This article has been written by Sadhak Sharma pursuing the Certificate Course in Insolvency and Bankruptcy Code from LawSikho.

Introduction

The Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) marks a significant shift in the process of management of insolvency of a company. Among various other statutes, the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the “SICA”) was brought in to identify and revive sick or potentially sick companies. Under the SICA, the Board for Industrial and Financial Reconstruction (hereinafter referred to as the “BIFR”) was constituted which had the responsibility and ultimate power to manage the debts and insolvency procedure of a sick industry. Section 15 of the SICA gives power to the BIFR for determining measures that should be taken with respect to the sick company. Further, under Section 16(2) of SICA, the BIFR may appoint an operating agency that can consist of either a public financial institution, scheduled bank or a State level institution. The operating agency is inter alia empowered to prepare a Draft Rehabilitation Scheme to revive the sick unit i.e. there are no concrete decision-making powers vested with the creditors of the sick company.

The SICA was repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 and now the Code regulates the insolvency process of companies among others. Under the provisions of the Code, all major decisions with respect to the Corporate Debtor are taken by the Committee of Creditors (CoC). Such wide powers are given under the Code because it is assumed that Financial Creditors who constitute the CoC are commercially most competent to decide about the viability of the Corporate Debtor. The CoC is empowered to approve a Resolution Plan to revive the Corporate Debtor and there are very limited grounds under Section 30(2) r/w Section 31 of the Code to such approval by the CoC before the Adjudicating Authority. It has been observed that the Legislature has given finality to the commercial wisdom of the CoC and such commercial decisions are non-justiciable.[5]However, the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors laid down certain principles which if not taken into consideration by the CoC, judicial review of CoC’s commercial wisdom can take place.

Essar Steel case: a landmark judgment recognizing the significance of CoC’s commercial wisdom

The Supreme Court in the Essar Steel case held that when a Corporate Debtor is in the resolution process under the Code, the ultimate authority to make business decisions with respect to the Corporate Debtor lies only with the CoC. The Court categorically stated that a decision to revive and rehabilitate a Corporate Debtor by accepting a Resolution Plan or initiate a liquidation process lies solely within the commercial wisdom of the CoC. It is pertinent to note that the administration of the day-to-day business of the Corporate Debtor is conducted by the Resolution Professional but certain decisions with respect to the management of the Corporate Debtor can only be taken with the approval of the majority of the CoC. Further, a Resolution Plan which aims to rehabilitate the Corporate Debtor is also approved only by the majority vote of the CoC. The Court further observed that because the CoC consisting of Financial Creditors is well aware of the financial condition of the Corporate Debtor, only the CoC is best suited to decide upon the “feasibility and viability” of the Resolution Plan. Therefore, ultimately it is the CoC that is in the driver’s seat determining the financial fate of the Corporate Debtor.

The Court reaffirmed the K Shashidhar decision that the validity of approval of a Resolution Plan by the CoC can be reviewed by the Adjudicating Authority on limited grounds provided under Section 30(2) of the Code but the Court herein went a step ahead and held that judicial review of a Resolution Plan should also be tested on the ground that it “does not contravene any provisions of the law” under Section 30(2)(e) of the Code. The Court held that though it cannot go into the merits of the decision taken by the CoC in their commercial wisdom but the objectives of the Code such as maximization of value of assets of the Corporate Debtor etc. if not taken into consideration, the Adjudicating Authority can review the said decision. The scope of Section 30(2)(e) of the Code was explained by the Court to include the following which must be strictly ensured by the CoC when a Corporate Debtor is being resolved under the Code:

1. The Corporate Debtor should continue as a going concern during the resolution process,
2. Maximization of the value of the assets of the Corporate Debtor, and
3. Interests of all stakeholders must be balanced. 

Therefore the Court categorically held that financial decisions with respect to the Corporate Debtor are taken only by the CoC and that their commercial wisdom remains sacrosanct. The commercial wisdom of the CoC is subjected to a very limited judicial review under Section 30(2) r/w Section 30(2)(e) of the Code. However, it is also pertinent to note that once the Adjudicating Authority forms an opinion that the proposed Resolution Plan does not conform to Section 30(2)(e) of the Code, it can only send the Resolution Plan back to the CoC asking it to re-submit it after confirming to the principles mentioned therein; the Adjudicating Authority cannot amend the Resolution Plan on its own accord.

