Vallal Rck v. Siva Industries: Decision in the right direction?

[By Avik Sarkar]

The author is a student at K.L.E. Society’s Law college, Bengaluru.

Introduction

In order to boost the investment regime in the country, the Government of India has introduced various enactments and amendments. Among them, the Insolvency and Bankruptcy Code, 2016 (‘the Code’) was one such enactment. It was introduced in order to bring the insolvency regime under one umbrella so that the investors could salvage their invested amount without much delay in case of any defaults. The code brought about a paradigm shift in the regime from the existing ‘debtor-in-possession’ to a ‘creditor-in -control’ model. However, the key highlights of this particular code were the fact that it had come with a promise of minimal judicial intervention.

In its recent decision of Vallal Rck V M/s Siva Industries and Holdings Limited, the apex court of the country has reaffirmed its already crystallized position with regards to the sanctity of the Committee of creditors’ (CoC) wisdom. The court in the present case held that NCLT and NCLAT cannot sit in appeals over the commercial wisdom of the CoC.

Factual Matrix

In the present matter, IDBI bank limited had filed a Section 7 application under the code for the initiation of the Corporate Insolvency Resolution Process (CIRP) against Siva Industries (Corporate Debtor). And consequently, the application was admitted and the CIRP process was initiated.  During the resolution process, a bid of M/s Royal PartnersInvestment Fund Limited was submitted by the resolution professional. However, due to inadequacy in sufficient number of votes by the CoC, the plan could not be passed.

Following this, the resolution professional filed for liquidation before the National Company Law Tribunal (NCLT) under section 33(1)(a) of the Code. It was during this time when the Vallal Rck (Promoter) of Siva Industries filed an application under section 60(5) of the Code for the proposal of a one-time settlement plan (‘OTS’). After a series of discussions and meetings by the CoC, it was decided to accept the OTS offer of the promoter by a sweeping majority of 94.23%. Therefore, once the OTS deal was accepted, the resolution professional filed to the NCLT for withdrawal of CIRP under Section 12A of the Code. However, NCLT rejected the OTS deal based on the reasoning that it seemed more like a Business Restructuring Plan than a settlement plan.

Aggrieved by the decision of the NCLT, an appeal was filed to the National Company Appellate Tribunal (‘NCLAT’) by the promoter. However, NCLAT dismissed the appeal. Consequently, miffed by the decision of NCLAT, the promoter further appealed to the Supreme Court of India.

Apex Court Dictum

Firstly, the court referred to Section 12A of the Code which allowed the withdrawal of insolvency application filed under Sections 7, 9 and 10, provided that, 90 percent of the CoC members through voting agree to withdraw the insolvency application. Further, on perusing regulation 30A of the Code, one would get a succinct idea of the procedure for filing a withdrawal application under section 12A of the Code. Therefore, in order to have a complete understanding of section 12A, it should always be read in juxtaposition with Section 30A

Secondly, the court referred to paragraph 29 of the Insolvency Committee Report (March 2018) where it has been clearly  stated that there is nothing in the Code that allows withdrawing insolvency application post-admission. However, the report refers to the objective of the Code enshrined under the BLRC report which states that all stakeholders shall participate and assess the viability of the proposed plan in order to withdraw the insolvency application. Also, it must be ensured that the stakeholders are actively willing to restructure their liabilities.

Thirdly, the court referred to Swiss Ribbon Private Ltd Vs Union Of India which upholds the validity of section 12A of the Code.

Based on the above deliberation the court held that if 90 percent of the CoC members after due deliberations, “find that it will be in the interest of all the stake­holders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC.”

Conclusion

This particular judgment by the apex court has reaffirmed its already crystallized position that CoC’s wisdom cannot be meddled with and therefore NCLAT/NCLT cannot sit over appeals from it. This decision of the apex court is said to be in the right direction considering the fact that it is in line with the ‘least judicial interference’ principle. However, the author would like to posit a different view.

In the recent past, there has been clamour concerning the conduct of the CoC. The author is of the view that giving such plenary power to the CoCs can have detrimental effects in the future which can affect the efficiency of the Code.

Now, the latest report released by the Insolvency Bankruptcy Board of India (‘IBBI’) for the quarter of January to March has come up with harrowing revelations.  It has been found that the value of the assets that are with creditors against which they have granted loans to various entities are lesser than the liquidation value of the entities themselves. This means that during the insolvency process, the creditors will tend to opt for liquidation than passing a resolution plan as it would help them salvage the majority of their borrowings. Therefore, in such scenarios, if the CoC is granted plenary powers, the majority of insolvency proceedings would lead to liquidation which would be against the objective of the Code i.e., to revive a distressed entity from its current state.

Further, in the past, there have been various instances where the conduct of the CoC has been highly contentious.  During the resolution process of Bhushan Steel Pvt Limited, the resolution professional had paid Rs 12 crore towards the fees of the legal counsel of the lender. However, as per a circular released by IBBI on 12.02.2018, the inclusion of legal fees has been clearly prohibited. It can be easily construed that such inclusion was the result of a collusion between the CoC and the resolution professional. Further, on another occasion, in the matter of Andra Bank Vs Sterling Biotech Ltd,  an ineligible promoter’s OTS proposal was approved by 90.32 percent voting of the members of CoC. In this matter, NCLT had raised doubt regarding the functionality of CoC and stated that “An act of CoC like this can never be considered commercial wisdom.” Apart from the above two instances, there have been various other instances where the conduct of the CoC has been questionable.

In view of the above observations, the author would like to posit the following recommendations proposed by IBBI for the conduct of CoC which can be used as a measure to ensure that the actions of the CoC are in tandem with the objective of the Code. Firstly, there should be a capping on the number of times a revised bid can be accepted by the CoC as this would help in the prevention of delay and will save the asset of the corporate debtor from value erosion. Secondly, the creditors should disclose conflict of interests, if any. Thirdly, the creditors should abstain from adjusting the corporate debtors’ dues by restructuring them.

Parallelly, it is equally important to ensure that formulation of the code of conduct does not make it cumbersome for the creditors to comply therefore an equipoise needs to be maintained. Further, the author is of the opinion that the reequipment of a code of conduct for the CoC is the need of the hour. Though in this particular dictum the apex court has given preference to the commercial wisdom of CoC, it would be interesting to see if in the future the legislature can introduce the code of conduct under the scheme of IBC.

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