Commercial Wisdom of the CoC is the last words under CIRP

In 2016, the law of insolvency and bankruptcy, a legal regime that had been long forgotten, was unified and codified in the form of the Insolvency and Bankruptcy Code, 2016 which laid that If there is a case of any defaults in paying a debt, financial and other creditors of Corporate Debtor or the Corporate Debtor itself can seek resolution, following the provisions of the Insolvency and Bankruptcy Code, 2016 wherein, such Corporate Debtor by initiating the Corporate Insolvency Resolution Process and engaging independent Resolution Professional for a period of 180 days, which may be extended to a maximum of 330 days. During the process of CIRP, the Interim Resolution Professional constitutes the Committee of Creditors i.e., CoC which is a committee consisting of the financial creditors of the Corporate Debtor and is the decision-making body regarding the administration of the Corporate Debtor, based on a majority vote of the members.

As per the Code, the Parliament had devised a new method for empowering the financial and other creditors of a company, to seek resolution of a company by engaging independent professionals to take charge of the company from the board of directors, when the company had defaulted in paying a debt for an amount over INR 1,00,000/- (Rupees One Lakh Only). All the creditors of such a company were created into an organism and that has been referred to as the Committee of Creditors of the company.

The supremacy of commercial wisdom of the CoC has been reaffirmed time and again by the NCLT, National Company Law Appellate Tribunal and the Supreme Court. However, on numerous instances, the courts have been tempted to adjudicate upon the extent of its interference in the decision made by the CoC which shall be explained in the sub-heading of judicial intervention.

ROLE OF CoC

The CoC has been enabled under the Code, as the board of directors, to take the decisions in respect of the Corporate Debtor, during the currency of the corporate insolvency resolution process. As a part of this enabling system, the Adjudicating Authority while commencing the process of CIRP for a company, appoints a resolution professional, who coordinates and executes all the decision making during the CIRP and thereby conducts the CIRP of the company. In respect of numerous aspects, the Resolution Professional is bound to take the prior approval of the CoC, as per Section 28 of the Code wherein the power lies in the hands of the CoC to consider and then approve a Resolution Plan by a vote of 66 % of the voting shares, in accordance with sections 30 and 31 of the IBC. However, this is subject to the final approval of the Resolution Plan by the concerned National Company Law Tribunal. Taking a leave from the earlier regimes of Corporate Debt Restructuring and Strategic Debt Restructuring, as prescribed by the Reserve Bank of India (RBI), the Code also vests the supreme authority to make decisions in respect of the Corporate Debtor in the CoC.

THE SUPREME NATURE OF COMMITTEE OF CREDITORS (CoC)

The Bankruptcy Law Reforms Committee was tasked with the onerous responsibility of rewiring the insolvency and bankruptcy framework in India. The BLRC presented an exhaustive report in November 2015 for crafting a comprehensive code – the BLRC Report pegged the creditors of the defaulting firms as the most qualified persons to address various situations arising while handling default in repayment by firms and individuals.

The Committee of Creditors was fashioned as one of the steering bodies driving the insolvency process under the Insolvency and Bankruptcy Code, 2016. This vision is captured in various provisions of the IBC, underscoring the significance accorded to the CoC throughout different stages of the Corporate Insolvency Resolution Process (CIRP) in Part II (corporate persons) and Part III (individuals and partnership firms) of the IBC.

JUDICIAL SCRUTINY OF CoC

Under sections 18(c) read with 21, the Interim Resolution Professional is required to constitute a CoC once all claims against the corporate debtor are collated. Typically, all the financial creditors make up the CoC and each financial creditor wields voting rights in proportion to the financial debt owed to them. In the event that a corporate debtor does not have any financial creditors, the proviso to section 21(8) contemplates that a CoC will be constituted in terms of regulation 16 of The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

As a rule of thumb, every act of the Resolution Professional in conducting the day-to-day business of the corporate debtor during CIRP must have clearance from the CoC. Specifically, section 28 enumerates a set of actions that cannot be performed without prior approval from the CoC, say, the creation of security interest over the corporate debtors’ assets, change in ownership of the corporate person, undertaking related party transactions, etc. This confirms that the CoC remains in charge of the acquisition of assets and liabilities. The RP, on the other hand, is primarily responsible for the day-to-day operations of the Corporate Debtor, to maintain it as a going concern.

