KALPRAJ DHARAMSHI & ANR. versus KOTAK INVESTMENT ADVISORS LTD. & ANR.
[2021] 2 S.C.R. 677, Supreme Court of India, 2021
Outcome: Disposed off
Segment: Facts
status without any judicial intervention for ensuring completion of the
stated processes within the timelines prescribed by the I&B Code. This
Court thus, in unequivocal terms, held, that there is an intrinsic assumption,
that financial creditors are fully informed about the viability of the corporate
debtor and feasibility of the proposed resolution plan. They act on the
basis of thorough examination of the proposed resolution plan and
assessment made by their team of experts. It has been held, that the
opinion expressed by CoC after due deliberations in the meetings through
voting, as per voting shares, is a collective business decision. It has been
held, that the legislature has consciously not provided any ground to
challenge the “commercial wisdom” of the individual financial creditors
or their collective decision before the Adjudicating Authority and that
the decision of CoC’s ‘commercial wisdom’ is made non-justiciable.
143. This Court in Committee of Creditors of Essar Steel India
Limited through Authorised Signatory (supra) after referring to the
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judgment of this Court in the case of K. Sashidhar (supra) observed
thus:
“64. Thus, what is left to the majority decision of the Committee
of Creditors is the “feasibility and viability” of a resolution plan,
which obviously takes into account all aspects of the plan, including
the manner of distribution of funds among the various classes of
creditors. As an example, take the case of a resolution plan which
does not provide for payment of electricity dues. It is certainly
open to the Committee of Creditors to suggest a modification to
the prospective resolution applicant to the effect that such dues
ought to be paid in full, so that the carrying on of the business of
the corporate debtor does not become impossible for want of a
most basic and essential element for the carrying on of such
business, namely, electricity. This may, in turn, be accepted by the
resolution applicant with a consequent modification as to
distribution of funds, payment being provided to a certain type of
operational creditor, namely, the electricity distribution company,
out of upfront payment offered by the proposed resolution applicant
which may also result in a consequent reduction of amounts
payable to other financial and operational creditors. What is
important is that it is the commercial wisdom of this majority
of creditors which is to determine, through negotiation with
the prospective resolution applicant, as to how and in what
manner the corporate resolution process is
to take place.”
(emphasis supplied)
144. This Court held, that what is left to the majority decision of
CoC is the “feasibility and viability” of a resolution plan, which is required
to take into account all aspects of the plan, including the manner of
distribution of funds among the various classes of creditors. It has further
been held, that CoC is entitled to suggest a modification to the prospective
resolution applicant, so that carrying on the business of the Corporate
Debtor does not become impossible, which suggestion may, in turn, be
accepted by the resolution applicant with a consequent modification as
to distribution of funds, etc. It has been held, that what is important is,
the commercial wisdom of the majority of creditors, which is to determine,
through negotiation with the prospective resolution applicant, as to how
and in what manner the corporate resolution process is to take place.
145. The view taken in the case of K. Sashidhar (supra) and
Committee of Creditors of Essar Steel India Limited through
KALPRAJ DHARAMSHI v. KOTAK INVESTMENT ADVISORS LTD.
[B.R. GAVAI, J. ]
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Authorised Signatory (supra) has been reiterated by another three
Judges Bench of this Court in the case of Maharashtra Seamless
Limited (supra).
146. In all the aforesaid three judgments of this Court, the scope
of jurisdiction of the Adjudicating Authority (NCLT) and the Appellate
Authority (NCLAT) has also been elaborately considered. It will be
relevant to refer to paragraph 55 of the judgment in the case of K.
