Decoding the Commercial Wisdom of Committee of Creditors: An analysis of Indian & Global Scenarios

Vishawjeet Singh
Advocate and student of Graduate Insolvency Programme (GIP)

The Committee of Creditors (CoC) holds a crucial power, which is the ability to consider and approve a resolution plan for a distressed company under the provisions of Section 30 and Section 31 of the Insolvency and Bankruptcy Code (IBC) [1]. The approval of the resolution plan is subject to final approval by the relevant Adjudicating Authority as per Section 31 of the Code. Since the Code has been in effect, the National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), and the Supreme Court of India (SC) have consistently given weight to the commercial wisdom of the CoC in determining the future course of action for the Corporate Debtor and ultimately bringing resolution to the debt-ridden company.

The focus of this article is to compare the “Indian Scenario vis-à-vis Global Scenario” relating to commercial wisdom of Committee of Creditors during the resolution process of a distressed company and whether the judiciary is required to interfere with the commercial decisions of the Committee of Creditors during or after the completion of process or not.

The NCLT, NCLAT & Supreme Court have time & again stressed upon the ‘supremacy’ of the commercial wisdom of the Committee of Creditors. However, on numerous occasions, the  courts have been tempted to decide on their scope of interference with the commercial decisions of the CoC.

a. Judicial Interpretations and Pronouncements on the Commercial Wisdom of Committee of Creditors

• “Importance of the commercial wisdom” of the Committee of Creditors (CoC) was reaffirmed by the Supreme Court in the case of Vallal RCK v M/s Siva Industries & Anr. (2022)[2], where , the court was presented with the question of whether the Adjudicating Authority could challenge the CoC’s decision to end insolvency proceedings based on a settlement agreement. The Supreme Court ruled that the Adjudicating Authority, when evaluating an application under Section 12A of the Insolvency and Bankruptcy Code (IBC), cannot examine the substance of a settlement plan approved by the CoC.
• The Supreme Court in Ashish Saraf v. Bhuvan Madan (2021)[3] upheld the decision of NCLAT, where Appellate Authority stated that the “committee of creditors holds the responsibility of making business decisions” regarding the approval or rejection of a resolution plan. This decision involves assessing the feasibility of the resolution plan and is considered non-justiciable. Therefore, the commercial wisdom of the committee of creditors cannot be challenged, even if they reject a settlement proposal that is supported by the majority of appellants and instead approve a resolution plan proposed by another party. The appellants do not have the authority to challenge the committee’s decision in such matters.
• Even, prior to that the Supreme Court dealt with the important question of judicial review of Commercial decisions of the Committee of Creditors in K. Sashidhar v. Indian Overseas Bank (2019)[4],wherein, it is declared that the decision of the “CoC’s commercial wisdom is non-justiciable” and that neither the NCLT nor the NCLAT has the authority to reverse it. The amendment to Section 30(4) of the IBC, which was introduced by the IBC (Second Amendment) Act in 2018, simply restated the factors that the CoC must consider while evaluating a resolution plan and does not grant the tribunals a jurisdiction over the commercial wisdom of the CoC. Under the IBC and the regulations framed thereunder, there was no requirement for financial creditors who disapproves or reject a resolution plan to provide a justification or explanation for their decision.
• The Supreme Court, in its significant decision in the case of Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta & Ors (2019)[5], thoroughly discussed the relevancy of the commercial wisdom of the Committee of Creditors (CoC) and stressed upon that the tribunal must work within the framework of IBC and are not entitled to travel beyond the jurisdiction. The Hon’ble Apex Court specifically ruled that the NCLT must limit its judicial review to the parameters outlined in Section 30 (2) of IBC, while the NCLAT must adhere to the guidelines set forth in Section 32 in conjunction with Section 61(3) of the IBC. Additionally, the Supreme Court stated that the NCLT and NCLAT must never interfere with a commercial decision made by the majority of the CoC.
• The Apex Court also dealt with the issue whether NCLAT can intervene in commercial decisions made by the Committee of creditors in another matter of Kalpraj Dharamshi (2021)[6]. The following are the facts of this case:
• Ricoh India Ltd, the Corporate Debtor, filed an application under section 10 of the IBC to commence its own CIRP, which was subsequently accepted by the NCLT.
• After the formation of the CoC, different Resolution Plans were proposed by several parties such as Mr. Kalpraj Dharamshi and Ms. Rekha Jhunjhunwala’s group (Kalpraj), Kotak Investment Advisors Ltd (KIAL), Karvy Data Management Systems Ltd, and WeP Solutions Ltd. However, Kalpraj’s Resolution Plan was submitted after the designated deadline, prompting objections from KIAL. As a result, the CoC instructed all parties to resubmit their revised plans.
• Following this, the Resolution Plan put forth by Kalpraj was sanctioned by the CoC and presented for approval to the NCLT by the RP. However, KIAL raised an objection to the acceptance of the plan, which was turned down by the NCLT. KIAL was not satisfied with this outcome and, as a result, filed a Writ Petition with the Bombay High Court. Nevertheless, the court dismissed the petition because it found that KIAL had an effective and alternate remedy, which was to file an appeal with the NCLAT.
• Following this, KIAL appealed to the NCLAT, which overturned the NCLT’s ruling and instructed the CoC to reconsider its decision solely based on Resolution Plans that were submitted within the designated timeframe.
• Kalpraj and others were dissatisfied with the NCLAT’s verdict and consequently filed appeals with the Supreme Court.
• The Hon’ble three-judge bench of the SC, in the aforesaid case, confirmed that the CoC’s commercial decision should not be interfered with except limits set forth in Sections 30 and 31 of the IBC. Furthermore, it was ruled that the NCLAT’s decision was unlawful and exceeded its jurisdiction by interfering with the CoC’s commercial decision-making.

