In the recent case of Pratap Technocrats (P) Ltd & Ors v. Monitoring Committee of Reliance Infratel Ltd and Anr (RIL/corporate debtor), the Supreme Court refused to interfere with an approved resolution plan submitted by Reliance Digital Platform and Project Services Limited (RDPPSL/resolution applicant).

The issues raised before the Court by the petitioners were that they had not been given fair and equitable treatment under the resolution plan as required by the provisions of the Insolvency and Bankruptcy Code, 2016.

After comparing the Code with insolvency statutes of other jurisdictions, the Court opined that the Code does not provide room for a National Company Law Tribunal (NCLT) to exercise its own discretion in matters pertaining to fairness and equity. This is in line with the established jurisprudence that the commercial wisdom of the Committee of Creditors (CoC) reigns supreme.

Below are the facts of the case:

• Corporate Insolvency Resolution Process (CIRP) commenced against RIL on May 15, 2018, post which a CoC was constituted and a resolution professional (RP) appointed. The resolution plan submitted by RDPPSL was found to be most commercially viable by the CoC and was approved with a vote share of 100%, and accordingly an application seeking approval of resolution plan was moved by the CoC before the NCLT, Mumbai.

• Doha Bank, which was one of the financial creditors of RIL, instituted proceedings challenging the decision of the RP to recognize certain indirect lenders of RIL as financial creditors.

• While approving the resolution plan, the NCLT noted that the pendency of the Doha Bank proceedings would not stand in the way of approval of the resolution plan, particularly since it had been unanimously approved by the CoC, including the creditors whose status as financial creditors was under challenge in the Doha Bank proceedings. The NCLT, however, clarified that the distribution to these creditors would be basis the final orders passed in the Doha Bank proceedings.

• Some of the OCs, after the approval order, directly approached the National Company Law Appellate Tribunal (NCLAT) challenging the resolution plan on the basis that the plan provided for unequal recovery for OCs and financial creditors. The appeal was dismissed by NCLAT. An appeal was then filed by the OCs before the Supreme Court against the order of NCLAT.

• In the meantime, by way of an order of the NCLT in the Doha Bank proceedings, certain entities which were recognized as financial creditors in the resolution plan were de-recognized as financial creditors. OCs argued before the Court that pursuant to the NCLT order, the recovery percentage of financial creditors increased to about 91% as against OC recovery of 19%, which amounted to unfair treatment.

Accordingly, the issues before the Court were:

a. Whether inclusion or exclusion of a financial creditor in the CoC would impact an already approved resolution plan?

b. Can the NCLT or NCLAT test a resolution plan on the parameters of equity and fairness?

1. Exclusion of certain financial creditors from the CoC after approval of a resolution plan unanimously would have no bearing on such approval as only distribution inter-se financial creditors would be affected and not the voting percentage.

2. Taking a strict interpretation of the provisions of the Code, the Court followed well-established principle that the scope of examination by NCLT while approving a resolution plan is limited to whether the requirements under the Code have been fulfilled.

3. NCLT derives its powers from the Code and is bound within its four-corners and cannot transgress those boundaries under the pretext of equity.

4. Comparing the Code with insolvency regimes in US and UK, the Court drew a comparison and noted that US and UK laws specifically permit inquiries into issues of equity and fairness regarding treatment of creditors. On the other hand, the Code permits differential treatment between different classes of creditors, which cannot be gone into by an NCLT on the grounds of equity.

While the Code began with substantial impetus, processes under the Code have since been marred with litigation and challenges based on discrimination under resolution plans. The Supreme Court by way of this decision reiterated that the commercial wisdom of the CoC is not justiciable.

The Court has taken a practical view on the impact of exclusion of creditors in an unanimously approved resolution plan, and at the same time has recognised that the situation may be different when a new financial creditor is introduced in the CoC. However, the impact of inclusion of a financial creditor subsequent to approval of a resolution plan still remains unanswered, which is an issue arising in multiple matters under the Code.

Despite the clear mandate on the scope of enquiry by an NCLT, various stakeholders continue to challenge resolution plans on commercial aspects including issues like treatment of creditors, payout to stakeholders, and valuations on the pretext of value maximisation and equity. Taking a cue from the decision of the Court, there may be a need to take a re-look at the Code to introduce specific grounds of challenge as are available in other insolvency regimes so as to achieve the objectives under the Code, including time bound resolution.

Prateek Kumar is a Partner, Raveena Rai is a Principal Associate and Smriti Nair is an Associate at Khaitan & Co.

Disclaimer: The views and opinions expressed in this article are those of the authors' and do not necessarily reflect the views of Bar & Bench.