2019 (11) TMI 731 - SC - IBC

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 ... Commercial wisdom of the Committee of Creditors - limited judicial review under Section 30(2) and Section 31 - equitable treatment of creditors within classes - treatment of secured and unsecured financial creditors - priority and liquidation-value floor for operational creditors - binding effect of an approved resolution plan on guarantors under Section 31(1) - residual jurisdiction of NCLT under Section 60(5) - permissibility of sub-committees subject to CoC ratification - validity of amendments in the Insolvency and Bankruptcy Code (Amendment) Act, 2019 - time bound CIRP and inclusion of court time within outer limitCommercial wisdom of the Committee of Creditors - limited judicial review under Section 30(2) and Section 31 - Extent of judicial review by the Adjudicating Authority and the Appellate Tribunal over a resolution plan approved by the Committee of Creditors. - HELD THAT: - The court reaffirmed that the Committee of Creditors (CoC) exercises commercial decision making authority in selecting and negotiating a resolution plan and that the jurisdiction of the Adjudicating Authority (NCLT) under Section 31 is circumscribed by the requirements of Section 30(2). The NCLT/NCLAT cannot re examine the commercial wisdom of the CoC; their scrutiny is limited to whether the approved plan meets statutory requirements (including that it does not contravene law and provides for repayment of operational creditors as prescribed). Section 61(3) similarly confines appellate review to specified grounds. While the Adjudicating Authority may remit a plan if the CoC manifestly failed to account for core Code objectives (e.g., maximisation of asset value, balancing stakeholders, and preservation of going concern), it cannot substitute its own commercial judgment for that of the CoC.The NCLAT's substitution of its commercial assessment for the CoC's decision was impermissible; the NCLAT judgment is set aside to the extent it interfered with the CoC's commercial wisdom beyond the limited statutory review.Equitable treatment of creditors within classes - treatment of secured and unsecured financial creditors - priority and liquidation-value floor for operational creditors - Whether a resolution plan must pay secured and unsecured financial creditors and operational creditors the same proportion of their admitted claims. - HELD THAT: - The court held that 'equitable treatment' under insolvency law means equal treatment of similarly situated creditors, not across dissimilar classes. The Code and Regulations recognise distinctions between financial and operational creditors and between secured and unsecured financial creditors; secured status and value of security are relevant commercial considerations. Regulation 38(1)/(1A) and Section 30(2)(b) establish a minimum (liquidation value floor) for operational creditors but do not mandate identical recoveries across unlike classes. Consequently the CoC may lawfully accept differential distribution among classes and sub classes, provided statutory requirements (including fair and equitable treatment and the need to preserve going concern value) are addressed.The NCLAT's direction treating all creditors as one undifferentiated group and mandating uniform percentage recovery was incorrect and is set aside.Permissibility of sub-committees subject to CoC ratification - commercial wisdom of the Committee of Creditors - Validity of the formation and use of a CoC sub committee (core committee) to negotiate with a resolution applicant. - HELD THAT: - The Court distinguished between delegation of the CoC's decision making power (which is impermissible) and use of sub committees for administrative or negotiatory functions. While Section 28 prohibits delegation of certain specified powers, the CoC may constitutionally authorise a sub committee to carry out negotiations or administrative tasks provided material decisions are taken and ratified by the CoC itself. The record showed CoC meetings approved and ratified the key decisions and Standard Chartered Bank had participated in and not consistently objected to formation/use of the sub committee until outcomes turned adverse to it.Formation and use of the sub committee in this case did not vitiate the CoC's decision; the challenge based on unlawful delegation is rejected.Binding effect of an approved resolution plan on guarantors under Section 31(1) - Whether an approved resolution plan can extinguish guarantors' rights (including subrogation) and bind guarantors. - HELD THAT: - Section 31(1) makes an approved resolution plan binding on guarantors as well as the corporate debtor and other stakeholders, enabling the successful resolution applicant to take over and operate the business on a fresh slate. The court relied on precedent holding that guarantors cannot avoid payment merely because of modification to the debtor's obligations once a plan is approved. The resolution plan clauses deeming assignments/novations and extinguishment of subrogation rights were found consistent with Section 31(1). The Court noted this does not prejudge pending separate proceedings upon invocation of guarantees but invalidated the NCLAT's contrary conclusion.The NCLAT's holding that personal guarantees remain enforceable notwithstanding approval of the resolution plan was set aside; the approved plan is binding on guarantors in terms of