b. “Glimpses of Best Practices in Some of the Developed Insolvency Resolution Regimes Across the World”

As can be seen from the above that the Hon’ble Supreme Court has given its jurisprudence supporting the commercial wisdom of the CoC time & again. Now we will consider some of the best practises around the world deliberating on the power and functions of the Creditor’s Committee.

United Kingdom

The ‘formal insolvency process’ in the UK is known as “administration” [7]. The main goal of this process is to either rescue the company and keep it as a going concern, or to provide a more favourable outcome for its creditors than if the company were to be liquidated. If neither of these options is feasible, the ‘administration process’ can involve selling-off the company’s assets to pay one or more secured creditors. The administration process is designed to balance the interests of all parties involved while maximizing the value of the company as a going concern.

According to the statute, the ‘Administrator’ is responsible for acting in the best interests of all creditors. This requires the administrator to act with good faith, fairness, and impartiality when managing the company and its assets. The administrator must also carry out their duties quickly and efficiently. They have broad powers to take any necessary actions for the management of the company’s affairs, business, and property. Thus, the broad scope of the administrators duties allow him to exercise good business judgement. ‘Creditors committee’ can be established by the Creditors of the company, however, their power is ‘limited to assist’ the administrator in discharging his duties.

Simultaneously, to “prevent the abuse of the administrator’s extensive powers”, the creditors have the right to challenge his administrative actions. They can do so by applying to the court, if they believe that the administrator’s conduct has harmed a creditor’s interests and if there has been any wrongdoing or malfeasance by the administrator.

Singapore

The insolvency process in Singapore is called “judicial management” and is supervised by the court [8]. Similar to the CIRP, the objective of the judicial management process is to rehabilitate financially distressed companies. The judicial manager, a licensed insolvency practitioner, oversees the judicial management process and has a broad range of responsibilities, including managing the company’s affairs, business, and property, taking over the director’s functions, and performing all duties in the best interests of the company’s creditors.

