Case Analysis: K. Sashidhar v. Indian Overseas Bank & Ors

LJCS: Legal Journal for Contemporary Society

Background

According to the Insolvency and Bankruptcy Board of India (IBBI) data, the number of insolvency cases witnessed a surge of 30.29% between October and December for 2019[1]. 23.6% of these (which is a total of 780 companies) have witnessed liquidation. One of the major reasons for the liquidation process’s initiation is the lack of concord between the Committee of creditors who have a major role in the approval of a resolution plan. In an insolvency proceeding, there are several layers of authorities that play indispensable roles throughout. In the case of K Sashidhar vs Indian Overseas Bank, the Supreme Court highlighted the Committee of Creditors’ indispensable function in deciding the fate of an ailing corporate debtor. The case mentioned involved two matters, i.e., Kamineni Steel and Power India Pvt. Ltd (KS&PIPL) and Innoventive Industries Ltd. (IIL).

Both companies were running at a loss and were facing financial crises subsequent to 2014-2015. Due to the despoliation of its net worth, an application was filed in order to revive the company by initiating the Corporate Insolvency Resolution Process (CIRP). [2] The distressed company had put forward a resolution plan, giving three options projecting the sustainable debt and scheme to resuscitate the ailing company. However, the assessment of the viability of the resolution plan is at the discretion of the Committee of Creditors. Both companies failed to meet the criteria of not less than 75% voting share of financial creditors, forming the Creditors Committee[3]. After elucidating the manner in which voting shares are to be assessed and coming to a conclusion, the Supreme Court threw light on several critical questions that arose in the proceeding, which was indispensable in order to analyse the outcome of the case.


Facts of the Case

Kamineni Steel and Power India Pvt. Ltd (KS&PIPL) and Innoventive Industries Ltd. (IIL) were in an indisputable position when attempting to recover the company from the financial losses through a resolution process under the Insolvency and Bankruptcy Code of 2016 failed. Under the code, a mandatory voting share of 75% must be obtained by the Committee of Creditors who formed the lender’s forum to resuscitate the “sick” company. The Committee of Creditors, which included banking institutions such as Indian Overseas Bank, Allahabad Bank, Bank of Maharashtra, etc., disapproved of the struggling debtor company’s resolution plan contrived by the company in hopes to recuperate its financial standing. Rejection of the resolution plan for KS&PIPL by Indian Overseas Bank, which held a 15.15% voting share, resulted in the resolution plan being rejected by the Committee of Creditors, with only 66.67% approval. An application was filed at the National Company Law Tribunal by the managing director of KS&PIPL, requesting the tribunal to approve the resolution plan by discarding the voting share of financial institutions who did not participate in voting, which would lead to a good 78% approval by the remaining institutions. The National Company Law Tribunal (NCLT) had thus, approved the resolution plan. Aggrieved by the decision of the NCLT, the dissenting financial institutions filed an appeal against the decision of the NCLT to the appellate authority, the National Company Law Appellate Tribunal (NCLAT)[4].

Innoventive Industries Ltd (IIL), on the other hand, had proposed Corporate Debt Restructuring (CDR) to its lender banks. The resolution plan, which was formulated after considering resolution applicants who were aiding in the company’s plan of action, was rejected by financial institutions holding 33.43% voting share. As a result of this, the NCLT directed the said company’s liquidation due to wanting adequate approvals. The managing director of the company had filed an appeal against the decision of the NCLT to the NCLAT, highlighting that the financial institutions disapproving the resolution plan were acting maliciously and did not cite any reason for such disapproval[5].

Both the appeals were heard together by the appellate authority as they were concerned with common interests and therefore were disposed of by a common impugned judgement held on September 6, 2018, wherein it was held that 75% approved voting share is requisite in order to pass the resolution plan. It was also held that the Committee of Creditors do not require to cite reasons for their rejection and cannot be questioned.

Discontented by the judgement held above, the managing director of both the companies filed a civil appeal to the Supreme Court under section 62 of the Insolvency and Bankruptcy Code 2016.


Issues Raised

The counsels appearing for both the debtor companies had placed pertinent arguments on behalf of the debtor company. It is imperative to note that while the case was pending, substantial amendments were made to the code that governed the authorities’ acts in the matter. Objecting to the Committee of Creditors’ disapproval, insisting on a retrospective view of the amendments to the case and questioning the justiciability of the NCLT, the learned counsels attempted to receive a favourable decision by the Supreme Court.

The critical bone of contentions that were required to necessitate an equitable decision in the case was:

I. What falls within the ambit of the NCLT and whether decisions taken by the Committee of Creditors are within the scope of judicial review?

II. Whether the Committee of Creditors should be compelled to cite reasons for rejecting a resolution plan?

III. Whether the voting share should consider the creditors who have abstained from voting?

IV. The extent of retrospective or prospective effect of the amendments made during the pendency of the case.


Cases Relied Upon

To support the arguments, the leaner counsel for KS&PIPL concerning the amendment to section 30(4) had placed reference on the judgment in Mithilesh Kumari & Another vs. Prem Behari Khare, Dahiben (Widow of Ranchnodji Jivanji) & Ors. vs. Vasanji Kevalbhai (dead) & Others[6]. To question whether an amendment should be retrospective or not, reliance was also placed on the decision in State Bank of India vs. Ramakrishnan had dealt with an amendment by substituting to Section14(3) of the Insolvency & Bankruptcy Code. The Court had therefore held that the amendment was retrospective.