Sashidhar (supra), which reads thus:
“55. Whereas, the discretion of the adjudicating authority (NCLT)
is circumscribed by Section 31 limited to scrutiny of the resolution
plan “as approved” by the requisite per cent of voting share of
financial creditors. Even in that enquiry, the grounds on which the
adjudicating authority can reject the resolution plan is in reference
to matters specified in Section 30(2), when the resolution plan
does not conform to the stated requirements. Reverting to Section
30(2), the enquiry to be done is in respect of whether the resolution
plan provides: (i) the payment of insolvency resolution process
costs in a specified manner in priority to the repayment of other
debts of the corporate debtor, (ii) the repayment of the debts of
operational creditors in prescribed manner, (iii) the management
of the affairs of the corporate debtor, (iv) the implementation and
supervision of the resolution plan, (v) does not contravene any of
the provisions of the law for the time being in
force, (vi) conforms
to such other requirements as may be specified by the Board.
The Board referred to is established under Section 188 of the
I&B Code. The powers and functions of the Board have been
delineated in Section 196 of the I&B Code. None of the specified
functions of the Board, directly or indirectly, pertain to regulating
the manner in which the financial creditors ought to or ought not
to exercise their commercial wisdom during the voting on the
resolution plan under Section 30(4) of the I&B Code. The
subjective satisfaction of the financial creditors at the time of voting
is bound to be a mixed baggage of variety of factors. To wit, the
feasibility and viability of the proposed resolution plan and including
their perceptions about the general capability of the resolution
applicant to translate the projected plan into a reality. The resolution
applicant may have given projections backed by normative data
but still in the opinion of the dissenting financial creditors, it would
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not be free from being speculative. These aspects are completely
within the domain of the financial creditors who are called upon
to vote on the resolution plan under Section 30(4) of the I&B
Code.”
147. It has been held, that in an enquiry under Section 31, the
limited enquiry that the Adjudicating Authority is permitted is, as to
whether the resolution plan provides:
(i)
the payment of insolvency resolution process costs in a
specified manner in priority to the repayment of other debts
of the corporate debtor,
(ii)
the repayment of the debts of operational creditors in
prescribed manner,
(iii)
the management of the affairs of the corporate debtor,
(iv)
the implementation and supervision of the resolution plan,
(v)
the plan does not contravene any of the provisions of the
law for the time being in force,
(vi)
conforms to such other requirements as may be specified
by the Board.
148. It will be further relevant to refer to the following observations
of this Court in K. Sashidhar (supra):
57. …Indubitably, the remedy of appeal including the width of
jurisdiction of the appellate authority and the grounds of appeal, is
a creature of statute. The provisions investing jurisdiction and
authority in NCLT or Nclat as noticed earlier, have not made
the commercial decision exercised by CoC of not approving
the resolution plan or rejecting the same, justiciable. This
position is reinforced from the limited grounds specified for
instituting an appeal that too
against an order “approving a
resolution plan” under Section 31. First, that the approved
resolution plan is in contravention of the provisions of any law for
the time being in force. Second, there has been material irregularity
in exercise of powers “by the resolution professional” during the
corporate insolvency resolution period. Third, the debts owed to
operational creditors have not been provided for in the resolution
plan in the prescribed manner. Fourth, the insolvency resolution
plan costs have not been provided for repayment in priority to all
other debts. Fifth, the resolution plan does not comply with any
KALPRAJ DHARAMSHI v. KOTAK INVESTMENT ADVISORS LTD.
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other criteria specified by the Board. Significantly, the matters or
grounds—be it under Section 30(2) or under Section 61(3) of the
I&B Code—are regarding testing the validity of the “approved”
resolution plan by CoC; and not for approving the resolution plan
which has been disapproved or deemed to have been rejected by
CoC in exercise of its business decision.”
[emphasis supplied]
149. It will therefore be clear, that this Court, in unequivocal terms,
held, that the appeal is a creature of statute and that the statute has not
invested jurisdiction and authority either with NCLT or NCLAT, to review
the commercial decision exercised by CoC of approving the resolution
plan or rejecting the same.
