisdom of the CoC. (Para 53 )
10. Is the Committee of Creditors mandated to consider every settlement offer made by a promoter under Section 12-A?
While consideration is generally required, offers made at the eleventh hour as dilatory tactics may be rejected by the CoC in its commercial wisdom, especially if they lack concrete funding proof. (Para 57 , 58 )
JUDGMENT :
DINESH MAHESHWARI, J.
| Preliminary and brief outline |
| Particulars of the proceedings and the parties |
| The relevant factual and background aspects |
| Initiation of CIRP |
| CoC Meetings and ancillary proceedings |
| Resolution plan approved by the Adjudicating Authority (NCLT) |
| Disapproval of the Appellate Tribunal (NCLAT) |
| Proceedings in this Court |
| The events during pendency of these appeals |
| Rival submissions |
| Points for determination |
| Relevant statutory provisions |
| Objectives and scheme of IBC: crucial role-players: |
| Point A – Valuation: Regulations 27 and 35 |
| Point B – Publication of Form G: Regulation 36-A |
| Point C1 – Effect of Section 164(2)(b) Companies Act |
| Point C2 – Effect of Section 88 Trusts Act |
| Point C3 – Effect of Section 166(4) Companies Act |
| Point D1 – Revision of resolution plan after approval by CoC |
| Point D2 – Increase of fees of resolution professional |
| Point E – The matter concerning related party |
| Point F – NCLAT’s findings regarding settlement offer of promoter |
| Point G – Impact and effect of subsequent events |
| Summation |
| Conclusion |
Preliminary and brief outline
1. These civil appeals are essentially directed against the common judgment and order dated 17.02.2022, as passed by the National Company Law Appellate Tribunal, Chennai Bench,1[Hereinafter also referred to as ‘NCLAT’/‘the Appellate Tribunal’.] in a batch of appeals in relation to the Corporate Insolvency Resolution Process2[‘CIRP’, for short.] under the Insolvency and Bankruptcy Code, 2016,3[Hereinafter also referred to as ‘IBC’/‘the Code’.] concerning the corporate debtor, Appu Hotels Limited4[Hereinafter also referred to as ‘the corporate debtor’.], whereby the Appellate Tribunal has reversed the order dated 15.07.2021, as passed by the National Company Law Tribunal, Chennai5[Hereinafter also referred to as ‘NCLT’/ ‘the Tribunal’/‘the Adjudicating Authority’]; and while rejecting the resolution plan in question, has remanded the matter to the committee of creditors6[‘CoC’, for short.] with directions to the resolution professional7[‘RP’, for short.] to proceed from the stage of publication of Form ‘G’, and invite the expression of interest8[‘EOI’, for short.] afresh as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 20169[Hereinafter also referred to as ‘the CIRP Regulations’].
2. In view of multiple issues raised in this batch of matters, where several steps have been taken at different stages and different parties are having different stands and interests, we may draw a brief outline with salient features of the factual and background aspects, in order to indicate the contours of the forthcoming discussion.
2.1. CIRP against the corporate debtor got initiated on 05.05.2020, with the NCLT admitting an application moved under Section 7 of the Code by one of its financial creditors, Tourism Finance Corporation of India Limited10[‘TFCI’, for short.]. In the course of proceedings, after various rounds of CoC meetings, ultimately, the resolution plan in question was approved with 87.39 per cent. majority of voting share on 22.01.2021. However, the CoC recommended certain changes to be made in the resolution plan. After incorporating the changes as suggested by CoC, an application was moved before the Adjudicating Authority (NCLT) under Section 30(6) of IBC for approval of the resolution plan. During the proceedings before NCLT, several objections were raised by various financial creditors, other resolution applicants and by the promoter and erstwhile director of corporate debtor against the resolution plan. The promoter also stated his grievance about want of consideration of his settlement proposal in terms of Section 12-A of the Code. However, the NCLT dismissed all the objections and approved the resolution plan declaring it binding on the corporate debtor and other sta
