Featured image for Supreme Court Judgment dated 04-02-2019 in case of petitioner name K. Sashidhar vs Indian Overseas Bank & Ors.
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Supreme Court Rules on Liquidation of Corporate Debtor: Key Insights on Insolvency and Bankruptcy Code

The case of K. Sashidhar vs. Indian Overseas Bank & Ors. is a landmark ruling by the Supreme Court of India concerning the interpretation of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The judgment addresses the role of the Committee of Creditors (CoC) in approving or rejecting resolution plans, the judicial review of such decisions, and the mandatory requirement for liquidation when the resolution plan fails to meet the required voting threshold.

Background of the Case

The dispute arose during the Corporate Insolvency Resolution Process (CIRP) of two companies: Kamineni Steel & Power India Pvt. Ltd. (KS&PIPL) and Innoventive Industries Ltd. (IIL). The insolvency resolution process was initiated against these corporate debtors under Section 7 of the I&B Code. The resolution professional (RP) presented a resolution plan before the CoC for approval. However, the CoC rejected the resolution plan as it failed to secure the mandatory 75% voting share of financial creditors.

The National Company Law Tribunal (NCLT) ordered the liquidation of the corporate debtors. The National Company Law Appellate Tribunal (NCLAT) upheld the decision. Dissatisfied with the ruling, the appellants approached the Supreme Court, challenging the CoC’s decision and the subsequent liquidation orders.

Legal Issues in the Case

  • Whether the CoC’s decision to reject a resolution plan is subject to judicial review?
  • Whether the commercial wisdom of the financial creditors can be questioned in court?
  • Whether the amendment lowering the CoC voting threshold from 75% to 66% applies retrospectively?
  • Whether the NCLT or NCLAT can compel the CoC to reconsider a rejected resolution plan?

Arguments Presented

Petitioner’s (K. Sashidhar) Arguments

  • The CoC acted arbitrarily in rejecting the resolution plan despite a substantial voting share in its favor.
  • The CoC should be required to provide specific reasons for rejecting a resolution plan.
  • The court should have the power to review the decision of the CoC to ensure fairness and transparency.
  • The amendment reducing the voting threshold to 66% should apply retrospectively, thereby making the resolution plan valid.

Respondent’s (Indian Overseas Bank & Ors.) Arguments

  • The CoC has absolute discretion to accept or reject a resolution plan, and its decision is non-justiciable.
  • As per Section 30(4) of the I&B Code, the resolution plan must be approved by a minimum 75% voting share (pre-amendment), which was not met.
  • Courts cannot interfere with the CoC’s commercial decisions.
  • The retrospective application of the amendment to reduce the voting threshold would create uncertainty and disrupt ongoing insolvency proceedings.

Supreme Court’s Observations and Judgment

1. CoC’s Decision is Final and Non-Justiciable

The Supreme Court emphasized that the commercial wisdom of the CoC is paramount in deciding the fate of a corporate debtor. The Court stated:

“The legislature has consciously made the commercial wisdom of the CoC non-justiciable, except in cases where the resolution plan violates Sections 30(2) or 61(3) of the I&B Code.”

This means that once the CoC rejects a resolution plan, the NCLT or NCLAT has no jurisdiction to question or interfere with the decision.

2. No Judicial Review of CoC’s Decision

The Court reiterated that courts cannot second-guess the commercial judgment of the CoC. The ruling affirmed:

“Financial creditors are best placed to assess the viability of a resolution plan and take decisions in their best commercial interest.”

Thus, financial creditors are under no obligation to justify their rejection of a resolution plan.

3. Retrospective Application of the 66% Voting Threshold Rejected

The Court clarified that the amendment lowering the CoC’s voting threshold from 75% to 66% applies prospectively from June 6, 2018. The Court ruled:

“Statutory amendments affecting substantive rights cannot be applied retrospectively unless explicitly stated by the legislature.”

Since the resolution plan was voted on before the amendment, the lower threshold did not apply.

4. Liquidation is the Only Option if CoC Rejects Resolution Plan

The Court reaffirmed that if a resolution plan is not approved by the required majority, the only course of action is liquidation under Section 33(1) of the I&B Code. The Court observed:

“Once the resolution plan is rejected by the CoC, the adjudicating authority has no option but to order liquidation of the corporate debtor.”

Final Judgment

The Supreme Court:

  • Dismissed the appeal and upheld the decision of the NCLT and NCLAT.
  • Reaffirmed that CoC’s commercial decisions are not subject to judicial review.
  • Declared that retrospective application of the voting threshold amendment is not permissible.
  • Confirmed that liquidation must follow if a resolution plan fails to secure the required votes.

Legal Implications of the Judgment

This ruling has far-reaching implications for insolvency proceedings in India:

  • Strengthening CoC’s Authority: The decision establishes that financial creditors have the final say in insolvency resolution.
  • Limited Role of Courts: Courts cannot interfere with commercial decisions unless statutory provisions are violated.
  • Clarity on Voting Thresholds: Voting percentage amendments will apply prospectively, preventing retrospective complications.
  • Liquidation as a Mandatory Consequence: If the CoC rejects a resolution plan, liquidation is the inevitable outcome.

Conclusion

The Supreme Court’s ruling in K. Sashidhar vs. Indian Overseas Bank & Ors. reinforces the principle that the commercial wisdom of financial creditors is non-justiciable. The decision strengthens the I&B Code framework, ensuring that insolvency proceedings remain creditor-driven. By upholding liquidation as the mandatory consequence of a failed resolution plan, the judgment provides clarity and certainty to insolvency professionals and stakeholders.


Petitioner Name: K. Sashidhar.
Respondent Name: Indian Overseas Bank & Ors..
Judgment By: Justice A.M. Khanwilkar.
Place Of Incident: India.
Judgment Date: 04-02-2019.

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