150. The position is clarified by the following observations in
paragraph 59 of the judgment in the case of K. Sashidhar (supra), which
reads thus:
“59. In our view, neither the adjudicating authority (NCLT) nor
the appellate authority (NCLAT) has been endowed with the
jurisdiction to reverse the commercial wisdom of the dissenting
financial creditors and that too on the specious ground that it is
only an opinion of the minority financial creditors…..”
151. This Court in Committee of Creditors of Essar Steel India
Limited through Authorised Signatory (supra) after reproducing certain
paragraphs in K. Sashidhar (supra) observed thus:
“Thus, it is clear that the limited judicial review available, which
can in no circumstance
trespass upon a business decision of the
majority of the Committee of Creditors, has to be within the four
corners of Section 30(2) of the Code, insofar as the Adjudicating
Authority is concerned, and Section 32 read with Section 61(3) of
the Code, insofar as the Appellate Tribunal is concerned, the
parameters of such review having been clearly laid down in K.
Sashidhar”
152. It can thus be seen, that this Court has clarified, that the
limited judicial review, which is available, can in no circumstance trespass
upon a business decision arrived at by the majority of CoC.
153. In the case of Maharashtra Seamless Limited (supra),
NCLT had approved the plan of appellant therein with regard to CIRP
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of United Seamless Tubulaar (P) Ltd. In appeal, NCLAT directed, that
the appellant therein should increase upfront payment to Rs.597.54 crore
to the “financial creditors”, “operational creditors” and other creditors
by paying an additional amount of Rs.120.54 crore. NCLAT further
directed, that in the event the “resolution applicant” failed to undertake
the payment of additional amount of Rs.120.54 crore in addition to Rs.477
crore and deposit the said amount in escrow account within 30 days, the
order of approval of the ‘resolution plan’ was to be treated to be set
aside. While allowing the appeal and setting aside the directions of
NCLAT, this Court observed thus:
“30. The appellate authority has, in our opinion, proceeded on
equitable perception rather than commercial wisdom. On the face
of it, release of assets at a value 20% below its liquidation value
arrived at by the valuers seems inequitable. Here, we feel the
Court ought to cede ground to the commercial wisdom of the
creditors rather than assess the resolution plan on the basis of
quantitative analysis. Such is the scheme of the Code. Section
31(1) of the Code lays down in clear terms that for final approval
of a resolution plan, the adjudicating authority has to be satisfied
that the requirement of sub-section (2) of Section 30 of the Code
has been complied with. The proviso to Section 31(1) of the Code
stipulates the other point on which an adjudicating authority has to
be satisfied. That
factor is that the resolution plan has provisions
for its implementation. The scope of interference by the
adjudicating authority in limited judicial review has been laid down
in Essar Steel [Essar Steel India Ltd. Committee of
Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531], the relevant
passage (para 54) of which we have reproduced in earlier part of
this judgment. The case of MSL in their appeal is that they want
to run the company and infuse more funds. In such circumstances,
we do not think the appellate authority ought to have interfered
with the order of the adjudicating authority in directing the
successful resolution applicant to enhance their fund inflow
upfront.”
154. This Court observed, that the Court ought to cede ground to
the commercial wisdom of the creditors rather than assess the resolution
plan on the basis of quantitative analysis. This Court clearly held, that
the appellate authority ought not to have interfered with the order of the
KALPRAJ DHARAMSHI v. KOTAK INVESTMENT ADVISORS LTD.
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adjudicating authority by directing the successful resolution applicant to
enhance their fund inflow upfront.
155. It would thus be clear, that the legislative scheme, as
interpreted by various decisions of this Court, is unambiguous. The
commercial wisdom of CoC is not to be interfered with, excepting the
limited scope as provided under Sections 30 and 31 of the I&B Code.
