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This post is authored by Nikhil S. Javali, third-year student of B.B.A. LL.B. (Hons.), at National Law University, Odisha.
Recently, the Supreme Court in the case of Vallal RCK v. M/s. Siva Industries and Holdings Limited and Others, has reiterated that the Committee of Creditors (CoC) can exercise its commercial wisdom without judicial interference. The court also opined that this unfettered status given to the CoC is to compel them to adhere to the time-frame as prescribed by the IBC. However, as per ICRA’s Report from as recent as April 2022, more than 47% of the cases admitted have ended in liquidation, and the remaining 53% have ended in resolution. These statistics are worrying because the financial resolution is not being achieved to the maximum extent possible which is one of the main objectives of the IBC. Moreover, the unregulated power that the CoC’s commercial wisdom holds is in fact eating up valuable time, which can be crucial for a debt-ridden company. As a result, an unhealthy majority of companies end up selling off their assets and getting liquidated. This article will trace the origin of the concept of commercial wisdom and further argue that this unrestricted power is in fact leading to lower resolution rates. Further, this article will also look at some of the attempts made by the regulators to regulate the CoC and critique them. Finally, an attempt will be made to suggest some changes that can make the CoC more accountable.
1. COC AND COMMERCIAL WISDOM - THE BACKSTORY
The Bankruptcy Law Reforms Committee Report (BLRC Report), which is the bedrock of the IBC, discussed various important stakeholders that the IBC must cater to. One of the most important changes that the IBC brought in, was to shift the focus of the debt recovery process to make it creditor-centric. The BLRC Report discussed that while the negotiations about the financials and viability of the business must be between the debtors and creditors, the final decision regarding restructuring and mode of recovery of the debts must be that of the creditors. In this regard, the IBC has incorporated these suggestions of the BLRC Report and has implemented various provisions to uphold the primacy of the creditors of a corporate debtor (CD). One such provision is the constitution of the CoC by the Interim Resolution Professional or Resolution Professional (IRP/RP) as the case may be. This CoC comprises entirely of the financial creditors of the CD as per section 21(2) of the IBC.
The CoC ultimately decides how the debts of the CD are to be restructured, which resolution plan shall be selected, how the debts are to be repaid, and in what proportion, etc. They take these decisions by exercising their ‘commercial wisdom’. The judiciary has time and again upheld that the CoC enjoys unrestricted freedom while exercising its commercial wisdom during the resolution process. The meaning of ‘commercial wisdom’ was explained by the NCLT in State Bank of India v. Ushdev International Limited, where the court opined that “wisdom is an exercise of prudence based on knowledge, intelligence, brilliance, and acumen-ship, and that the terminology ‘commercial’ is based upon data and figures”. Further, in the landmark decision of K. Shashidhar v. Indian Overseas Bank & Ors., the apex court highlighted the paramount importance of the CoC’s decision-making authority. The extent of this authority was delved into by the apex court in its Committee of Creditors of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta & Ors. (Essar Steel) case. The court laid down three criteria that the CoC must adhere to while making its decision. First, the CoC must ensure that the CD remains a going concern throughout the CIRP. Second, the CoC must strive to maximize the value of the CD’s assets; and thirdly, they must balance the interests of all stakeholders.
2. COC'S UNRESTRICTED POWER - A BANE ON THE RESOLUTION PROCESS?
This unrestricted power of the CoC is a purely judicial creation. The IBC does not explicitly provide unrestricted power to the CoC. In fact, there are no grounds to challenge the CoC’s commercial wisdom within the IBC’s framework. The judiciary, through a series of cases like K. Shashidhar v. Indian Overseas Bank & Ors, the Essar Steel case, Ghanashyam Mishra & Sons Pvt Ltd through the Authorized Signatory v. Edelweiss Asset Reconstruction Co Ltd through the Director & Ors (Ghanshyam Mishra), etc. have reinforced the view that the commercial wisdom of the CoC is non-justiciable. Additionally, the apex court in Ghanshyam Mishra has opined that the tribunals have limited grounds (section 31 and section 61(3) of the IBC) to review the commercial decisions of the CoC. Being one of the most important stakeholders during the resolution process of a CD, the CoC is one such participant in the corporate insolvency resolution process (CIRP) that remains unregulated to date; unlike others involved in the CIRP like the IRP/RP or other Insolvency Professionals (IP). In essence, the RP and the NCLT cannot force the CoC to act in a particular way and serve merely as an approval/facilitator of the insolvency process. For instance, there is little the NCLT or RP can do if there is a delay in approving the resolution plan by the CoC.
There are many instances where last-minute amendments have been made to the resolution plan before approving it, which has led to significant delays. In Bank of Maharashtra Stressed Asset Management Branch v. Videocon Industries Pvt. Ltd. & Others, the NCLAT held that the CoC can reconsider the resolution plan and make changes to it even after the RP puts it before the Adjudicating Authority (AA). In this case, the AA had still not approved the resolution plan, and the CoC had filed a separate application for recalling the Resolution Plan in the intervening period between the CoC having approved the plan and the AA which was yet to approve the plan. Such interpretation only gives further legitimacy to the absolute unchecked power of the CoC, even if it leads to delays. In the above case, the CoC recalled the resolution plan because the creditors realised that their claims were cut by 95%. This is a classic example of a situation when the improper use of the CoC’s commercial wisdom has led to inordinate delays.
In other cases like Jindal Saxena Financial Services Pvt. Ltd. V. Mayfair Capital Pvt. Ltd., and SBJ Exports & Manufacturing Pvt. Ltd. V. BCC Fuba India Ltd, the NCLT pointed out that since the CoC was not sufficiently qualified or apprised of their role as decision-makers, it led to inordinate delays and resulted in depletion of the value of the CD’s assets. These trends show that the lack of accountability or any regulatory check of the CoC has led to a rising trend of delay in resolution proceedings, unfavourable outcomes from the CIRP, and improper decision-making. This leads us to the conclusion that the unchecked commercial wisdom of the CoC is in fact a bane on the resolution process. This begs the question- is it time to regulate the CoC?
The author has highlighted the shortcomings of not adopting the a code of conduct and further suggested a few alternative solutions to the posed problem in the second part of the blog in order to reserve the rights of the CoC as well as other parties involved.
The second part of the blog can be accessed here.