IBC | For Rejection Of A Resolution Plan Under Section 31(2), NCLT Must Pass A Reasoned Order: Supreme Court

The Supreme Court has held that when the National Company Law Tribunal (“NCLT”) exercises its power under Section 31(2) of the Insolvency and Bankruptcy Code, 2016 to not approve a resolution plan, then a reasoned order must be passed. It was emphasized that recording of cogent reasons while passing an order is the duty of Courts and Tribunals.

The Supreme Court has set aside an order whereby the NCLT kept the approval of a resolution plan in abeyance while directing an Official Liquidator to conduct re-valuation of the Corporate Debtor’s assets. Consequently, the order of National Company Law Appellate Tribunal (“NCLAT”) affirming the NCLT’s order has also been set aside.

The Bench has further cautioned that the NCLT may direct re-valuation of Corporate Debtor’s assets when necessary, but strictly within the domain permitted by IBC.

The Bench comprising Justice Vikram Nath and Justice Ahsanuddin Amanullah, has held, “It is worthwhile to note that the Adjudicating Authority has jurisdiction only under Section 31(2) of the Code, which gives power not to approve only when the Resolution Plan does not meet the requirement laid down under Section 31(1) of the Code, for which a reasoned order is required to be passed. We may state that the NCLT’s jurisdiction and powers as the Adjudicating Authority under the Code, flow only from the Code and the Regulations thereunder.”

BACKGROUND FACTS

ACIL (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) under the IBC by the NCLT.

The Resolution Plan submitted by Ramkrishna Forgings Limited (“Successful Resolution Applicant/SRA”) was approved by the Committee of Creditors (CoC) for the Corporate Debtor. Accordingly, the Resolution Professional filed an application under Section 30(6) of IBC before the NCLT, seeking approval of resolution plan.

On 01.09.2021, the NCLT kept the approval of SRA’s Resolution Plan in abeyance and directed the Official Liquidator (OL) to provide exact figures/value of assets. The SRA filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) against the order dated 01.09.2021. The NCLAT vide order dated 19.01.2022 dismissed the appeal, while observing that an avoidance transaction of approximately Rs. 1000 Crores had come to light and the case justifies interference since figures of crores are involved.

The SRA filed an appeal before the Supreme Court against NCLAT order dated 19.01.2022. It was argued that IBC has an inbuilt mechanism for valuation of assets of the Corporate Debtor which is provided under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Therefore, appointment of an Official Liquidator for valuation, which is otherwise a creation of the Companies Act, 2013 is unwarranted. Further, NCLT cannot sit in appeal over commercial decision of CoC.

SUPREME COURT VERDICT

NCLT can reject a resolution plan only through a reasoned order

The Bench noted that Section 31(2) of IBC alone empowers the NCLT to reject a resolution plan when the same does not meet requirements given under Section 31(1) of IBC. For rejecting a resolution plan, the NCLT must pass a reasoned order and the power is exercisable only within the ambit of IBC and its Regulations.

“It is worthwhile to note that the Adjudicating Authority has jurisdiction only under Section 31(2) of the Code, which gives power not to approve only when the Resolution Plan does not meet the requirement laid down under Section 31(1) of the Code, for which a reasoned order is required to be passed. We may state that the NCLT’s jurisdiction and powers as the Adjudicating Authority under the Code, flow only from the Code and the Regulations thereunder.”

It was observed that the Bench would have refrained from interfering in the NCLT order if the same was reasoned. The Bench emphasized that recording of cogent reasons is a duty of Courts and Tribunals.

“There may have been a situation where due to glaring facts, an order of the nature impugned herein could be left untouched and this Court would have refrained from interference, but only if detailed reasoning, disclosing the facts for being persuaded to embark on such path, were discernible in the order dated 01.09.2021, which unfortunately is cryptic and bereft of detail. Recording of reasons, and not just reasons but cogent reasons, for orders is a duty on Courts and Tribunals.”

While placing reliance on the line of judgments passed from Kranti Associates Private Limited v Masood Ahmed Khan, (2010) 9 SCC 496 to Manoj Kumar Khokhar v State of Rajasthan, (2022) 3 SCC 501, it was held that a Court or even a quasi-judicial authority has a duty to record reasons for its decision. “Needless to add, ‘Reason is the heartbeat of every conclusion. Without the same, it becomes lifeless.’”

NCLT can direct re-valuation of assets strictly within domain permitted by IBC

One of the Counsels had raised concerns that the power to direct re-valuation of assets should not be excluded from the NCLT’s powers. On this issue, the Bench took the view that NCLT may exercise such power when necessary but strictly within the domain permitted by IBC.

“Insofar as Mr. Singh’s submissions that this Court may not exclude from the NCLT’s ambit any power to direct re-valuation, we have given our anxious thought to the same. Our view is that while certainty in law and legal principles is the obvious aim, the law is to be applied in the context of the facts. If a matter where the facts are stark comes to light, the same would have to necessarily be dealt with by the NCLT within the four corners of the Code itself, having due regard to the extant circumstances. It is for the NCLT to exercise power strictly within the domain permitted by the Code. In this behalf, one may peruse the decisions in Embassy Property Developments Private Limited v State of Karnataka, (2020) 13 SCC 308 and Gujarat Urja Vikas Nigam Limited v Amit Gupta, (2021) 7 SCC 209.”

The Bench has set aside the orders dated 01.09.2021 and 19.01.2022 passed by NCLT and NCLAT. The NCLT has been directed to pass appropriate orders in application for approval of resolution plan.

Case Title: Ramkrishna Forgings Limited v Ravindra Loonkar & Anr.

Citation: CIVIL APPEAL No.1527 OF 2022

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