THE SUPREME COURT UPHOLDS IBC RESOLUTION PLAN OVER NSEZ ACT

This Judgment was delivered by a Bench of Hon’ble Justice Abhay S. Oka and Augustine George Masih on November 05, 2024, arising from Civil Appeal Nos. 5918-5919 of 2022 filed before the Supreme Court in the case of Noida Special Economic Zone Authority vs. Manish Agarwal & Ors.(CIVIL APPEAL NOS. 5918-5919 OF 2022).The Appellant, Noida Special Economic Zone Authority (NSEZ), challenged the judgment passed by the National Company Law Appellate Tribunal (NCLAT) on February 14, 2022.The Appeal was filed against the order of the Committee of Creditors approving the Resolution Plan under the Insolvency and Bankruptcy Code (IBC), 2016, dated November 27, 2020, for the Corporate Debtor, Shree Bhoomika International Limited, concerning the payments distributed under the Resolution Plan.

FACTS

The Corporate Debtor, Shree Bhoomika International Limited, was subleased a plot at the NSEZ by the Appellant. A Lease Deed was executed, which was valid for 15 years, up to May 31, 2010. The Corporate Debtor defaulted on lease payments in 1999, and no activity occurred on the land from 2003 to 2004, causing financial losses to NSEZ. The Appellant asserted that the defaults in payments violated the Special Economic Zone Rules and Guidelines.

A public notice for the sale of assets of the Corporate Debtor dated February 06, 2018,by the Stressed Assets Stabilization Fund (SASF) was announced and a reserve price of INR 9.18 crore was fixed.

NCLT

As the Corporate Debtor defaulted on the payments, the Corporate Insolvency Resolution Process (CIRP) was initiated by the Appellant before the NCLT, which admitted the application and appointed an Interim Resolution Professional (IRP). The Appellant filed a claim of INR 6.29 Crore, which was admitted by the Resolution Professional (RP).

The Resolution Plan, prepared by the Respondent, M/s Commodities Trading, was approved by the Committee of Creditors on January 06, 2020. The RP filed an application seeking approval of the Resolution Plan before the NCLT, which granted INR 50 lakhs to the Appellant against its admitted claim of INR 6.29 crores. Dissatisfied with this amount, the Appellant challenged the Resolution Plan before the NCLT, which dismissed the application on November 27, 2020.

NCLAT

The Appellant filed an Appeal before the NCLAT, challenging the orders of the RP and NCLT. The Appeals were dismissed on February 14,2022. The Appellant argued that he was not informed about the auction proceedings initiated by the RP, depriving him of the opportunity to participate. Additionally, the Appellant contended that once the total claim was admitted by the RP, the full amount should have been disbursed to him before the claimants, including the sole financial creditor.

The Appellant further argued that Clause 10.9 of the Resolution Plan, concerning exemptions from the NSEZ, contradicted the Special Economic Zone Act, 2005. He also challenged the absence of a physical inspection of the property by the valuers conducting the Liquidation Valuation, as required by Regulation 35(1)(a) of the Insolvency and Bankruptcy Board of India (IBBI) guidelines.

SUPREME COURT

The Supreme Court cited Duncans Industries Ltd. v. State of U.P. and Others(AIR 2000 SUPREME COURT 355) and stated that a question of fact does not warrant interference if it is based on relevant material on record. The estimates provided by the valuers, which were considered fair value and liquidation value respectively, were found to be just and reasonable by the Court. According to Section 35C[1] of the IBC, 2016, the powers and duties of the liquidator have been laid down, and since due process was followed, there was no fault found in the proceedings. As such, the Supreme Court refused to interfere.

The Court also referred to principles from previous judgements and held that Sections 30 and 31 of the IBC, 2016, which deal with the submission of the Resolution Plan, were evaluated by the NCLAT. The Court affirmed that all dues, including statutory dues owed to the Central Government, State Government, and Local Authorities, which are not part of the Resolution Plan, shall stand extinguished. No proceedings can be initiated or continued to recover any dues for the period before the approval of the Resolution Plan by the NCLT.

Regarding other claims and the transfer fee, the Court held that Courts and Tribunals should refrain from interfering as it is the commercial wisdom of the Committee of Creditors. The Committee of Creditors is considered the best entity to determine its interests, and any such interference is not justifiable.

The Court found no violation of the statute or procedure, and the Resolution Plan, as approved by the Committee of Creditors, was accepted and upheld. The Court stated that the financial decisions made by the Committee of Creditors in evaluating the plan would prevail.

Further, the Court ruled that any fees or penalties for the renewal of the sub-lease and/or for transfer charges related to changes in directorship or shareholding in favour of the Resolution Applicant cannot be accepted in light of Section 238 of the IBC, 2016, which provides that the provisions of the IBC shall have an overriding effect over other laws, including the SEZ Act, 2005.

The Court held that the Resolution Plan had already been implemented and the dues payable under the Resolution Plan was disbursed to the concerned parties. The amount allocated to the Appellant in the Resolution Plan was disbursed via a Demand Draft on October 22, 2020, which the Appellant received. Consequently, the Court dismissed the Appeal and upheld the decision of the NCLAT.

KEY TAKEAWAYS FROM THE JUDGMENT

• In this case, the Apex Court refused to interfere with the liquidation and fair value assessment of the Corporate Debtor, as it was based on the relevant material. The Court referred to Duncans Industries case and held that since valuation questions are factual in nature, they should remain unchallenged if they are based on substantial evidence.
• The Supreme Court referred to the precedents and held that if any dues that are owed to the statutory bodies are not part of the Resolution Plan, then such dues shall be terminated or cancelled. Once the Resolution Plan is in effect, any claims to recover the dues shall not be continued.
• The Supreme Court has given the Committee of creditors supremacy to evaluate the commercial viability, and it refuses to interfere unless there is a violation of Section 30(2) of the IBC.
• According to Section 238 of the IBC, the Insolvency and Bankruptcy Code, 2016 has an overriding effect over the conflicting laws; in this case, the IBC preceded the Special Economic Zones Act, 2005 (SEZ Act). It allowed for certain exemptions from SEZ fees and penalties as it was laid down under the Resolution Plan.
• In this case, the Court noted that the Resolution Plan was implemented, and the amount has been disbursed according to what was laid down in the plan. The Court is discouraged from reopening the settled aspects within the plan.

 CONCLUSION

This case plays an important role in establishing the integrity of the Resolution Plan and non-interference in the valuation matters when it is factual and backed by substantial evidence. The Court also emphasised that IBC shall have an overriding effect over other laws if it is part of the Resolution Plan. The supremacy of the committee of creditors in determining the commercial viability of the Resolution Plan was reaffirmed by the Court. Once the Resolution Plan was implemented and the amount was disbursed as per the plan, the Court discouraged challenging the settled aspects of the plan, promoting stability in the insolvency proceedings.

Baddam Parichaya Reddy

Associate

The Indian Lawyer & Allied Services

 

 

[1]Section 35C[1] of the IBC, 2016,

35. (1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely: —

(a) to verify claims of all the creditors.

 (b) to take into his custody or control all the assets, property, effects and actionable claims of the Corporate Debtor.

(c) to evaluate the assets and property of the Corporate Debtor in the manner as may be specified by the Board and prepare a report….