JUDICIAL INTERVENTION AND IBC
The judicial intervention of the Hon’ble Supreme Court while dealing with cases filed under the Insolvency and Bankruptcy Code, 2016 (“Code”) either challenging the code or for any specific relief, clearly establish how the intent of the Legislature is preserved and defended all the time.
The cases like Innoventive Industries Ltd, Mobilox Innovations, B.K. Educational, Chitra Sharma, Swiss Ribbons, Pioneer Urban Infra, Essar Steel etc. established the kind of importance the Hon’ble Supreme Court imposed on the object of the Code and the intent of the Legislature.
However, there were instances where the Adjudicating Authority (“AA” or “NCLT”) and the Appellate Authority (“NCLAT”) had deviated from the legislative intent by adopting to strict interpretation of the Code. Where the AA had wrongly interpreted any provision, the NCLAT, in several occasions, set-aside such orders. Similarly, where the NCLAT had erred in any interpretation the Hon’ble Supreme Court had set-aside such orders.
I will rely on the following two cases to establish my opinion on the judicial intervention and the Code:
- Andhra Bank Limited v. Sterling Biotech Ltd & Ors. – decided by NCLT and set-aside by NCLAT;
- Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta & Anr. – decided by NCLAT and set-aside by the Supreme Court.
In the matter of Sterling Biotech Ltd.
In this case, the applicant filed for withdrawal of application after having obtained approval of 90% voting-share of the Committee of Creditors (“CoC”). However, the Mumbai bench of the NCLT rejected the application on the following grounds, among others:
- The settlement agreement signed by the authorised representative of the absconding promoters is not a binding contract and hence withdrawing the CIRP application on the basis of such invalid contract was not held to be valid;
- The NCLT opined that this is an attempt by the Promoters to defeat the legislative provisions of Section 29A of the Code;
- The settlement amount proposed to be paid is out of the proceeds of crime.
Based on this, the NCLT rejected the withdrawal application and passed liquidation order.
The instant case was appealed before the Appellate Authority, i.e. NCLAT which opined that where the approval of 90% per cent voting share of the CoC is obtained, the NCLT cannot exercise any discretion and shall mandatorily approve such withdrawal application.
We can observe from the above that the NCLAT fostered the intent of the Code which was clear from the bill as well as from the Insolvency Law Committee Report, 2018, which recommended the insertion of separate provisions for withdrawal of CIRP application. Where the intent of the Code was limited judicial review, both the NCLAT and NCLAT cannot delve into the commercial wisdom of the CoC which was also clarified by the Supreme Court in K. Sashidhar v. Indian Overseas Bank & Ors.
However, from this case I wish to highlight the fact that there were instances where the AA had failed to give importance to the intent of the Code and rather relied on the plain meaning rule of interpretation.
In the matter of Essar Steel Ltd.
This is a classic example of how judicial intervention in the IBC distorted the law dealing with secured and unsecured creditors. In a never-seen-before approach, the NCLAT in this case did not differentiate among the secured and unsecured financial creditors by directing to distribute the funds proposed by the resolution applicant among them proportionately without any heed to the value of the security interest.
While the intent of the Code was to leave it to the commercial wisdom of the CoC to approve a plan after consideration of the distribution of funds proposed by the resolution applicant, the NCLAT in this case recalculated the entire distribution of funds and has proposed a new distribution which has treated both the secured and unsecured financial creditors on the same footing. This caused disruption in the industry as it had sent a negative indication which, if upheld by the Supreme Court, would have disrupted the entire credit market in the Country.
The Hon’ble Apex Court had set-aside this decision of the NCLAT and opined that the intent of the Code was never to place both the secured and unsecured financial creditors on the same page. Even in the earlier case of Pioneer Urban Land and Infrastructure, the Supreme Court held that “… the legislature must be given free play in the joints when it comes to economic legislation. Apart from the presumption of constitutionality which arises in such cases, the legislative judgment in economic choices must be given a certain degree of deference by the courts”.
Hence, this is another instance where even though the NCLAT deviated from the intent of the Code, the Supreme Court had rightly upheld the intent of the Code and interpreted the impugned provisions of the code in promotion of the intent and object of the Code.
To conclude, barring few instances, the judicial intervention of NCLT, NCLAT and the Supreme Court in the context of IBC has time and again established the objective of the Code.