Primacy of Decision of Adjudicating Authority over Committee of Creditor’s in modifying Resolution Plan : A Legal Conundrum
Under Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code) the Committee of Creditors (hereinafter referred to as CoC), consisting of financial creditors of the corporate debtor, are constituted. CoC under the Code take decisions regarding the various tasks involved in Corporate Insolvency Resolution Process (CIRP) which includes approval or rejection of proposed resolution plan. When CoC, by not less than 66% of vote, approves the resolution plan proposed by a Resolution Applicant, they send it to Adjudicating Authority (NCLT) which either approves it or rejects it. When the resolution plan approved by the CoC meets the requirement of Section 30(2), then the Adjudicating Authority shall approve it and if it does not then reject it. But the law is silent on whether the Adjudicating Authority can modify the resolution plan without the consent of CoC? The legislators might not have been forseen that such muddle may arise. And even the guidlelines of Insolvecy and Bankruptcy Board of India are silent on this issue.
POWER UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016
According to the provisions of the Code, the Adjudicating Authority, on receiving the resolution plan approved by the CoC, should enquire whether the resolution plan has garnered the support of not less than 66% of members of Committee of Creditors and met the requirements under Section 30(2) viz. 1) It must provide for payment of insolvency resolution process, 2) It must provide for the payment of debts of operational creditors, 3) It must provide for the management of the affairs of the Corporate debtor after approval of resolution plan, 4) Implementation and supervision of the resolution plan, 5) It must not contravene any other provision of the any law, and 6) It should conform to such other requirements as may be specified by Insolvency and Bankruptcy Board of India. However, no provision of the Code empowers the Adjudicating Authority to modify the approved plan with or without the consent of CoC. Thus, the Adjudicating Authority can either accept or reject the approved plan but not more than that. Reference can be made to the report of Bankruptcy Law Reforms Committee of November 2015 to accentuate the legislative intent behind the Code. According to this report, the business decision of appropriate disposition of a defaulting firm should be made only by the creditors. The final decision regarding the viability of the enterprise (corporate debtor) has to be an agreement among creditors as they are the one who is going to bear the loss in the insolvency. The legislature and the courts must control the process of resolution but not be burdened to make business decisions.
The Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India has recognized the fact that Appellate Authority (NCLAT) modifies the resolution plan to safeguarding the rights of operational creditors. The interest of operational creditor is what needs to be considered by Appellate Authority under section 30(2)(b) while approving or rejecting the approved resolution plan. But the Court didn’t discuss questions such as can modification be done in other general cases on the grounds not mentioned under Section 30(2), or without the approval of CoC. However, in K. Sashidhar v. Indian Overseas Bank, while dealing with the scope of judicial review by the adjudicatory authority in relation to the opinion expressed by committee of creditors on the proposal for approval of the resolution plan has observed that legislature consciously has not provided any grounds to challenge the “commercial wisdom” of the individual financial creditor or their collective decision as they are assumed to be fully aware of the viability and feasibility of proposed resolution plan and their action is based on the meticulous examination and assessment made by their team of experts of the proposed resolution plan. Therefore an Adjudicating Authority neither can make any inquiry other than enquiring into resolution plan approved by CoC on the limited grounds mentioned in Section 30(2) read with Section 31(1) nor it is competent to issue any directions to the exercise of commercial wisdom of the financial creditors be it for approving, rejecting or abstaining, as the case may be.
PROBLEMS IN MODIFYING THE APPROVED RESOLUTION PLAN
Following muddles may hinder the Adjudicating Authority to modify the approved resolution plan without the consent of CoC:
- No provisions of Insolvency and Bankruptcy Court empowers the Adjudicating Authority to modify plans approved by the committee of creditors. Even the Apex Court is of the view that such powers are not to be exercised by Adjudicating Authority. Thus, modification of approved resolution plan without the approval of CoC is outside the scope of jurisdiction of Adjudicating Authority and the Appellate Authority (NCLAT).
- Modification of an approved resolution plan would mean questioning the commercial wisdom of the financial creditors and their team of expert.
- If the Adjudicating Authority keeps on modifying the resolution plan according to their mind then there would not left any purpose for constitution and existence of CoC.
- Financial Creditors (members of CoC) are the person who is going to suffer the loss and therefore has substantial interest in any resolution plan. This is also one of the reasons why CoC are constituted. Therefore, they are the best person to decide the plan which would affect them subject to considering the interest of operational creditors.
- Approval of the resolution plan would mean approval from large number of persons who are experts in the matter. Therefore, the overall expertise approving the resolution plan can be said to outweigh the overall expertise of members of Adjudicating Authority and Appellate Authority, as the case may be.
Considering the overall architecture of the Insolvency and Bankruptcy Code, 2016 and the Court evolved jurisprudence, it is clear that the Adjudicating Authority is not empowered to modify the resolution plan approved by the Committee of Creditors. The Adjudicating Authority in cases thinks that the approved resolution plan requires certain modifications then 1) if the approved resolution plan meets the requirement of Section 30(2), may make suggestions regarding the modification of plan, which CoC would not be bound to accept and the Adjudicating Authority shall require to accept the plan without modifications; or 2) if the approved resolution plan does not fulfill the requirement of Section 30(2) than to protect the corporate debtor from liquidation may make suggestions to CoC to modify the plan accordingly or can reject it. Thus, Adjudicating Authority cannot turn down a plan approved by CoC, by not less than 66%, for any reason beyond non-compliance of section 30(2). And, therefore, it would not be incorrect to say that the primacy in approving or rejecting the resolution plan is given to CoC over Adjudicating Authority and this primacy of CoC is recognized as bedrock of the Code. Any other view would lead to frustration of the purpose of CoC.
 Section 21, Insolvency and Bankruptcy Code, 2016.
 Section 30(6), Insolvency and Bankruptcy Code, 2016.
 Section 31, Insolvency and Bankruptcy Code, 2016.
 (2019) 4 SCC 17.
 2019 SCC OnLine SC 257.
Harsh Kumar Patidar
Sem VII B.A.LL.B.(Hons)
National University of Study and Research in Law, Ranchi (Jharkhand)
Contact: +91-6260539052, +91-9669992990
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