2019 (4) TMI 1607 - Tri - Insolvency and Bankruptcy

CoCs empowered to reject Resolution Plans based on commercial considerations, court affirms non-justiciability

M/s. Liberty House Group Versus Mr. R. Venkatakrishnan

The court upheld the Committee of Creditors' (CoCs) authority to reject a Resolution Plan based on commercial considerations, emphasizing the need to ... Liquidation of the Corporate Debtor if a Resolution Plan is rejected - CoCs rejecting of the Resolution Plan of the Applicant - Resolution Plan is rejected for reasons extraneous to the scheme of the IBC - HELD THAT:- Reasons stated by the CoCs for rejection of the Resolution Plan of the Applicant show that there has been significant haircut to which the creditors would be subject to, offer was materially lower than the OTS offer made in 2016, and much concern is about the preferential payments, potentially undervalued transactions and transactions that could have been made to potentially defraud creditors. The reasons given by the CoCs for rejection of Resolution Plan may not be looking plausible on the face of it. But, the reasons are justifiable, which point out towards commercial un-viability and uncertainties of the Resolution Plan submitted by the Applicant. CoCs while rejecting or accepting the Resolution Plan is under obligation to strike a balance between the interests of the creditors and Corporate Debtor. Resolution Applicant or the promoters of the Corporate Debtor cannot thrust their will on the creditors, who have already been pushed to odd position with regard to the recovery of their legitimate dues, which have been advanced to the Corporate Debtor in the shape of credit against the consideration for the time value of money. Resolution Professional, Adjudicating Authority or the Appellate Authority is/are not empowered to reverse the commercial decision of the CoCs. In view of the reasons recorded by the CoCs for rejection of the Resolution Plan of the Applicant and the legal proposition laid down by the Hon'ble Apex Court in K. SASHIDHAR VERSUS INDIAN OVERSEAS BANK & OTHERS [2019 (2) TMI 1043 - SUPREME COURT] , the Resolution Applicant has no vested right to challenge the rejection of its Resolution Plan. Therefore, the Application for challenging the rejection of the Resolution Plan is devoid of merit and stands rejected Issues:Challenge to rejection of Resolution Plan under I&B Code, 2016 based on extraneous considerations.Analysis:1. The main issue in this case revolves around the rejection of a Resolution Plan submitted by the Applicant under Section 60(5) of the I&B Code, 2016. The critical question raised is whether the liquidation of the Corporate Debtor can be allowed if a Resolution Plan is rejected for reasons unrelated to the IBC's scheme. The Applicant contends that the CoCs must base their decision on the Evaluation Matrix prepared by the RP and not on extraneous factors.2. The Applicant's Resolution Plan was rejected due to concerns such as significant haircut for creditors, lower offer compared to past settlements, provisions in financial statements affecting liquidation value, and suspicions of fraudulent transactions. The Applicant argues that CoCs must assess Resolution Plans based on commercial viability, impact on stakeholders, and the possibility of liquidation, emphasizing the need for a rigorous feasibility analysis.3. The Applicant asserts that the CoCs failed to consider the Resolution Plan's merits independently and instead relied on improper factors during rejection. The CoCs, in their defense, claim better recovery options exist beyond the Applicant's proposal and question the fairness and viability of the Resolution Plan. They argue that the rejection was justified due to commercial unviability and uncertainties in the Applicant's plan.4. The CoCs' reasons for rejection, including significant creditor haircuts and concerns over transactional integrity, may seem implausible on the surface. However, the judgment emphasizes the CoCs' duty to balance creditor interests and the Corporate Debtor's realisibility under Resolution Plans. The court cites the Hon'ble Supreme Court's decision, highlighting the CoCs' commercial wisdom as paramount without judicial interference.5. The legal precedent established by the Supreme Court dictates that the CoCs' commercial decisions are non-justiciable, and their rejection of a Resolution Plan cannot be challenged unless based on specific statutory grounds. As per this ruling, the Resolution Applicant lacks the right to contest the rejection, and the Application challenging the rejection is dismissed for lacking merit.6. In conclusion, the judgment upholds the CoCs' authority to make commercial decisions regarding Resolution Plans, emphasizing the need for balancing creditor interests and Corporate Debtor viability. The ruling underscores the non-justiciability of CoCs' commercial wisdom and highlights the limited scope for challenging rejection based on statutory grounds, ultimately dismissing the Applicant's challenge to the rejection of their Resolution Plan.