Supreme Court validates Sections 4 and 6 of Insolvency and Bankruptcy Code Amendment Act 2019

SC upheld the constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. The Court set aside NCLAT's judgment that substituted judicial wisdom for the commercial wisdom of the Committee of Creditors. SC clarified that resolution professionals must manage corporate debtors as going concerns, Committee of Creditors' business decisions require 66% majority approval, and Adjudicating Authority's review is limited under Section 30(2). The Court emphasized that successful resolution applicants must operate on a fresh slate, with all claims decided during CIRP. Appeals by Committee of Creditors were allowed, except for specific civil appeals which were dismissed.

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Issues Involved:
1. Role of resolution applicants, resolution professionals, and the Committee of Creditors under the Insolvency and Bankruptcy Code, 2016.
2. Jurisdiction of the NCLT and NCLAT regarding approved resolution plans.
3. Constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.
4. Treatment of secured and unsecured creditors.
5. Extinguishment of personal guarantees and undecided claims.
6. Utilization of profits of the corporate debtor during CIRP to pay off creditors.

Detailed Analysis:

1. Role of Resolution Applicants, Resolution Professionals, and the Committee of Creditors:
The judgment emphasizes the administrative role of the resolution professional, who manages the affairs of the corporate debtor, collects and collates claims, and presents resolution plans to the Committee of Creditors (CoC). The CoC, comprising financial creditors, evaluates and approves resolution plans based on their commercial wisdom. The resolution professional's role is non-adjudicatory but administrative, ensuring that the resolution plans conform to the legal requirements before presenting them to the CoC.

2. Jurisdiction of NCLT and NCLAT:
The NCLT's jurisdiction is limited to ensuring that the resolution plan meets the requirements specified in Section 30(2) of the Code. The NCLAT's jurisdiction is similarly circumscribed, focusing only on the grounds specified in Section 61(3) of the Code. The judgment reiterates that the commercial decisions of the CoC are not subject to judicial review unless they violate the provisions of the Code. The Adjudicating Authority and the Appellate Tribunal cannot interfere with the merits of the CoC's business decisions.

3. Constitutional Validity of Sections 4 and 6 of the Amending Act, 2019:
The judgment upholds the amendments, stating that the legislature can amend laws to address issues arising from judicial interpretations. The amendments apply generally and are not targeted at any specific judgment. The judgment also clarifies that the time taken in legal proceedings should not unduly prejudice the parties, and the outer limit of 330 days for completing the CIRP can be extended in exceptional cases where delays are attributable to the adjudicatory process.

4. Treatment of Secured and Unsecured Creditors:
The judgment emphasizes that equitable treatment of creditors means treating similarly situated creditors in the same manner. It rejects the NCLAT's approach of treating all creditors equally, regardless of their secured or unsecured status. The CoC has the discretion to classify creditors and determine the distribution of amounts based on the value of their security interests. The judgment highlights that secured creditors are often incentivized to vote for liquidation if they are not given priority, which would defeat the purpose of the Code.

5. Extinguishment of Personal Guarantees and Undecided Claims:
The judgment clarifies that once a resolution plan is approved, it is binding on all stakeholders, including guarantors. This ensures that the successful resolution applicant can start afresh without being burdened by past liabilities. The judgment also sets aside the NCLAT's decision to allow undecided claims to be pursued post-approval of the resolution plan, emphasizing that all claims must be decided during the CIRP to provide certainty to the resolution applicant.

6. Utilization of Profits of the Corporate Debtor During CIRP:
The judgment invalidates the NCLAT's direction to use profits generated during the CIRP to pay off creditors, as it contradicts the agreed terms in the resolution plan. The RFP and the resolution plan explicitly stated that such profits would not be used for debt repayment.

Conclusion:
The Supreme Court's judgment reinforces the sanctity of the CoC's commercial decisions, limits judicial intervention to ensure compliance with the Code, and upholds the amendments made to address practical challenges in the insolvency resolution process. It clarifies the roles and responsibilities of various stakeholders and ensures that resolution plans provide certainty and finality to the resolution process.

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