Corporate Insolvency and Settlement: Supreme Court’s Verdict on Withdrawal of CIRP under Section 12A
The Supreme Court of India recently delivered a significant ruling in the case of Vallal RCK v. M/S Siva Industries and Holdings Limited & Others. The case centered around the withdrawal of a Corporate Insolvency Resolution Process (CIRP) under Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC). The judgment clarifies the role of the Committee of Creditors (CoC) in approving a settlement plan and limits judicial interference in commercial decisions made by creditors.
The case involved a dispute where the CoC had approved a settlement plan with an overwhelming majority of 94.23%. However, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) rejected the plan, leading to the initiation of liquidation proceedings. The Supreme Court intervened and ruled that neither the NCLT nor the NCLAT could override the commercial wisdom of the CoC.
Background of the Case
The case originated when IDBI Bank Limited filed an application under Section 7 of the IBC to initiate CIRP against M/S Siva Industries and Holdings Limited. The NCLT admitted the application on 4th July 2019, leading to the initiation of CIRP.
Read also: https://judgmentlibrary.com/supreme-court-clarifies-limitation-period-for-initiating-cirp-under-ibc/
The Resolution Professional (RP) presented a resolution plan submitted by M/s Royal Partners Investment Fund Limited. However, this plan only received 60.90% of the votes from the CoC, falling short of the required 66% threshold for approval. Consequently, the RP filed an application before the NCLT seeking the initiation of liquidation proceedings.
Meanwhile, the appellant Vallal RCK, a promoter of the Corporate Debtor, proposed a Settlement Plan and sought consideration by the CoC. After multiple deliberations in CoC meetings, the plan was approved by 94.23% of the voting share. Based on this approval, the RP filed an application under Section 12A of the IBC for withdrawal of CIRP.
Petitioner’s Arguments
The appellant Vallal RCK contended that:
- The CoC, having approved the Settlement Plan with 94.23% voting, demonstrated its commercial wisdom in resolving the insolvency without liquidation.
- The purpose of IBC is to allow the Corporate Debtor to continue as a going concern while maximizing the value for creditors.
- The NCLT and NCLAT exceeded their jurisdiction by rejecting the plan, as they cannot interfere with the commercial wisdom of the CoC.
Respondent’s Arguments
The opposing parties contended that:
- The Settlement Plan proposed by the appellant was a business restructuring plan rather than a straightforward settlement.
- Approval of the plan would set a precedent where promoters could misuse the insolvency process to regain control of companies without sufficient safeguards.
- The NCLT and NCLAT had the authority to review the plan to ensure fairness and legality.
Key Observations of the Supreme Court
The Supreme Court emphasized the importance of minimal judicial interference in commercial decisions made by creditors. The Court stated:
“The adjudicating authority and the appellate authority cannot sit in appeal over the commercial wisdom of the CoC. The interference would be warranted only when the decision of the CoC is wholly capricious, arbitrary, irrational, or de hors the provisions of the statute or the rules.”
The Court highlighted that Section 12A of the IBC requires approval of 90% of the voting share for withdrawal of CIRP, demonstrating the legislature’s intent to make such withdrawals stringent. The Court observed:
“When 90% and more of the creditors, in their wisdom, after due deliberations, find that it will be in the interest of all stakeholders to permit settlement and withdraw CIRP, the adjudicating authority or appellate authority should not override such decisions.”
Final Judgment and Directions
The Supreme Court ruled in favor of the appellant, making the following key pronouncements:
- The appeal was allowed, and the orders passed by the NCLT and NCLAT were set aside.
- The CoC’s decision to approve the Settlement Plan with 94.23% voting was upheld.
- The application for withdrawal of CIRP under Section 12A was allowed.
- The liquidation proceedings initiated against the Corporate Debtor were quashed.
Conclusion
This landmark judgment reinforces the principle that the CoC’s commercial wisdom takes precedence in insolvency proceedings. By emphasizing minimal judicial interference, the Supreme Court has upheld the core objective of the IBC: ensuring a structured resolution process that balances creditor interests with the revival of financially distressed companies.
The decision sets a crucial precedent for future insolvency cases, particularly concerning withdrawal under Section 12A, and affirms that CoC decisions should be respected unless they are manifestly arbitrary or illegal.
Petitioner Name: Vallal RCK.Respondent Name: M/S Siva Industries and Holdings Limited & Others.Judgment By: Justice B.R. Gavai, Justice Hima Kohli.Place Of Incident: Chennai, India.Judgment Date: 03-06-2022.
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