156. No doubt, it is sought to be urged, that since there has been
a material irregularity in exercise of the powers by RP, NCLAT was
justified in view of the provisions of clause (ii) of sub-section (3) of
Section 61 of the I&B Code to interfere with the exercise of power by
RP. However, it could be seen, that all actions of RP have the seal of
approval of CoC. No doubt, it was possible for RP to have issued another
Form ‘G’, in the event he found, that the proposals received by it prior to
the date specified in last Form ‘G’ could not be accepted. However, it
has been the consistent stand of RP as well as CoC, that all actions of
RP, including acceptance of resolution plans of Kalpraj after the due
date, albeit before the expiry of timeline specified by the I&B Code for
completion of the process, have been consciously approved by CoC. It
is to be noted, that the decision of CoC is taken by a thumping majority
of 84.36%. The only creditor voted in favour of KIAL is Kotak Bank,
which is a holding company of KIAL, having voting rights of 0.97%. We
are of the considered view, that in view of the paramount importance
given to the decision of CoC, which is to be taken on the basis of
‘commercial wisdom’, NCLAT was not correct in law in interfering
with the commercial decision taken by CoC by a thumping majority of
84.36%.
157. It is further to be noted, that after the resolution plan of
Kalpraj was approved by NCLT on 28.11.2019, Kalpraj had begun
implementing the resolution plan. NCLAT had heard the appeals on
27.2.2020 and reserved the same for orders. It is not in dispute, that
there was no stay granted by NCLAT, while reserving the matters for
orders. After a gap of five months and eight days, NCLAT passed the
final order on 5.8.2020. It could thus be seen, that for a long period,
there was no restraint on implementation of the resolution plan of Kalpraj,
which was duly approved by NCLT. It is the case of Kalpraj, RP, CoC
and Deutsche Bank, that during the said period, various steps have been
taken by Kalpraj by spending a huge amount for implementation of the
plan. No doubt, this is sought to be disputed by KIAL. However, we do
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not find it necessary to go into that aspect of the matter in light of our
conclusion, that NCLAT acted in excess of jurisdiction in interfering
with the conscious commercial decision of CoC.
158. It is also pointed out, that in pursuance of the order dated
5.8.2020 passed by NCLAT, CoC has approved the resolution plan of
KIAL on 13.8.2020. However, since we have already held, that the
decision of NCLAT dated 5.8.2020 does not stand the scrutiny of law, it
must follow, that the subsequent approval of the resolution plan of KIAL
by CoC becomes non-est in law. For, it was only to abide by the directions
of NCLAT. We are of the view that nothing would turn on it. The decision
of CoC dated 13/14.2.2019 is a decision, which has been taken in exercise
of its ‘commercial wisdom’. As such, we hold, that the decision taken by
CoC dated 13/14.2.2019, which is taken in accordance with its
‘commercial wisdom’ and which is duly approved by NCLT, will prevail.
Further, NCLAT was not justified in interfering with the stated decision
taken by CoC.
159. In that view of the matter, we find, that Civil Appeal Nos.
2943-2944 of 2020 filed by Kalpraj; Civil Appeal Nos. 2949-2950 of
2020 filed by RP and Civil Appeal Nos. 3138-3139 of 2020 filed by
Deutsche Bank deserve to be allowed. It is ordered accordingly. The
order passed by NCLAT dated 5.8.2020 is quashed and set aside and
the orders passed by NCLT dated 28.11.2019 are restored and
maintained.
160. Insofar as, the Civil
Appeals arising out of D.No. 24125 of
2020 filed by Fourth Dimension Solutions Limited are concerned, it is
submitted, that the appeal preferred by it against the order of NCLT is
still pending before NCLAT. Without going into the merits of the rival
contentions of the parties, we direct NCLAT to decide the appeal of
Fourth Dimension Solutions Limited in accordance with law, as
expeditiously as possible, and in any case, within a period of two months
from today.
161. As such, all appeals are disposed of in view of the above and
pending applications, if any, shall stand disposed of.
Nidhi Jain
Appeals disposed of.
KALPRAJ DHARAMSHI v. KOTAK INVESTMENT ADVISORS LTD.
[B.R. GAVAI, J. ]