NCLT/NCLAT Can't Interfere With Commercial Wisdom Of CoC Except Within Limited Scope Under Sections 30 & 31 IBC : Supreme Court

The Supreme Court has reiterated that the National Company Law Tribunal(NCLT) or the National Company Law Appellate Tribunal(NCLAT) cannot interfere with the 'commercial wisdom' of the Committee of Creditors(CoC), except within the limited scope under Sections 30 and 31 of the Insolvency and Bankruptcy Code(IBC).

Based on this well settled principle, a 3-judge bench comprising Justices AM Khanwilkar, BR Gavai and Krishna Murari set aside an order of the NCLAT which had annulled the decision of CoC to accept a resolution plan(Kalparaj Dharamshi and another vs Kotak Investment Advisors Ltd and Others and connected cases).

"It would thus be clear, that the legislative scheme, as interpreted by various decisions of this Court, is unambiguous. The commercial wisdom of CoC is not to be interfered with, excepting the limited scope as provided under Sections 30 and 31 of the I&B Code", the Supreme Court observed referring to precedents such as Committee of Creditors of Essar Steel India Ltd vs Satish Kumar Gupta and others,  Maharashtra Seamless Ltd v Padmanabhan Venkatesh and others, K. Sashidhar vs. Indian Overseas Bank etc.

"It will therefore be clear, that this Court, in unequivocal terms, held, that the appeal is a creature of statute and that the statute has not invested jurisdiction and authority either with NCLT or NCLAT, to review the commercial decision exercised by CoC of approving the resolution plan or rejecting the same", the judgment authored by Justice BR Gavai stated.

"We are of the considered view, that in view of the paramount importance given to the decision of CoC, which is to be taken on the basis of 'commercial wisdom', NCLAT was not correct in law in interfering with the commercial decision taken by CoC by a thumping majority of 84.36%", the Court observed.

Factual background

The appellants in Supreme Court, Kalparaj Dharamshi and Rekha Jhunjhunwala, were successful resolution applicants in a corporate insolvency resolution process. The respondent, Kotak Investment Advisories Ltd(KIAL), another resolution applicant, challenged the acceptance of the resolution plan of appellants contending that it was accepted beyond the time-period.

The NCLT dismissed the challenge. However, in further appeal by KIAL, the NCLAT interfered with the CoC decision.

Being aggrieved with the NCLAT order, Kalparaj and certain other financial creditors appealed to the Supreme Court.

Issues before the Supreme Court

The Supreme Court considered three issues :

(i)Whether the appeals filed by KIAL before NCLAT were within limitation?

(ii)Whether there was waiver and acquiescence by KIAL, so as to estop it from challenging the participation of Kalpraj?

(iii)Whether NCLAT was right in law in interfering with the decision of CoC of accepting the resolution plan of Kalpraj?

First issue

The first issue was relating to the fact that KIAL had first approached the High Court challenging the NCLT decision. The High Court however refused to entertain the matter saying that the alternate remedy of appeal before NCLAT was available to KIAL. The issue was that whether the time spent pursuing the case in High Court could be regarded as bona fide prosecution for the purposes of exclusion of time for limitation under Section 14 of the Limitation Act.

Answering the issue in favour of KIAL, the Supreme Court noted that the writ petition filed in High Court was not just pertaining to the CoC decision; there were allegations with regard to the manner of functioning of NCLT.

The SC observed that  KIAL was prosecuting the proceedings before the High Court with due diligence.

"The matter before the High Court was hotly contested and ultimately, the petition was dismissed by an elaborate judgment relegating KIAL to the alternate remedy available to it in law. As such, the conditions which enable a party to invoke the provisions of Section 14 of the Limitation Act are very much available to KIAL"

Second issue

The second issue was also answered in favour of KIAL by holding that its participation in the CoC process did not estop it from challenging the decision to accept the resolution plan of the appellants.

The Court held that KIAL's conduct cannot be regarded as "acquiescence" or "waiver".

"Taking into consideration the fact, that KIAL had objected to participation of any other applicant submitting plan after the due date as per the last Form 'G' and also reiterated its objection, we are of the considered view, that it cannot be held, that having participated by submitting the revised plans, KIAL is estopped from challenging the process on the ground of acquiescence and waiver. Merely because,the revised plans are not submitted with the words "without prejudice", in our view, would not make any difference. As already discussed hereinabove, KIAL had no other option than to submit its revised plans in view of clause 11.2 of the Process Memorandum. Inasmuch as, had it not responded,it had to run the risk of being out of fray. As already discussed herein above, the conduct of the party is relevant for considering, whether it can be held, that a case is made out of waiver or acquiescence", the bench observed.

Third issue

The third issue was however answered against KIAL by holding that the NCLAT overstepped its jurisdiction by interfering with the CoC decision.

As regards the argument that the NCLAT was justified in interfering with the CoC decision on the ground of material irregularity, the bench observed :

"No doubt, it is sought to be urged, that since there has been a material irregularity in exercise of the powers by RP, NCLAT was justified in view of the provisions of clause (ii) of sub­section (3) of Section 61 of the I&B Code to interfere with the exercise of power by RP. However, it could be seen, that all actions of RP have the seal of approval of CoC. No doubt, it was possible for RP to have issued another Form 'G', in the event he found, that the proposals received by it prior to the date specified in last Form 'G' could not be accepted. However, it has been the consistent stand of RP as well as CoC, that all actions of RP, including acceptance of resolution plans of Kalpraj after the due date, albeit before the expiry of timeline specified by theI&B Code for completion of the process, have been consciously approved by CoC. It is to be noted, that the decision of CoC is taken by a thumping majority of 84.36%.The only creditor voted in favour of KIAL is Kotak Bank,which is a holding company of KIAL, having voting rights of0.97%. We are of the considered view, that in view of the paramount importance given to the decision of CoC, which is to be taken on the basis of 'commercial wisdom', NCLAT was not correct in law in interfering with the commercial decision taken by CoC by a thumping majority of 84.36%"

"Mr. Kalpraj Dharamshi and Ms. Rekha Jhunjhunwala were represented by Senior Advocates, Mr. Mukul Rohatgi, Dr. A.M. Singhvi and Mr. Pinaki Mishra, instructed by Karanjawala & Co., through Ms. Ruby Singh Ahuja, Ms. Tahira Karanjawala, Mr. Anupm Prakash, Mr. Anmol Jassal and Mr. Utkarsh Maria and Khaitan & Co., through Ms. Kalpana Unadkat, Mr. Prateek Kumar and Ms. Raveena Rai."

Case Details

Case Title : Kalparaj Dharamshi and another vs Kotak Investment Advisors Ltd and Others and connected cases

Bench : Justices AM Khanwilkar, BR Gavai and Krishna Murari

Appearances : Senior Advocates Mukul Rohatgi, Dr. Abhishek Manu Singhvi and Pinaki Mishra for Kalparaj;  K.V. Viswanathan, appearing for Deutsche Bank A.G.and CoC,  C.A. Sundaram, Gopal Sankaranarayanan and P.P. Chaudary, for Fourth Dimension Solutions Limited, Shyam Divan for RP and Neeraj Kishan Kaul for KIAL.

Citation : LL 2021 SC 155

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