NCLAT orders “CoC is not functus officio”

On 5th January 2022, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi headed by Justice Jarat Kumar Jain and Technical member Dr. Ashok Kumar Mishra in Bank of Maharashtra v Videocon Group (Company Appeal (AT) (Ins.) No. 503 of 2021) held that the Committee of Creditors (CoC) is not functus officio on approval of the Resolution Plan and ruled that it is within the CoC’s domain to review or reconsider any of its decisions in pursuant to the Insolvency and Bankruptcy Code of 2016.

Background

In 2018, Corporate Insolvency Resolution Process (CIRP) was initiated against 13 Videocon group companies by creditors headed by the lead bank, State Bank of India (SBI). Among the eleven Resolution Plans proposed for the CIRP, the plan submitted by Twinstar Technologies, a Vedanta Group company led by Anil Agarwal, was approved by the CoC with a vote share of 95.09 percent.

However, the Assenting Financial Creditors (AFC) who constituted 94.98 percent of the votes, filed an affidavit seeking to reconsider their decision on the approved plan in the larger interest of all the stakeholders resulting from the unprecedented haircut of 95 percent. While the AFC was of the opinion that the power to approve on part of the CoC includes the power to vary, modify and reconsider, the Respondent companies contended that the CoC cannot review its earlier decisions. The aggrieved parties of the aforementioned order filed an appeal to resolve the request and direct the order of the appellate tribunal for reconsideration of the resolution plan by the CoC through an affidavit.

National Company Law Appellate Tribunal

Essentially, the matter involved an appeal being filed by the dissenting financial creditors (DFC) including Bank of Maharashtra, IFCI Ltd, and SIDBI against an order passed by the National Company Law Tribunal in favour of the respondent group of companies. Bank of Maharashtra (BoM) submitted that the Resolution Plan provided them with less than the liquidation value which the bank will receive otherwise, in contravention of the Code. They further contended that there was no priority payment to the DFCs as the Non-Convertible Debentures (NCD) were recovered 24 hours prior to the NCD redemption of AFCs. IFCI in support of BoM’s submissions raised the issues that the payment in the form of NCD is not stipulated in law and that the Resolution Plan falls short in payment of upfront as required under section 30 read with section 53 of the Code. SIDBI further submitted that the contention of the respondent that the amounts to be paid out to the creditors to be determined “at the time of payout” is in contravention to section 30(2)(b) which stipulates for the RP to confirm the payment of a debt to all the creditors who vote against the Resolution Plan to be not less than the liquidation value.

The respondent group of companies – Videocon Industries Ltd, Videocon Telecommunications Ltd., Evans Fraser & Company (India) Ltd., Millennium Appliances (India) Ltd, Applicomp India Ltd, Electroworld Digital Solutions Ltd, Techno Kart India, Century Appliances Ltd, Techno Electronics Ltd, Value Industries Ltd., PE Electronics Ltd, CE India Ltd. and Sky Appliances Ltd. – represented by the Resolution Professional collectively submitted that they would protect and preserve the priority status of the DFC, and strongly suggested that there was no reason for the CoC to review the matter.

Twinstar technologies, one of the respondents, emphasized the approval of the Resolution Plan by the CoC with an overwhelming majority of 95.09 percent while the AFCs proposed their intent to reconsider their votes for the benefit of the public.

Judgment and analysis

NCLAT disagreed with its subordinate equivalent and declared the decision as “ex facie illegal, bad in law and contrary to the settled provisions of the Code” (para 42). It was observed that the Adjudicating Authority in exercising its jurisdiction as given under section 31(1) of the Code failed to comply with the provision by not taking into account the contentions raised by the appellants in terms of the haircut of INR62,000 crore.

The appellate tribunal draws attention to the fact that it is the role of the Board of Directors that is being replaced by the CoC in the case of companies undergoing the insolvency process. It intuitively opined that when the Board of Directors reject a proposal and later approve the same with amendments incorporated by powers bestowed on them, then the same should apply to CoC’s who are managing the affairs of the CD in place of the Board. NCLAT declared that “the CoC”, significantly comprising of public sector banks and financial institutions handling public money, “is vested with a duty of trust and care” (para 30) to make commercial decisions in the interest of all the stakeholders involved in the rehabilitation process. The 213-page judgement order highlighted the importance and the role of the CoC by purposively redefining the copula ‘power to approve’ to include the power to review, rescind and modify based on settled cases such as Dhikpathy v. Chairman Chennai Port Trust (para 44). In support of the same, the tribunal bench cited Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta & Ors ((2020) 8 SCC 53) where the Supreme Court stated that the AA has the power to return the resolution plan to the CoC if the parameters such maximizing the value of assets and interest of the stakeholders are not taken care of (para 45).

By establishing that the purpose of the Code is to rehabilitate a company, the appellate tribunal acknowledged the technical expertise and commercial wisdom of the CoC which works towards the recovery process.  Based on the above reasoning, the tribunal duly allowed for the body to review their decisions in light of protecting the interests of all the stakeholders of the company and held that the CoC is not functus officio. NCLAT finally directed the plan to be remitted back to the CoC for review and completion of the CIRP of the CD.  

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