The CoC stays at the helm of all affairs, even where the proceedings transition out of CIRP to the stage of resolution/liquidation. As per section 30(4), the CoC must approve the proposed resolution plan by at least 66% majority after considering its feasibility and viability. Once the CoC approves the resolution plan, the RP is bound to place the resolution plan before the NCLT for due approval under section 31, whose power is very limited in scope. Once the NCLT approves the resolution plan as approved by the CoC, the said resolution plan becomes binding on all stakeholders.

The 2016 Regulations stipulate the conduct of CoC meetings, contents of a resolution plan, etc. regulation 39 (3) states that the CoC must appraise the proposed resolution plans by strictly measuring them against the evaluation matrix and approve the best resolution plan with appropriate modifications. Any modifications mooted by the CoC while approving the resolution plan are not subjected to examination on any count. However, the RP is required to confirm that the resolution plan conforms to the IBC Code, its Regulations and that it does not violate any other law.

Significantly, the IBC does not subject the resolution plan per se to judicial scrutiny and the limits of judicial review have been circumscribed to the parameters in Section 30(2) and Section 61(3) of the IBC. In this manner, the IBC has cordoned off the entire bankruptcy framework so that once the CoC is constituted as per section 21, the CoC possesses exclusive access to negotiations and retains the final hand in dealing with business decisions.

KEY INSTANCES OF JUDICIAL INTERVENTION

While the scope of enquiry to be made by the Adjudicating Authority has been prescribed in the Code; the scope for challenging the approval of the resolution plan before the Appellate Authority has also been enumerated under section 61 (3) of the Code. While exercising their power under the Code, the Adjudicating Authority and the Appellate Tribunal have on numerous occasions been tempted to adjudicate the extent of interference that may be permitted in such cases.

In K. Sashidhar v. Indian Overseas Bank and Others, REED 2021 SC 02502, which involved a critical question on the scope of judicial scrutiny over a commercial decision taken by the CoC to approve or reject a Resolution Plan in which the senior counsel appearing for workers union contended that, the resolution plan manifests that the company is a viable company and all efforts should be made to revive the company and not to shove it into liquidation because of the whims and fancies of the minority financial creditors or, for that matter, in the guise of their commercial wisdom. Reliance is placed on United Bank of India, Calcutta v. Abhijit Tea Co. Pvt. Ltd. and Other, (2000) 7 SCC 357 Paragraph 20 and Karan Singh and Others v. Bhagwan Singh (Dead) By Lrs. and Others wherein Hon’ble Supreme Court noted that legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable. The Hon'ble court opined that neither the adjudicating authority (NCLT) nor the appellate authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the 70 dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors & clarified that the amendment made to section 30 (4) of the IBC - which came into force w.e.f. June 6, 2018, vide the IBC (Second Amendment) Act, 2018 and introduced the requirement for the CoC to consider the feasibility and viability of a Resolution Plan before its approval - was simply a restatement of the factors that the CoC is required to bear in mind while considering approval of a Resolution Plan.

This judgment has been followed in numerous cases by the Adjudicating Authorities and the Appellate Tribunal. Thereafter, the Hon’ble Supreme Court reaffirmed this view in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REED 2019 SC 11505, holding that, it is clear that the limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned.

This judgment has been followed in various decisions by the NCLT and NCLATs, and this view was reaffirmed by the Supreme Court in Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh and Others, REED 2020 SC 01501.

In a similar vein, a recent case of Kalpraj Dharamshi and Another v. Kotak Investment Advisors Limited and Another, REED 2021 SC 03545, involving, inter alia, the question as to whether the NCLAT can interfere with commercial decisions taken by the CoC was raised again before the SC. The three-judge bench of the SC upheld that the commercial wisdom of Coc is not to be interfered with, other than in the limited scope as provided under sections 30 and 31 of the IBC.

In addition, no circumstance could trespass upon a business decision of the majority of the CoC. The Apex Court further observed that the Learned Adjudicating Authority cannot interfere on merits with the commercial decision taken by the CoC, the limited judicial review available is to see that the CoC has taken into account the following factors:

• that the Corporate Debtor needs to continue as a going concern during the insolvency resolution process;

• that it needs to maximize the value of the assets of the Corporate Debtor; and

• that the interests of all stakeholders including operational creditors have been taken care of.