Section 31(1).Residual jurisdiction of NCLT under Section 60(5) - limited judicial review under Section 30(2) and Section 31 - Whether the NCLT/NCLAT may use Section 60(5) to expand review of a resolution plan beyond limits in Section 30(2)/Section 31. - HELD THAT: - Section 60(5) confers broad jurisdiction on the NCLT over matters arising under the Code, but it cannot be read so as to undermine the specific statutory limitation on judicial review of resolution plans contained in Section 30(2) and Section 31. A harmonious construction requires that residual jurisdiction not be used to encroach on the restricted review permitted when a plan approved by the CoC is submitted for sanction. The Court rejected submissions that Section 60(5) empowers the NCLT to exercise an unconstrained equity or plenary jurisdiction in relation to approved plans.Section 60(5) does not authorise the Adjudicating Authority or Appellate Tribunal to re open or substitute their judgment for the CoC's commercial decision beyond the statutory grounds of review.Time bound CIRP and inclusion of court time within outer limit - validity of amendments in the Insolvency and Bankruptcy Code (Amendment) Act, 2019 - Constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (in particular addition of 330 day outer limit including time in legal proceedings, and amended Section 30(2)(b)). - HELD THAT: - The Court upheld the constitutionality of the Amending Act of 2019 insofar as it applies generally to proceedings and insofar as it strengthens minimum protections for operational and dissenting financial creditors (the substituted Section 30(2)(b) raises the floor payable to operational creditors to the higher of two specified measures and guarantees a minimum to dissenting financial creditors). Explanation 2 applying the amendment to pending proceedings was also held valid. However, the Court struck down the word 'mandatorily' in the proviso to Section 12(3) (as inserted) to avoid an absolute bar that could unjustly penalise parties for delays attributable to courts or tribunals (invoking actus curiae neminem gravabit). The effect is that 330 days (including court time) is the general outer limit, but the Adjudicating Authority/NCLAT may in exceptional cases extend time where delay is not attributable to the litigant and completion in the interest of stakeholders is demonstrably appropriate.Sections 4 and 6 of the Amending Act of 2019 are constitutionally valid generally; the absolute term 'mandatorily' in the proviso to Section 12 is read down to permit exceptional extensions in appropriate cases.Role and duties of the resolution professional - Functions and limits of the resolution professional in the CIRP. - HELD THAT: - The Court restated that the resolution professional performs administrative and managerial functions: preserving assets, collating and admitting claims, preparing the information memorandum, inviting and presenting resolution plans and conducting due diligence to report to the CoC. The resolution professional's role is to examine and confirm that submitted plans satisfy statutory conditions, but not to decide commercial questions reserved for the CoC. While reasons need not be given, appending due diligence reports is good practice. The resolution professional must maintain and update the list of creditors so that the prospective resolution applicant has clarity on admitted claims.The resolution professional's administrative, investigatory and reporting duties were clarified; he is not empowered to substitute the CoC's commercial decision.Admission and quantification of claims - finality of claims on approval of resolution plan under Section 31 - Whether claims not finally determined by the resolution professional/Adjudicating Authority can be revived against the successful resolution applicant after plan approval (Section 60(6) invocation). - HELD THAT: - The Court held that allowing 'undecided' claims to be later asserted against a successful resolution applicant would undermine finality and the purpose of Section 31. All claims must be submitted and processed by the resolution professional so a correct picture of liabilities exists for prospective applicants. The NCLAT's direction permitting additional claims and redistribution based on later admissions was set aside to preserve certainty for the successful resolution applicant and to uphold the finality of admitted claims.NCLAT's admission of additional claims after approval of the plan and its direction that undecided claims be pursued under Section 60(6) was set aside; claims must be decided during the CIRP for purposes of the resolution plan.Final Conclusion: The Court allowed the appeals of the Committee of Creditors and others, set aside those parts of the NCLAT judgment that substituted its commercial judgment for the CoC, ordered that the ArcelorMittal resolution plan as approved by the CoC be given effect subject to the clarifications in this judgment, upheld the constitutionality of the Amending Act of 2019 except insofar as an absolute 'mandatorily' time bar was struck down, affirmed the limited scope of judicial review, upheld the binding effect of an approved plan on guarantors, validated the use of sub committees so long as the CoC ratifies decisions, and directed that claims be finally processed in CIRP so as to preserve certainty for successful resolution applicants. 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.