Liquidation Process Initiated: Supreme Court Upholds Voting Threshold in I&B Code

Introduction

In a significant ruling, the Supreme Court of India upheld the mandatory voting threshold for the approval of resolution plans under the Insolvency and Bankruptcy Code (I&B Code). The judgment, delivered on February 5, 2019, in the case of K. Sashidhar vs. Indian Overseas Bank & Ors., clarifies the legal framework surrounding the insolvency resolution process and the implications of creditor voting dynamics. The Court's decision reinforces the importance of creditor consensus in the resolution process, emphasizing that a resolution plan must secure at least 75% approval from the Committee of Creditors (CoC) to be deemed valid.

Case Background

The appeals arose from a common judgment of the National Company Law Appellate Tribunal (NCLAT) concerning the insolvency resolution process of two corporate debtors: Kamineni Steel & Power India Pvt. Ltd. (KS&PIPL) and Innoventive Industries Ltd. (IIL). The NCLAT had affirmed the rejection of the resolution plan for IIL and directed the initiation of liquidation proceedings, while it reversed the approval of the resolution plan for KS&PIPL, also leading to liquidation.

The NCLAT's decision was based on the failure of the resolution plans to secure the requisite 75% approval from the CoC, as mandated by Section 30(4) of the I&B Code. The appeals were filed by the corporate debtors challenging the NCLAT's ruling, arguing that the voting threshold should not be strictly enforced and that the amendments to the I&B Code should be considered.

What The Lower Authorities Held

The NCLAT held that the approval of a resolution plan by a vote of not less than 75% of the voting share of financial creditors was mandatory. It emphasized that the adjudicating authority (NCLT) could not disregard this requirement, and the failure to meet the threshold warranted the initiation of liquidation proceedings under Section 33 of the I&B Code. The NCLAT dismissed the appeals, reinforcing the legislative intent behind the I&B Code to ensure that resolution plans are supported by a significant majority of creditors.

The Court's Reasoning

The Supreme Court, while examining the appeals, focused on the interpretation of Section 30(4) of the I&B Code, which stipulates that a resolution plan may be approved by a vote of not less than 75% of the voting share of financial creditors. The Court noted that the use of the word 'may' in this context pertains to the discretion of the CoC to approve or reject a plan, but the requirement for a minimum voting threshold is mandatory.

The Court rejected the argument that the voting threshold should be considered directory rather than mandatory. It emphasized that allowing a lower threshold would undermine the legislative intent of the I&B Code, which aims to protect the interests of creditors and ensure a fair resolution process. The Court also highlighted that the commercial wisdom of financial creditors in rejecting a resolution plan is non-justiciable, meaning that their decisions cannot be challenged in court.

Statutory Interpretation

The Court's interpretation of the I&B Code was grounded in the legislative history and the objectives of the Code. It noted that the I&B Code was enacted to streamline the insolvency resolution process and provide a clear framework for the treatment of corporate debtors. The requirement for a 75% voting threshold was designed to ensure that resolution plans have broad support among creditors, reflecting their collective interests.

The Court also addressed the amendments to the I&B Code, particularly those that reduced the voting threshold from 75% to 66%. It clarified that these amendments, which came into effect after the events in question, do not apply retrospectively. The Court emphasized that the amendments were intended to introduce a new norm rather than clarify existing provisions, thus reinforcing the need for adherence to the original voting threshold during the relevant period.

Why This Judgment Matters

This ruling is significant for legal practice as it clarifies the procedural requirements for the approval of resolution plans under the I&B Code. It underscores the importance of creditor consensus in the insolvency resolution process and establishes that the commercial decisions of financial creditors are protected from judicial scrutiny. The judgment also highlights the implications of legislative amendments and the necessity for stakeholders to be aware of the applicable provisions at the time of decision-making.

Final Outcome

The Supreme Court dismissed the appeals filed by K. Sashidhar and upheld the NCLAT's decision to initiate liquidation proceedings for both KS&PIPL and IIL due to the failure to secure the requisite voting threshold for the approval of their resolution plans.

Case Details

• Case Title: K. Sashidhar vs Indian Overseas Bank & Ors.
• Citation: 2019 INSC 148
• Court: IN THE SUPREME COURT OF INDIA
• Date of Judgment: 2019-02-05