In another recent case of Ghanashyam Mishra & Sons Pvt Ltd through the Authorized Signatory v. Edelweiss Asset Reconstruction Co Ltd through the Director and Others, REED 2021 SC 04534, the Supreme Court referred to its previous decisions and reasserted that the legislature has given paramount importance to the commercial wisdom of CoC and the scope of judicial review by Adjudicating Authority is limited to the extent provided under section 31 of I&B Code and of the Appellate Authority is limited to the extent provided under sub­section (3) of section 61 of the I&B Code, is no more res integra.

In an apparent salute to the CoC’s commercial wisdom being ultimate, a Larger Bench of the Hon’ble Supreme Court in Karad Urban Cooperative Bank Ltd. v. Swwapnil Bhingardevay, REED 2020 SC 09501. Drawing heavily from its earlier decisions in K. Sashidhar v. IOB and Others and in The Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta, the Larger Bench of the Hon’ble Apex Court described NCLT as laying the principles in the aforesaid decisions, make one thing very clear. If all the factors that need to be taken into account for determining whether or not the corporate debtor can be kept running as a going concern have been placed before the Committee of Creditors and the CoC has taken a conscious decision to approve the resolution plan, then the adjudicating authority will have to switch over to the hands-off mode.

CHECKS AND BALANCES ON THE POWER

The Code under section 30(4), obliges the CoC to assess the viability and feasibility of the Resolution Plan. In respect of the same, the Code prescribes the manner in which the Resolution Plan will be evaluated (described in the Evaluation Matrix). On the basis of the score of the different resolution applicants, the CoC if approves a resolution plan by a vote of not less than seventy-five sixty-six per cent; then the same is required to be placed before the Learned Adjudicating Authority (under section 31).

The Learned Adjudicating Authority is required to satisfy itself whether the approved resolution plan meets the following requirements [as provided in section 30(2) of the Code] and provides for means for its effective implementation:

• provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor;

• provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;

• provides for the management of the affairs of the corporate debtor after approval of the resolution plan;

• the implementation and supervision of the resolution plan;

• does not contravene any of the provisions of the law for the time being in force;

• conforms to such other requirements as may be specified by the Board.

The Resolution Professional in the earlier part of CIRP submits a report on the compliance of section 30(2) of the Code before the CoC [as per section 30(2) of the Code]. Once the Adjudicating Authority approves the Resolution Plan, the same bind the corporate debtor, its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.

CONCLUSION

The recent judgments of Kalpraj, REED 2021 SC 03545, and Ghanashyam, REED 2021 SC 04534 have once again reinforced the primacy of commercial wisdom of the CoC. Arguably, the most crucial decision taken by the CoC is the approval or rejection of the Resolution Plan. The question regarding the autonomy of the CoC vis-à-vis the jurisdiction of the NCLT/NCLAT has been consistently dealt with by the courts and the commercial wisdom of the CoC has been given paramount status without any judicial intervention for ensuring completion of the CIRP within the prescribed timeline. It is now a settled law that in so far as the feasibility and viability of the Resolution Plan is concerned, the CoC is the expert body to determine whether the Resolution Plan is viable and feasible, as the CoC alone can deal with the underlying technical complexity and merits. Thus, the responsibility that has been placed upon the CoC is one that it cannot shy away from and cannot be questioned, except on limited grounds.

However, the question then arises is whether the said power is unfettered or like every other power required to be balanced with necessary checks and balances. These have been considered in some cases by the Adjudicating Authority, the Appellate Tribunal and the Hon’ble Supreme Court and shall be brainstormed about in our next release. Conclusively, The IBC portends a seismic shift in the approach to insolvency resolution and bankruptcy for non-financial entities and persons in India– the financial creditors wield full control over all commercial decisions concerning the resolution of debts, and an approved resolution plan will bind all stakeholders. The adjudicating and appellate authorities are enabled to control the process of resolution without trespassing into the domain of making business decisions. The RP and IRP are appointed as focal points of contact facilitating the entire process. The erstwhile management is retained as a bridge to the transactional history of the corporate debtor. Thus, if the Adjudicating Authority or the Appellate Tribunal finds, in a given set of facts, that the aforesaid parameters have not been considered or have been breached; then it has also the power to reject the Resolution Plan or send it back to the CoC if the time permits.