Validity of decisions taken by COC: NCLAT in Jayanta Banerjee case

A recent decision of the NCLAT in the matter of Jayanta Banerjee v. Shashi Agarwal, Liquidator of INCAB Industries Limited & Anr held that decisions taken by the CoC cannot be immune from judicial review on the ground of supremacy of commercial wisdom of the CoC if the said CoC was constituted in violation of provisions of the Code. It was held that if the provisions of the Code and Regulations thereunder are disregarded while constituting the CoC, such CoC is a “nullity in the eye of law” and the entire CIRP is vitiated.

In this instant matter, the Resolution Professional had constituted the CoC without properly verifying the claims submitted. As a result of which two Financial Creditors who qualified as a ‘related party’ became part of the CoC. Subsequently, the CoC decided to liquidate the Corporate Debtor which was thus challenged. The NCLAT held that the constitution of CoC was in violation of Section 21(2) of the Code r/w Regulation 12(3) of CIRP Regulations, 2016 thus vitiating the entire CIRP. It was further held that because the “illegally constituted” CoC took decisions during the CIRP of the Corporate Debtor, all such decisions cannot be validated on the ground of commercial wisdom and the decision to liquidate by the CoC was set aside.

Another recent decision of the NCLT Chennai in the matter of M/s. Siva Industries and Holdings Ltd. case rejected the application filed by the CoC under Section 12A of the Code on the ground that the proposal accepted by the CoC was a “business restructuring plan” rather than a settlement.  It was held that such a proposal goes beyond the scope of the Code and where any decision is taken by the CoC which is beyond their powers and scope of the Code, it cannot be approved on the ground of supremacy of commercial wisdom.

Therefore, it can be observed that only a proposed Resolution Plan violates the grounds mentioned under Section 30(2) r/w Section 30(2)(e) of the Code or when the CoC exercises its powers beyond the scope of the Code irrespective of the sanctity of commercial wisdom of the CoC, such decisions are liable to be set-aside by the Adjudicating Authority.

Conclusion

The sanctity of the decisions of the CoC has been upheld by various decisions of the Supreme Court and it is well settled now that commercial wisdom of the CoC cannot be reviewed except on limited grounds. The CoC under the provisions and objectives of the Code is an expert committee and its decisions can and should not be challenged on vague and ambiguous grounds.

The decision of committed creditors, apprehended to be tainted, cannot be validated on the pretext of commercial wisdom only under certain limited grounds under the Code. As mentioned above, the commercial wisdom of CoC can only be challenged on limited grounds mentioned under Section (2) r/w Section 30(2)(e) of the Code or when the decision has been made beyond the scope of the Code. Therefore, the decision of the CoC can only be challenged on statutory grounds and limits under the Code. Even if a broad interpretation is given to the principles provided in Essar Steel under Section 30(2)(e) of the Code, the Adjudicating Authority can read such principles only in light of the provisions of the Code and cannot go beyond them.

An interesting example where even though the Adjudicating Authority had reasons to believe that confidentiality of liquidation value was violated in the matter of Videocon Industries Ltd. and that decision could have been tainted but because there was no statutory ground under the Code to either enquire into or set aside the decision of the CoC, all the Adjudicating Authority could do was ask the IBBI to study the matter of confidentiality in-depth and propose amendments to the Code and CIRP Regulations.

Therefore, in my opinion, the sanctity of the commercial wisdom of the CoC must always be maintained and the Court should ordinarily not review commercial decisions of the CoC because the Court is not an expert in the commercial environment. Further, there are safeguards already in the Code and through judicial pronouncements which ensure that decisions are not taken by the CoC which are in violation of the provisions and objectives of the Code. Therefore, the Courts must only review the decision of the CoC when the specific grounds under the Code are violated or if the decision was made beyond the scope of the Code. Thus, even though the commercial wisdom of the CoC is given supremacy but the same cannot be immune from judicial action in toto if the provisions and principles of the Code are violated.

References

1. https://astrealegal.com/revival-and-rehabilitation-of-sick-industrial-companies/.
2. Shivani Kumar, Analysis of Power of Committee of Creditors, IBC Laws; available at: https://ibclaw.in/analysis-of-power-of-committee-of-creditors-mr-shivani-kumari/.
3. Decisions of CoC constituted in violation of IBC cannot be validated on pretext of commercial wisdom, ReedLaw; available at: https://www.reedlaw.in/post/decisions-of-coc-constituted-in-violation-of-ibc-cannot-be-validated-on-pretext-of-commercial-wisdom.
4. IBC Newsletter, ReedLaw; available at: https://library.nalsar.ac.in/storage/2021/06/REEDLAW-IBC-Newsletter-1-13-June-2021.pdf.

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