NCLAT Delhi: Adjudicating Authority Has No Right To Substitute Its Own Assumption With CoC's Commercial Wisdom, Sets Aside Order On Violation Of Natural Justice

Background Facts:

SKS Power Generation Chhattisgarh Limited (Corporate Debtor) was admitted into the Corporate Insolvency Resolution Process (“CIRP”) on 29.04.2022. The Resolution Professional (“RP”) conducted a negotiation/bidding process to ascertain the highest bidder/commercial bid and the Resolution Plan by Sarda Energy and Minerals Limited (“SEML”) was approved by the CoC with a 100% voting.

NCLT Mumbai in its Order dated 06.10.2023 while considering the application for approval of Resolution Plan observed that there are numerous procedural errors in conducting the negotiation/bidding process and that the CoC's decision is bound to be perverse and not fair being based on incorrect data and sent SEML's Resolution Plan for reconsideration to the CoC.

The appeals have been filed by the Successful Resolution Applicant (“SRA”) SEML, one of the unsuccessful Resolution Applicants, Vantage Point Asset Management Pte. Ltd., and the RP of the Corporate Debtor against the said Order.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal setting aside an order on violation of natural justice holding that the Adjudicating Authority (NCLT Mumbai) has no right to substitute its own assumption over the commercial wisdom of CoC.

The Appellate Tribunal noted that the Adjudicating Authority, without providing the CoC, RP, and SRA an opportunity to explain the various terms of the SRA's Resolution Plan, incorrectly assumed that the RP had not presented relevant data to the CoC without taking any clarification from the RP and inappropriately substituting its own assessment over the CoC's decision. Thus, warranting the set aside of the Order on the violation of principles of natural justice.

NCLAT Delhi noted that the Adjudicating Authority misinterpreted the Tribunal's judgment in the `Darshak Enterprises and PNC Infratech' case to create a new basis for challenging the Resolution Plan. The Adjudicating Authority exceeded its jurisdiction under the Code by independently evaluating and scoring the Resolution Plans on the Evaluation Matrix and interpreting financial data presented to the CoC. Additionally, the Adjudicating Authority's decision to base the CoC's decision as perverse to justify its interference in the approval process of the Resolution Plan is impermissible. Moreover, it conclusion that that the SEML proposal only covered INR 122.23 Crores of Margin Money and that INR 58.08 Crores did not benefit the Financial Creditor is also incorrect.

NCLAT highlighted that the CoC included the Bank of Baroda and the State Bank of India, two of India's largest banks which were fully informed about the details of the various Resolution Plans, including the handling of Bank Guarantees, Margin Money, and Equity Value and had minutely considered all the Resolution Plans and thereafter voted the Resolution Plan of the SMEL with 100% vote shares. Moreover, findings on the total Bank Guarantees and Bank Guarantee Margin Money by NCLT Mumbai were factually incorrect. Thus, the unsuccessful Resolution Applicants i.e., Vantage Point Asset Management Pte. Ltd. and Torrent Power Ltd. have no right to challenge the Resolution Plan approved by the CoC.

It also pointed out that an Adjudicating Authority's interference in the CoC's decision related to a Resolution Plan is limited to Section 31(1) of the Code. Moreover, as per the Supreme Court's ruling in Kuldeep Singh vs. Commissioner of Police and Ors., there must be a clear distinction when labeling a decision as perverse. Minor procedural infractions or similar issues are insufficient to deem a decision perverse. Furthermore, it noted that the Supreme Court in M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder and Anr. stated that the CoC's commercial wisdom is valid only when all relevant information is presented and thoroughly deliberated by its members. Therefore, in the present case, if all pertinent materials are available and discussed by the CoC, its decision cannot be considered perverse. Thus, a decision can only be faulted if there is a significant error in the decision-making process that prevents the CoC from making a sound commercial decision.

In conclusion, the NCLAT set aside NCLT Mumbai's Order dated 06.10.2023 and sent the Resolution Plan back for reconsideration, instructing that the RP, SRA, and CoC be given an opportunity to present their explanations. Additionally, since the Plan has been pending approval since June 2023, the NCLAT directed it to resolve the application within 60 days of this Order.

Case Title: Sarda Energy and Minerals Limited vs. Ashish Arjunkumar Rathi & Ors.

Case No.: Company Appeal (AT) (Insolvency) No. 1395 – 1397 of 2023

Counsel for Appellant: Mr. Arun Kathpalia, Mr. Krishnendu Datta, Mr. Abhijit Sinha, Sr. Advocates with Mr. Manu Krishnan, Ms. Pooja Mahajan, Mr. Savar Mahajan and Ms. Geetika Sharma, Advocates.

Counsel for Respondent: Mr. Abhinav Vasisht, Sr. Advocate with Mr. Bishwajit Dubey, Mr. Somesh Srivastava, Mr. Rama Kant Rai, Mr. Shivam Wadhwa, Advocates for R-1/(RP).

Mr. Gopal Jain, Sr. Advocate with Mr. Madhav V. Kanoria, Ms. Srideepa Bhattacharyya and Ms. Neha Shivhare, Advocates for R-2.

Mr. K. Venugopal, Sr. Advocate with Ms. Gauri Rasgotra, Ms. Priyashree Sharma, Mr. Shivansh Agarwal and Mr. Krishnan Agarwal, Advocates for Intervenor in I.A. No. 1214/2024.

Mr. Kapil Sibal, Mr. Ramji Srinivasan, Sr. Advocates with Ms. Ruby Singh Ahuja, Ms. Hancy Maini, Mr. Varun Khanna, Mr. Devang Kumar, Mr. Manisha Singh and Ms. Namrata Saraooh,Karanjawala & Co, Advocates for R-3.

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