The Apex Court, vide its order dated 22.01.2020, in the matter of Maharasthra Seamless Limited vs. Padmanabhan Venkatesh & Ors. held that there is no requirement that the resolution plan should match the maximized asset value of the corporate debtors. Reiterating the principle laid down in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Hon’ble Supreme Court held that once a resolution plan is approved by the committee of creditors (CoC), the Adjudicating Authority has limited power of judicial review.
The judgment of the Supreme Court boldly brings out the object of the Insolvency and Bankruptcy Code, 2016 (“Code”), i.e. “resolution before liquidation”. However, it will be pertinent to understand whether this ruling should be considered as a benchmark? Further, what will be the situation in case of liquidation? Whether sale under liquidation can be done for a value lower than the reserve price?
Below we analyse the ruling, seeking to answer the aforementioned questions.
FACTS OF THE CASE:
The National Company Law Tribunal, Hyderabad Bench, by an order dated 21.01.2019, approved the resolution plan submitted by Maharashtra Seamless Ltd. in the matter of United Seamless Tubulaar Private Limited (“Corporate Debtor”). However, an appeal was filed by the promoter of the Corporate Debtor and the dissenting financial creditor on the preliminary ground that the amount provided in the resolution plan is lower than the average of the liquidation value arrived at by the valuers. In this regard, the NCLAT held that since the amount provided in the resolution plan was lower than the average of the liquidation value arrived at by the valuers, therefore, the resolution plan approved by the Adjudicating Authority is against Section 30(2)(b) of the Code.
Aggrieved by the decision of NCLAT, the successful resolution applicant preferred an appeal before the Hon’ble Supreme Court. The primary issue for consideration before the Apex Court was whether the scheme of the Code contemplate that the sum forming part of the resolution plan should match the liquidation value or not.
The Hon’ble Supreme Court held that there is no breach of the provisions of the Code or the regulations, and upheld the order of the Adjudicating Authority approving the resolution plan.
OBSERVATIONS OF THE SUPREME COURT:
The following were the major observations of the court:
- There is no provision in the Code or regulations under which the bid of any resolution applicant has to match liquidation value arrived at in the manner provided in Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and the intent of conducting valuation is only to assist the CoC in decision- making.
- While it may seem that release of assets at a value below its liquidation value is inequitable, however, the Court ought to rely on the commercial wisdom of the creditors rather than evaluating the resolution plan on the basis of quantum proposed to be paid.
- Further, considering that the Code has been formulated for maximisation of value of assets of stakeholders, and to balance the interests of all the stakeholders of the corporate debtor, the court observed that resolution of the corporate debtor should be given preference over liquidation of the corporate debtor. The rationale being that during resolution, the corporate debtor remains a going concern, whereby the financial creditors will have the opportunity to lend further money, the operational creditors will have a continued business and the workmen and employees will have job opportunities.
For arriving at the conclusion, the Apex Court prominently placed reliance on the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, which lays down the scope of judicial interference by the Adjudicating Authority. The relevant extract of the ruling, as cited in Maharashtra Seamless Limited (supra), is as follows:
“There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.”
Comparing the scenarios in case of resolution with that of liquidation, one may contend that in case of liquidation, the reserve price is fixed based on valuation, but the liquidator has an option of reducing the reserve price, so why not in case of resolution. Here, it is important to understand that in liquidation, sale happens by way of swiss challenge method, which assures highest possible value, unlike in resolution, where the discretion is on the CoC.
Another argument may be that in case of resolution since the reserve price is not disclosed to the resolution applicant, therefore, while placing the proposal, the resolution applicant factors market reality and is not prejudiced by the disclosed liquidation value. In fact, since the resolution applicant is interested in running the corporate debtor, there may also be additional investment w.r.t. working capital, etc which may be required to be made, therefore, even if the resolution value is lower than the liquidation value, the plan may be approved.
However, to what extent can the Adjudicating Authority cede to the commercial wisdom of CoC? There may be instances of collusion between members of CoC and the resolution applicant, and a complete pull back by the Adjudicating Authority may also prove to be harmful. As someone has rightly said- “Greater the power, the more dangerous the abuse”. Therefore, the intervention of the Adjudicating Authority is required to a certain extent.