Supreme Court Upholds 90% Approval Threshold Under IBC Section 12A: Limiting Judicial Intervention in CoC Decisions

Introduction

The Supreme Court of India, in the landmark judgment of Vallal Rck (S) v. Siva Industries And Holdings Limited And Others (S) (2022 INSC 634), addressed critical issues pertaining to the Insolvency and Bankruptcy Code, 2016 (IBC). This case primarily revolved around the withdrawal of the Corporate Insolvency Resolution Process (CIRP) under Section 12A of the IBC and the extent to which judicial bodies can interfere with the Committee of Creditors' (CoC) decisions. The appellant, Vallal Rck (S), challenged the decisions of the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT), which had dismissed his appeals and initiated liquidation proceedings against Siva Industries and Holdings Limited, respectively.

Summary of the Judgment

The Supreme Court examined whether the NCLT and NCLAT had overstepped their authority by challenging the CoC's decision to approve a Settlement Plan submitted by the appellant. The CoC had initially approved the Settlement Plan with 70.63% votes, which increased to 94.23% after further deliberations and amendments. Despite this, the NCLT had rejected the withdrawal of CIRP under Section 12A, categorizing the Settlement Plan as a "Business Restructuring Plan" rather than a settlement simpliciter. The Supreme Court quashed the NCLT and NCLAT's orders, allowing the withdrawal of CIRP and emphasizing minimal judicial interference in the CoC's commercial decisions, provided they meet the stringent requirements set forth under Section 12A.

Analysis

Precedents Cited

The judgment references several key cases and reports that shaped the court's understanding and decision:

Swiss Ribbons Private Limited v. Union Of India (2019) 4 SCC 17: This case challenged the constitutionality of Section 12A, arguing that the 90% voting threshold was arbitrary. The Supreme Court upheld Section 12A, stating that the threshold ensures a collective agreement among creditors, thus preventing unilateral decisions.
Various rulings like K. Sashidhar v. Indian Overseas Bank (2019) 12 SCC 150, Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta (2020) 8 SCC 531, and others were cited to reinforce the principle that the CoC's commercial wisdom is paramount and should be minimally interfered with by judicial bodies.
Uttara Foods and Feeds Private Limited v. Mona Pharmacem: Referenced to highlight that specific rules under the IBC, such as Rule 11 of the NCLT Rules, 2016, may not be directly applicable to CIRP withdrawal scenarios.

Legal Reasoning

The core of the Supreme Court's reasoning lies in the interpretation and application of Section 12A of the IBC, which allows for the withdrawal of CIRP if approved by at least 90% of the CoC's voting share. The Court emphasized the following:

Legislative Intent: Section 12A was introduced to provide a structured mechanism for withdrawing CIRP post-admission, ensuring that such withdrawals are supported by a substantial majority of the CoC, thereby reflecting collective creditor agreement.
Minimal Judicial Intervention: The Court upheld the principle that judicial bodies like the NCLT and NCLAT should not interfere with the CoC's commercial decisions unless there is clear evidence of arbitrariness or irrationality.
Detailed Procedural Safeguards: The judgment noted the comprehensive procedures outlined in Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which govern the withdrawal process, ensuring transparency and accountability.
Precedent Consistency: The Court maintained consistency with earlier judgments that affirm the CoC's authority and discourage unwarranted judicial interference, thereby promoting the efficacy of the IBC framework.

Impact

This judgment has significant implications for the insolvency resolution landscape in India:

Strengthening CoC Authority: By upholding the 90% voting threshold for CIRP withdrawal, the judgment reinforces the CoC's decision-making power, ensuring that only widely supported plans are sanctioned.
Reducing Judicial Burden: Limiting the scope of judicial intervention in CoC decisions helps expedite the insolvency resolution process, reducing delays and promoting efficiency.
Encouraging Collective Creditor Action: The high voting threshold encourages creditors to collaborate and reach consensus, fostering a more cooperative environment for corporate restructuring.
Clarifying Legal Framework: The judgment provides clarity on the application of Section 12A and Regulation 30A, guiding practitioners and insolvency professionals in navigating the withdrawal process.

Complex Concepts Simplified

CIRP (Corporate Insolvency Resolution Process): A legal process initiated to reorganize a financially distressed company, aiming to maximize the value of the company's assets and ensure equitable treatment of all creditors.
Committee of Creditors (CoC): A group comprising all financial creditors of the corporate debtor. The CoC holds significant decision-making power in the insolvency resolution process, including approving or rejecting resolution plans.
Section 12A of the IBC: A provision that allows the withdrawal of an application for CIRP if the CoC approves such withdrawal by a minimum of 90% voting share.
Resolution Professional (RP): An insolvency professional appointed to manage the CIRP, including overseeing the resolution process and ensuring compliance with legal requirements.
Business Restructuring Plan: A plan aimed at reorganizing the business operations and financial structure of the corporate debtor to achieve viability and address creditor claims.

Conclusion

The Supreme Court's judgment in Vallal Rck (S) v. Siva Industries And Holdings Limited And Others (S) reaffirms the sanctity of the Committee of Creditors' decisions within the insolvency framework. By upholding the stringent 90% voting requirement under Section 12A for CIRP withdrawal, the Court ensures that only consensually supported plans survive judicial scrutiny. This decision not only bolsters the authority of the CoC but also streamlines the insolvency resolution process, aligning it with the legislative intent of promoting collective creditor action and minimizing unnecessary judicial interference. Practitioners and stakeholders must therefore adhere to the established procedural safeguards, fostering a more efficient and creditor-centric insolvency regime in India.