The contention placed by the learned counsel on behalf of IIL placed significant reliance on Mardia Chemicals Limited and Others vs. Union of India, where the Committee of Creditors’ arbitrary exercise of power, must be justified and reasonable.


Apex Court’s Observation

Circumscribing the Domain of The National Company Law Tribunal

The Supreme Court assessed the significant roles played by the several layers of authorities involved in the case and had provided much-needed clarity regarding all the authorities’ scope. The NCLT jurisdiction is circumscribed and has a limited scope of scrutiny in matters that involve intricacies regarding the viability of a resolution plan. This falls within the financial creditors’ domain, as matters such as priority of payments, effective management of the distressed company, and implementation and supervision of the resolution plan are considered. These can only be assessed and analysed with commercial wisdom, a skill that is not possessed by the judicial authority. Therefore, the Supreme Court had settled and recognised the dominion of the judicial and the appellate authority in insolvency matters. However, if the rejected resolution plan is falling within the grounds mentioned in section 30(2) of the code and includes any decision on the applicability of the resolution applicant (as specified in section 29A) of the case, it would be subject to judicial review. The Court’s comments concerning this in Para 33 is[7] :

Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan.


Citation of Reasons - “Not A Necessity”

Further, according to the Insolvency and Bankruptcy code, while taking into consideration the amendment to the code in July 2018 wherein it was provided for recording the reasons for approval or rejection of the resolution plan by the Committee of Creditors, it was held that the same could not have a retrospective effect. If the same is to take effect retrospectively, it will have a crucial impact on the Committee of Creditors’ decisions before the amendment. Therefore, it was comprehensible that the Committee, with all its commercial wisdom, are not mandated to cite reasons for rejecting a resolution plan.


Retrospective Execution of Amendments

The most significant aspect of the case was the calculation of the voting share, which played a substantial role in determining the resolution plan’s fate. It is pertinent to note that an amendment was passed in July 2018, where a voting share requirement was reduced to 66% from 75%. The Supreme Court noted that the amendment, being in the nature of clarification and a new norm, is prospective in its implementation. In addition, the Insolvency and Bankruptcy Code (Amendment) Act, 2017, which was deemed to have been in force from November 23, 2017, inserted the words ‘after considering its feasibility and viability, and such other requirements as may be specified by the Board’ in section 30(4). The Apex Court observed that the amendment only clarified that the financial creditors should consider the feasibility and viability and any other such requirement that may be specified while exercising their option to approve or reject the resolution plan. The amended provision merely restates what the financial creditors are already expected to bear in mind whilst expressing their opinion on the proposed resolution plan.

To conclude, the Supreme Court upheld the appellate authority’s decision (NCLAT) and had ordered the initiation of the liquidation process for both the corporate debtors.


Ratio Decidendi And Analysis

In the case mentioned above, the Supreme Court has emphasised the Committee of Creditors’ primacy concerning a resolution plan and has recognised the same as the code’s bedrock. The Apex Court has correctly determined the scope and jurisdiction of the different authorities in such matters. If the NCLT is allowed to intervene and scrutinise every decision taken by the Committee of Creditors to make its decision, the question that must be asked is: What remains the need of the financial institutions in such matters?

Obviously, the Committee will assess the viability and feasibility of a resolution plan placed before it, as the Committee’s decision directly impacts the rights of all the stakeholders. The Committee of Credits has been placed in such a position because of the commercial wisdom possessed by each one of the financial institutions. Therefore, every decision taken by the Committee is not open to scrutiny; however, it remains subject to challenge in certain cases.

Taking note of the amendments introduced to the code, it is established that the same, for obvious reasons, cannot be implemented on a retrospective approach. The amendments have been introduced as a new norm, forming a new standard for all prospective cases. Implementing the same with a retrospective approach would hinder all prior decisions taken by the Committee in analysing a resolution plan’s viability. Every pending case in such matters would be subject to approval if a retrospective approach is taken into account, defeating the code’s purpose.

A financial creditor who abstains from voting and remains open to a new resolution plan holds the same strength as the member who says “NO” to a resolution plan.

While the question of whether or not to consider the votes of the “abstained” members was settled, the question that remains open is, what about the members who “absent” themselves from the meeting altogether and do not even cast e-votes? Unfortunately, the Supreme Court failed to deal with this point which was eventually dealt with by the NCLAT later[8].

Author
Zeba Khan 

(1st Year LLB,
Amity University)

Reference

[1]https://www.businesstoday.in/current/corporate/insolvency-cases-rose-between-october-december-2019-ibc-insolvency-and-bankruptcy-code-liquidation/story/396381.html

[2] Sec 10 of Insolvency and Bankruptcy Code read with Rule 7 of Insolvency and Bankruptcy Rules, 2016

[3] Sec 30(4) of Insolvency and Bankruptcy Code, 2016 - before the 2017 amendment

[4] https://indiankanoon.org/doc/28868630/ paragraph 7

[5] https://indiankanoon.org/doc/28868630/ paragraph 8

[6] https://indiankanoon.org/doc/28868630/ paragraph 10

[7]https://icsiiip.com/Portals/0/March_Issue_IBJ_2019-pages-deleted.pdf

[8] Tata Steel Ltd vs. Liberty House Group Pd. Ltd

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