Supreme Court Advises NCLT to Provide Cogent Reasons While Passing Orders Not Approving Resolution Plan

Supreme Court Advises NCLT to Provide Cogent Reasons While Passing Orders Not Approving Resolution Plan

Cautions that the tribunal may direct re-valuation of corporate debtor’s assets, but strictly within the permitted domain under the IBC

The Supreme Court has held that when the National Company Law Tribunal (NCLT) exercises its powers under Section 31(2) of the Insolvency and Bankruptcy Code (IBC), 2016 to not approve a resolution plan, a reasoned order must be passed.

The bench comprising Justice Vikram Nath and Justice Ahsanuddin Amanullah set aside the NCLT order keeping the approval of a resolution plan in abeyance while directing an official liquidator to conduct the re-valuation of the corporate debtor’s assets. Consequently, the order of the National Company Law Appellate Tribunal (NCLAT) affirming the NCLT order was also set aside.

The Court cautioned that the NCLT may direct re-valuation of corporate debtor’s assets, when necessary, but strictly within the domain permitted under the IBC.

The bench stated, “The adjudicating authority has the jurisdiction only under Section 31(2) of the IBC, which gives power not to approve only when the resolution plan does not meet the requirement laid down under Section 31(1) for which a reasoned order is required to be passed. The NCLT’s jurisdiction and powers as the adjudicating authority under the Code flow only from the IBC and the regulations thereunder.”

ACIL (corporate debtor) was admitted into the Corporate Insolvency Resolution Process (CIRP) under the IBC by the NCLT.

The Resolution Plan submitted by Ramkrishna Forgings Limited (successful resolution applicant/SRA) was approved by the Committee of Creditors (CoC) for the corporate debtor.

Accordingly, the Resolution Professional (RP) filed an application under Section 30(6) of the IBC before the NCLT, seeking approval of the resolution plan.

On 01 September 2021, the NCLT kept the approval of SRA’s resolution plan in abeyance. It directed the Official Liquidator (OL) to provide exact figures/value of assets.

The SRA filed an appeal before the NCLAT against the order. Vide the 19 January 2022 order, the NCLAT dismissed the appeal. It observed that an avoidance transaction of approximately Rs.1000 crores had come to light. Since a large sum was involved, the case justified interference.

Thereafter, the SRA filed an appeal before the top Court against the NCLAT’s 19 January 2022 order.

The SRA argued that IBC had an inbuilt mechanism for the valuation of assets of the corporate debtor provided under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Therefore, the appointment of an OL for valuation, which was otherwise a creation of the Companies Act, 2013, was unwarranted. Also, the NCLT could not sit in appeal over commercial decisions of the CoC.

However, the apex Court ruled that the NCLT could reject a resolution plan only through a reasoned order. The bench held that Section 31(2) of the IBC alone empowered the NCLT to reject a resolution plan when the same did not meet the requirements given under Section 31(1) of the IBC. For rejecting a resolution plan, the tribunal must pass a reasoned order and the power was exercisable only within the ambit of IBC and its provisions.

The judges stated that it ought to be noted that the adjudicating authority had jurisdiction only under Section 31(2), which gave power not to approve only when the resolution plan did not meet the requirement laid down under Section 31(1) for which a reasoned order was required to be passed. They emphasized that the NCLT’s jurisdiction and powers as the adjudicating authority under the Code came only from the Code and the regulations therein.

Justice Nath and Justice Amanullah explained that they would have refrained from interfering in the NCLT order if it was reasonable. The bench stressed that it was the duty of the Courts and the tribunals to record the cogent reasons.

The Court further expressed, “There may have been a situation where due to glaring facts, an order of the nature impugned herein could be left untouched and this Court would have refrained from interference, but only if detailed reasoning, disclosing the facts for being persuaded to embark on such path, were discernible in the order dated 01.09.2021, which unfortunately is cryptic and bereft of detail. Recording of reasons and not just reasons but cogent reasons, for orders is a duty of the Courts and the tribunals.”

The bench relied on the judgments passed in the Kranti Associates Private Limited vs Masood Ahmed Khan, (2010) 9 SCC 496 case and the Manoj Kumar Khokhar v State of Rajasthan, (2022) 3 SCC 501 case.

It held that a Court or a quasi-judicial authority had a duty to record the reasons for its decision. It further said, “The reason is the heartbeat of every conclusion. Without the same, it becomes lifeless.” The NCLT could direct the re-valuation of assets strictly within the domain permitted under the IBC.

One of the counsels had raised concerns that the power to direct the re-valuation of assets should not be excluded from the powers of the NCLT. Thus, explaining the scenario, the bench stated that the NCLT might exercise such power when necessary but strictly within the domain permitted by the IBC.

The Top Court ruled, “Regarding the counsel’s submission that this Court may not exclude from the NCLT’s ambit any power to direct re-valuation, we have given our anxious thought to it. Our view is that while certainty in law and legal principles is the obvious aim, the law is to be applied in the context of the facts. If a matter where the facts are stark comes to light, the same would have to necessarily be dealt with by the NCLT within the four corners of the Code itself, having due regard to the extant circumstances.

The judges added, “It is for the NCLT to exercise the power strictly within the domain permitted by the Code. In this context, one may peruse the decisions in the Embassy Property Developments Private Limited vs State of Karnataka, (2020) 13 SCC 308 case, and the Gujarat Urja Vikas Nigam Limited vs Amit Gupta, (2021) 7 SCC 209 case.”

Thus, the bench set aside the orders passed by the NCLT and the NCLAT. It directed the NCLT to pass appropriate orders in the application for the approval of the resolution plan.