HM Journal

The Apex Court clarifies on Jurisdiction of NCLT & NCLAT under Provisions of IBC, 2016

  1. Introduction-

Insolvency & Bankruptcy Code, 2016 is one of the biggest economic reforms made by legislative assembly after GST. Several overlapping laws were there before the introduction of IBC 2016, which led to ambiguity. The Code is a noble concept, which acts an umbrella of solutions of all varieties of insolvency & bankruptcy cases. However, time to time significant interpretation has been done by the Supreme Court & High courts of India acted as lubricant to keep the wheels of IBC run smoothly. Pratap Technocrats (P) Ltd. & Ors. vs Monitoring Committee of Reliance Infratel Ltd. & Anr. (2021) is a case where Supreme court that NCLT does not have any equity-based jurisdiction under IBC, 2016.

  • The Aim of Insolvency & Bankruptcy Code, 2016

The fundamental feature of IBC, 2016 is that it allows the creditor to understand the position of the debtor and take action accordingly in an efficient manner. It lays down provisions which assures that all the parties have been treated equally in a fair & transparent manner. Violation of any provision can amount to penalty and start over the failed process accordingly. The powers, processes & jurisdiction of the NCLT, NCLAT & other significant committees etc. IBC covers all the possible dimension which can arise during insolvency or bankruptcy process.

  • Pratap Technocrat vs Monitoring Committee of Reliance Infratel Limited in a glance
  • Committee of Creditors (CoC) passed the Insolvency Resolution Plan submitted by Reliance Digital Platform & Project Service Limited which was passed with 100% vote share on 2nd March, 2020 on the basis of its feasibility, viability & implementation.
  • Application was submitted to NCLT under Section 30(6) of IBC, 2016. NCLT passed the resolution plan on 3rd December, 2020 & discussed the salient features of IBC, 2016. The NCLT also observed that Doha Bank had launched a lawsuit to challenge admission of other creditors claim & the decision to accept other lenders as financial creditors. However, the adjudicating authority found that it would not prevent the resolution plan from being approved.
  • Appeal filed in NCLAT against NCLT’S approval order on grounds that the appellants were kept unaware of the CIRP, no details about the claims of funds which led to inequitable & unfairness in fund distribution & a big portion of the claim has been rejected.
  • In a ruling dated January 4, 2021, the NCLAT dismissed the appeal in the absence of evidence that operational creditors were treated unfairly or inequitably in terms of fund distribution, also the appellate authority observed that the appellants were not barred from participating in the CIRP because they had submitted claims which had been partially allowed. According to the NCLAT the treatment of operational creditors differs from that of financial creditors & entitled to payment equal to or greater than the liquidation value, but financial creditors are not. Also, the distribution system complies with Section 53 of IBC’s requirements. So, NCLAT upheld the decision of NCLT.
  • Finally, by the aggrieved appellant, under Section 62 of IBC, 2016 appeal went to Supreme Court of India against the decision of NCLAT on 10 March 2021. The Court noted at the time that several entities that had been acknowledged as financial creditors under the resolution plan, had been de-recognized. That time issue was whether this decision would have any effect on the requisite of majority which is required to pass a resolution plan. Respondent contended that the resolution plan has been accepted by 100% of the voting shares, and that the exclusion of some financial creditors from the CoC would not have impact later on. In the end, the appeal was squashed.
  • Interpretation on IBC Principles from The Lens of Apex Court

In the case, certain provisions of IBC have been emphasized by Supreme court of India. Those are-

  1. As the objection raised about approving the resolution plan, Sc explained that the resolution plan has been passed by the CoC & consistent with section 30(2) of the act which provides conditions to be considered while examining the resolution plan by resolution professional. Hence, the decision to approve the resolution plan by NCLT held valid & NCLT acted within its jurisdiction granted by IBC, 2016. There is no equity-based jurisdiction with NCLT, under Insolvency & Banking Code, 2016.
  2. The adjudicating authority’s (NCLT) competence over the approval of a resolution plan is statutorily organised by Section 31(1). The court’s authority is restricted to deciding whether the conditions mentioned in Section 30(2) have been met or not. This is recognised, and conferred jurisdiction, not to be compared with jurisdiction in equity that functions irrespective of the statute’s provisions. The Adjudicating Authority, as a body created by legislation, is bound by the nature and scope of its authority as set forth in the statute itself. Similarly, NCLAT’s appellate power is mentioned under Section 61 & has to be scrutinized as per the grounds of Section 31.
  3. Regarding the nature of the jurisdiction the court observed that adjudicating authority is constrained by Section 31 to scrutinizing the resolution plan approved by the CoC under Section 30(4). Similarly, appellate authority of NCLAT is limited under the grounds of section 61(3).
  4. On the objection of fair and equitable treatment in regards to distribution of funds among operational creditors, Sc observed NCLT’s decision was consistent with the grounds mention under Section 30(2)(b) of IBC, 2016. Explanation 1 under this provision further clarifies it. The court clarified that as long as the payment under the resolution plan is fair and equitable to all operating creditors as a group & meets Section 30(2)(b), the resolution plan stands valid.
  5. The uniform legal principle established is that neither the adjudicating authority nor the appellate authority can not interfere into the commercial logic behind the CoC’s acceptance of the resolution plan. As a result, the CoC’s commercial acumen in its collegial role is not justiciable. In Essar Steel India Limited case, a three-judge bench re-emphasized and expanded on the aforesaid concept.
  6. The court further stated once the IBC’s criteria have been met, the adjudicating authority and the appellate authority are obligated to follow the statutory provisions’ discipline. It goes without saying that the adjudicating authority and the appellate authority have no uncharted equity authority.
  7. Supreme court upheld the decision of NCLT & squashed the appeal.
  • Inference from Judgement

There are number of things which gets clear from the supreme court’s interpretations-

  1. Adjudicating authority’s and appellate authority’s jurisdictions do not extend to deciding the merits of a business decision taken by a majority of the CoC in its commercial wisdom & have no residual equity-based jurisdiction as long as it conforms with the requirements of the IBC and the regulations promulgated under the legislation.
  2. Grounds of fair & equitable treatment regards to distribution of fund is emphasized in IBC, 2016. In the above case from the appointment of Resolution professional to the determination of the value of liquidated amount & distribution of fund, everything was consistent with the norms of IBC, 2016. Also, the distribution of funds is asper Section 53(1), successfully secures the interest of all creditors. The Court finally also detected that the fair and equitable standard does not mean that financial and operational creditors must be paid the equal amounts in any resolution plan if it is not passed by Committee of Creditors.
  3. Once the resolution is passed by CoC & if its consistent with IBC, NCLT or NCLAT can not reject its approval & duty bound to approve it.
  • Conclusion

Insolvency & bankruptcy Code is formed with an ambition to provide a speedy, justiciable legal framework. It lays down principles which are non-discriminatory & fair for every party involved within it. Supreme court rightly interpreted the provisions & dismissed the appeal. By court’s explanation in this insolvency case, we get a transparent portrait of jurisdiction of adjudicating authority (NCLT) & appellate authority (NCLAT) and to what extent it can involve in the decision of Committee of Creditors. It’s also true that IBC has its own loopholes, which are being identified with newer challenges & expected to be amended in upcoming days. So far, till this present day, the ambition of the code is proven to be code of champion in the cases insolvency & bankruptcy.

Reference-

  1. https://main.sci.gov.in/supremecourt/2021/4603/4603_2021_35_1501_29198_Judgement_10-Aug-2021.pdf
  2. https://ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdf

Author- Indranil Banerjee

College- Amity Law School, Kolkata (3rd Year, 5th Semester)

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