To Summarize, the judicial manager carries out the same responsibilities as that of the RP, as well as exercises the commercial wisdom of the CoC, all within the overall supervision and active participation of the court.

United States of America

In the ‘formal insolvency regime’ of the United States of America, chapter 11- reorganisations or Chapter-7 liquidation survey are the main options for corporate reorganisation. Chapter 11 deals with the reorganisation of the corporate entities in the similar manner as that of the CIRP under Indian Insolvency regime while the purpose of chapter 7 is to optimise the recovery of different creditors of the debtors vis-à-vis liquidation.

Chapter 11 provides for a provisions, where the debtor remains in the control of the business operations and repays the creditor via a reorganisation plan approved by the court. The US Trustee, an official from the US Department of Justice, has the duty of overseeing the development of a Chapter 11 case and managing the operations of the debtor-in-possession’s business. The court may appoint an examiner to investigate in cases of fraud, mismanagement in competence by the debtor. The court can also order the takeover of the management of the debtors business by the trustee. When a trustee is appointed, the debtor forfeit its authority to be in control and is obliged to transfer the management of its business to the trustee. The trustee takes the place of the debtors board of directors and takes on the responsibility of the businesses, executive leadership and administration in a way that is comparable to the RP during CIRP in India.

The US bankruptcy code stipulates in Section 1129 (a) (7) that a reorganisation plan must fulfil specific criteria to be accepted, such as obtaining the vote of at least one impaired class in the event of any impaired classes under the plan [9].

Under US low, a committee of unsecured creditors can be established to Advocate for the benefits of all general and secured creditors and maximise their returns. The creditors committee typically assumes an active role in representing the interests of the creditors.

As can be seen that Creditors’ Committee play active role in decision making and fast tracking the insolvency process in various regimes. In UK, creditors’ committee has limited role i.e. to assist the Administrator (insolvency professional) in carry out his duties and can only ask the court for appropriate action in case Administrator misuses its power while in Singapore Judicial Manager (Insolvency Professional) performs both function of management of assets of the debtor as well as exercising the commercial wisdom of the CoC. On the other hand, US Bankruptcy regime is debtor friendly and provides for engaged participation and some degree of power to the unsecured creditors.

Conclusion

Indian courts by giving primacy to the “commercial wisdom” has unlocked unlimited power of the CoC. For example, in the case of Kalpraj Dharamshi, the SC permitted the acceptance of resolution plan even after the deadline based on the commercial decision of the CoC),  which fails to address the crucial objective of the Code i.e. timely resolution of the Corporate Debtor. In Committee of Creditors of Essar Steel, the Supreme Court has curtailed the scope of judicial review concerning CoC decisions to Section 30(2).

In addition, the courts have neglected to consider the rationale underlying the commercial decision of the COC, and there are no regulations or guidelines in place for evaluating the decision-making procedure of the CoC.

A proper code of conduct needs to be framed for CoC to promote transparency & fairness in the insolvency process. To keep the powers of CoC in check IBBI can restrict the decision-making power of CoC with some guiding principles. IBBI could consider adopting the following suggestions:

• Similar to the practice in the UK of an Administrator, specific criteria could be established to judge the commercial decisions of the CoC.
• It is possible to consider implementing certain guiding principles for the CoC that are similar to the US Code, specifically Section 1129(a)(7).
• Commercial decision of the CoC must be supported by sound justification.

 

References

1. Insolvency and Bankruptcy Code, 2016.
2. (2022) ibclaws.in 63 SC
3. (2022) 10 SCC 493
4. (2019) ibclaw.in 08 SC
5. (2019) ibclaw.in 07 SC
6. (2021) ibclaw.in 40 SC
7. Insolvency Act, 1986
8. Insolvency, Restructuring & Dissolution Act, 2018
9. “Section 1129(a)(7),” in US Bankruptcy Code.

 

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