Madras High Court: Adjudicating Authority Must Exercise Jurisdiction Akin To Revisional Jurisdiction To Assess The Correctness Of COC's Actions

Background Facts:

National Sewing Thread Co. Ltd. (Petitioner), a public limited company registered under the MSME Act, 2006, was under the Corporate Insolvency Resolution Process under Section 7 of Insolvency and Bankruptcy Code, 2016 ('IBC') due to its failure to service the loan obtained from the Indian Overseas Bank.

From June 2019, the petitioner also failed to pay the electricity charges due to Tamil Nadu Generation and Distribution Corporation Limited ('TANGEDCO'). On 19.01.2022, TANGEDCO issued a Demand Notice claiming Rs. 32 Lakhs as unpaid electricity charges.

The petitioner contended that since the CoC under its commercial wisdom passed the Resolution Plan which also received the NCLT approval, all the outstanding claims or liabilities, not covered by the Plan are extinguished.

The petitioner filed the writ of certiorari and mandamus to quash the Demand Notice issued by TANGEDCO and to further direct it to provide the electricity connection.

Observations by the High Court:

The Madras High Court dismissed the writ petition and held that though the Adjudicating Authority may not substitute the commercial wisdom of the CoC, however, it must exercise jurisdiction akin to revisional jurisdiction to assess the correctness of the actions taken by the CoC.

The High Court noted that the role of the Adjudicating Authority under IBC has been limited to ensuring that the Resolution Plan approved by the CoC has complied with Section 30(2) of IBC. It observed that various judgments like State Tax Officer vs Rainbow Papers Ltd. and particularly Committee of Creditors of Essar Steel India Limited, through authorized signatory vs Satish Kumar Gupta and Others point that the Adjudicating Authority should not replace the CoC's commercial wisdom with its own notions of fairness and equity.

The High Court emphasized the decision in M.K.Rajagopalan vs Dr. Periasamy Palani Gounder & Anr which established that the commercial wisdom of the CoC holds supremacy only when it is based on complete disclosure of information. Therefore, the said decision often referred to as the “Rajagopalan effect”, not only clarifies the concept of the CoC's "commercial wisdom" but also redefines the role of the Adjudicating Authority.

It ruled that although the Authority does not act as an appellate body over the CoC's decisions, it must exercise a form of revisional jurisdiction to ensure the accuracy and correctness of the CoC's actions. The said duty cast upon the Adjudicating Authority also aligns with the constitutional mandate to maintain the Adjudicating Authority as a neutral tribunal.

The Madras High Court specified the below-mentioned circumstances where the Adjudicating Authority may reject a Resolution Plan approved by the CoC.

First, when the information relied upon by the CoC is incomplete or shows a lack of due diligence by the Resolution Professional in gathering and verifying information, including instances where the suspended Board of the Corporate Debtor failed to fully disclose its affairs, which the Interim Resolution Professional or Resolution Professional could have discovered through due diligence.

Second, when there is a lack of transparency regarding the accuracy of the information known to the operational creditors.

Third, when the CoC does not ensure the operational creditors receive at least the minimum amount they would get in the event of liquidation of the corporate debtor.

Last, when despite meeting the minimum requirement, the operational creditors are not treated fairly and equitably as per Explanation I to Section 30(2) of the IBC, meaning that fairness and equity might necessitate payments above the minimum.

In conclusion, the High Court observed that though the Adjudicating Authority shall not substitute the commercial wisdom of the CoC with its sense of fairness and equity, it can always refuse to approve the resolution plan if there is a breach of Explanation I to Section 30(2) of the IBC.

Therefore, it observed that the petitioner cannot avoid discharging the unpaid dues it owed to the TANGEDCO.

Case Title: National Sewing Thread Co. Ltd. vs Superintending Engineer, TANGEDCO and Anr.

Citation: 2024 LiveLaw (Mad) 236

Case No.: W.P. No.29845 of 2022 and WMP.No.29233 of 2022

Counsel for Petitioner: Mr. E. Omprakash, Senior Counsel assisted by Mr.Imayavaramban for M/s.Ramalingam & Associates

Counsel for Respondents: Ms.Keerthana R.Shenoi for Mr.V.Venkata Seshaiya, Standing Counsel for TANGEDCO

Date of Judgment: 07^th June, 2024

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