Important Judgements of Supreme Court on Insolvency Bankruptcy Code, 2016

Author: Diya Thakur

The Insolvency and Bankruptcy Code ("IBC/code") was enacted by the Government in the year 2016 with the objective to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. Since it’s commencement the Code Judiciary has placed a vital role to establish the substance of the Code and led to the development of law for debt recovery in India.

  1. CoC of Essar Steel India Limited v. Satish Kumar Gupta & Ors. (Supreme Court?—?November 15, 2019)

.Feasibility and viability of a resolution plan, takes into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors, is a decision left to the majority of the Committee of Creditors ("CoC")

  • The CoC does not act in any fiduciary capacity to any group of creditors. It takes business decisions by a majority, which binds all stakeholders, including dissenting creditors.
  • The Corporate Insolvency Resolution Process ("CIRP") regulations do not lead to the conclusion that Financial Creditors ("FCs") and Operational Creditors ("OCs"), or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster. It is the commercial wisdom of the requisite majority of the CoC which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors.
  • Legislature must be given free play in the joints when it comes to economic legislation. Apart from the presumption of constitutionality which arises in such cases, the legislative judgment in economic choices must be given a certain degree of deference by the courts
  • Ordinarily the insolvency resolution of the Corporate Debtor ("CD") must be completed within the outer limit of 330 days from the Insolvency Commencement Date ("ICD"), including extensions and the time taken in legal proceedings. However, if a short period is left for completion of CIRP, the National Company Law Tribunal/ National Company Law Appellate Tribunal ("NCLT/NCLAT") can extend time beyond 330 days.

2. Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India (Supreme Court?—?August 09, 2019)

  • Homebuyers are now to be treated as financial creditors who can initiate insolvency proceedings against the CD and also form part of the CoC.
  • The Real Estate (Regulation and Development) Act, 2006 (RERA) and Code must be held to co-exist, and, in the event of a clash, the Act must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Code

3. K. Sashidhar v. Indian Overseas Bank & Ors. (Supreme Court?—?February 5, 2019)

  • The legislature has not provided the Adjudicating Authority ("AA") with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC or to enquire into the justness of the rejection of the resolution plan by the dissenting FCs.
  • The jurisdiction bestowed upon the NCLAT is limited. They cannot enquire into the autonomy or commercial wisdom of dissenting FCs. They can examine the challenge only in relation to the grounds specified in Section 61 (3) of the code.

4. Vijay Kumar Jain v. SCB & Ors. (Supreme Court?—?January 31, 2019)

The erstwhile Board of Directors are not members of the CoC, yet, they have a right to participate in each and every meeting and also have a right to discuss along with members of the CoC all resolution plans that are presented at such meetings. Thus, being participants in the CoC are entitled to the notice of the meeting, agenda, and all such documents relevant for the matters to be discussed and issues to be voted upon in the CoC. The terms documents also include Resolution Plans.

5. Swiss Ribbons & Anr. v. Union of India (Supreme Court?—?January 25, 2019)

  • Section 29A of the code not only applies to resolution applicants but also to liquidation. There is no vested right in an erstwhile promoter of a CD to bid for the immovable and movable property of the CD in liquidation.
  • The RP is really a facilitator of the resolution process, whose administrative functions are overseen by the CoC and by the AA.
  • The CoC has the primary responsibility of financial restructuring. It assesses the capability of a CD by considering all available information as well as evaluates the resolution plan on the basis of feasibility and viability.
  • There is an intelligible differentia between the FCs and OCs which has a direct relation to the objects sought to be achieved by the Code. The classification between FCs and OCs is neither discriminatory, nor violative of Article 14.

6. Anand Rao Korada v. Varsha Fabrics (P) Ltd & Ors. (Supreme Court?—?November 18, 2019)

Section 238 of the Code gives an overriding effect to the IBC over all other laws. The provisions of the IBC vest exclusive jurisdiction on the NCLT and the NCLAT to deal with all issues pertaining to the insolvency process of a corporate debtor, and the mode and manner of disposal of its assets. The Supreme Court accordingly held that the High Court was not justified in passing the Order for carrying out the auction of the assets of the CD, which was undergoing CIRP and the alienation of such assets would jeopardise the interest of all stakeholders.

7. ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ars (Supreme Court?—?October 04, 2018)

  • Section 30(2)(e) of the code does not empower Resolution Professional to decide whether the resolution plan contravenes provisions of law but only to give a prima-facie opinion to the CoC on whether a resolution plan contravenes any provision of Law.
  • A resolution applicant has no vested right that his resolution plan be considered, it is clear that no challenge can be preferred to the Adjudicating Authority at the stage when a resolution plan is received by the Resolution Professional under Section 30(2).
  • When the RP presents a Resolution Plan to the CoC under 30(3) of the code and if the CoC does not approve such plan by the required majority, in that case no application before the AA can be entertained as there is no vested right in the resolution applicant to have its resolution plan approved.
  • A Resolution Plan once approved by the CoC and the AA can be challenged before the NCLAT and later before the Supreme Court

8. Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd. & Ors (Supreme Court?—?November 19, 2018)

The NCLAT had held that the CoC should follow such procedure which is transparent while approving or rejecting a resolution plan. Further, the suspended Board of Directors; Operational Creditors and Resolution Applicant are not mere spectators but may express their views to the CoC for coming to a conclusion. Hence the NCLAT held that the CoC should record reasons while approving or rejecting one or other resolution plan. The Hon’ble Supreme Court accordingly held that there was no infirmity in the order passed by the NCLAT, thereby dismissing the appeal.

9. State Bank of India Vs. V. Ramakrishnan & Anr (Supreme Court?—?April 14, 2018

The objective of the Code is not to allow personal guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt. Thus, Moratorium referred to in Section 14 can have no manner of application to personal guarantors of a corporate debtor.