CoC can't withdraw approved insolvency resolution plan citing debtor's improved financial position: Supreme Court

The Supreme Court on Monday held that in corporate insolvency resolution proceedings, the Committee of Creditors (CoC) cannot withdraw an approved insolvency resolution plan merely by citing an improvement in the corporate debtor's financial position [Bank of India & Ors. v. S.M. Kamal Pasha & Ors.].

A Bench of Justices JB Pardiwala and K Vinod Chandran held that a resolution plan becomes binding on both the CoC and the successful resolution applicant once it is approved by the creditors, even before its confirmation by the NCLT.

The Court observed that the Insolvency and Bankruptcy Code, 2016 (IBC) does not permit either the CoC or the resolution applicant to withdraw from an approved resolution plan simply because subsequent developments have made the transaction financially less attractive.

"We are of the opinion that the withdrawal of an application can only be till the CoC approves the plan and after it is placed before the Adjudicating Authority, there can be no withdrawal either of the application or the approved Resolution Plan," the October 26 judgment stated.

The Court made the observation while dealing with a case concerning insolvency proceedings initiated by the Bank of India against a company engaged in toll collection on National Highway 45.

During the Covid-19 pandemic, the company's financial position deteriorated, leading to the approval of a resolution plan involving ₹172.55 crore. At the time, the corporate debtor had an opening cash balance of approximately ₹30 crore.

However, prolonged litigation delayed the implementation of the plan. During this period, the company's financial position improved considerably, with its opening cash balance increasing to approximately ₹165 crore.

The CoC subsequently decided unanimously to withdraw its approval of the resolution plan and invite fresh expressions of interest.

It argued that implementing the original plan would confer a windfall gain on the successful resolution applicant, who would effectively have to bring in significantly less money than originally contemplated.

The National Company Law Tribunal (NCLT) permitted the withdrawal of the plan. However, the National Company Law Appellate Tribunal (NCLAT) later reversed that decision, holding that the CoC lacked the authority to withdraw its approval of the resolution plan.

This was challenged before the Supreme Court by the creditors.

Senior Advocate Gopal Sankaranarayanan, appearing for the creditors, argued that allowing the withdrawal of the resolution plan and inviting fresh bids could maximise the value of the corporate debtor's assets and benefit creditors.

Senior Advocate Nidhesh Gupta, representing the successful resolution applicant, opposed the plea, arguing that creditors could not abandon their earlier commitment merely because the company's financial circumstances had improved.

After considering the rival submissions, the Court upheld the NCLAT's view that the CoC could not withdraw an approved resolution plan merely on the ground that the corporate debtor's financial position had improved.

It held that the binding nature of a resolution plan operates equally against both creditors and resolution applicants.

Relying on its earlier judgment in Ebix Singapore v. Committee of Creditors of Educomp Solutions, the Bench held that the statutory insolvency framework does not contemplate such unilateral withdrawals or modifications of approved resolution plans.

The Court also took note of the resolution applicant's argument that the creditors' change of position was driven not by commercial wisdom but by a desire to obtain a better financial settlement.

"The SRA’s contention that the CoC has turned turtle not because of its commercial wisdom but only due to a shortsighted opportunism revealing institutionalized rapacity also cannot be ignored," it said.

However, the Court did not itself decide whether the resolution plan should ultimately be approved, leaving the matter to the NCLT to decide along with the pending application seeking to end the CIRP through a one-time settlement.

The Supreme Court also clarified that the NCLT must examine the corporate debtor's present financial position, including its available cash balance, while considering the resolution plan.

However, improved profitability alone could not justify rejecting a plan that otherwise satisfied the statutory requirements, the Court held.

The Court clarified that its observations, except those concerning the binding nature of the resolution plan, were prima facie and would not govern the NCLT's final decision.

Advocates T Ravichandran, KV Mohan, KV Balakrishnan, RK Raghavan, Devesh Khanduri, Tushar Shrivastava and Kanishk Garg, also represented the appellant creditors

Senior Advocate Nidhesh Gupta, along with advocates Bhanu Chopra, Deepak Deshmukh, Rashmi Shetty, Mohammad Shahyan Khan and Devashish Tiwari, represented the successful resolution applicant.

Senior Advocate Nikhhil Nayyar, along with advocates Ankur Kashyap, Hasan Murtaza, Surendra Khot, Sameer Sharma, Aman Bajaj, Ankit Kumar Sinha, Purushartha Singh and Siddharth Dua, represented the corporate debtor's holding company.

Advocates Pooja Dhar, Anant A Pavgi, Yajura RV, Shagufa Salim and Hariom also appeared for the respondents.

[Read Judgment]