The Insolvency and Bankruptcy Code, 2016 ("IBC") has been lauded for being a transformative legislation in India aimed at resolving corporate insolvency in a time-bound manner while maximizing the value of assets without compromising the interests of other relevant partiesA pivotal ingredient of IBC is the central role played by the Committee of Creditors ("CoC") in the Corporate Insolvency Resolution Process ("CIRP"). The CoC, comprising financial creditors, is empowered to evaluate and select a Successful Resolution Applicant ("SRA") whose resolution plan is deemed viable and in the best interest of all stakeholders. However, the extent of judicial scrutiny in the selection process of SRA by the CoC has been an area of debate and contention.
I. The Role of the Committee of Creditors
After employing its financial prudence, the IBC has given the CoC the mandate to select a suitable resolution plan. The motivating factor for bestowing the aforesaid mandate is that the financial creditors, who are also the primary stakeholders, possess the necessary financial clairvoyance to determine the feasibility and functionality of the resolution plan. The process of selection of the SRA adopted by the CoC is encouraged by the two-pronged objectives of augmenting the value of the corporate debtor's assets and ensuring that the business of the corporate debtor doesn't come to a halt, which would have negative ramifications on the nation's economy.
The IBC has assigned a limited role to adjudicating authorities like the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), in interfering with the commercial decisions of the CoC. Section 30(2) of the IBC mandates that the resolution plan must meet certain statutory requirements, such as providing for the payment of insolvency resolution process costs, repayment of operational creditors, and management of the corporate debtor's affairs. However, The IBC has refrained from providing an exhaustive list of parameters that the CoC must adhere to in selecting the SRA and has encouraged the CoC to act with reasonable autonomy.
II. Judicial Interference: Limited Scope
In line with the legislative intent behind IBC, the Indian judiciary has also encouraged restraint when dealing with questions about the CoC's decision-making process. In the landmark case ofCommittee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors., the Supreme Court of India upheld the primacy of CoC's commercial wisdom.1 The Court ruled that the NCLT and NCLAT cannot substitute their judgment for that of the CoC as long as the resolution plan complies with the statutory requirements under the IBC. The Court clarified that judicial intervention is permissible only in material irregularities but not on the merits of the resolution plan itself.
This principle was further reinforced inK. Sashidhar v. Indian Overseas Bank and Ors., where the Supreme Court held that the CoC's decision to approve or reject a resolution plan is final and binding, and the adjudicating authority cannot question the commercial rationale behind the decision.2 The Court emphasized that the IBC is a creditor-driven process, and the CoC's commercial wisdom cannot be subjected to unnecessary judicial scrutiny without explicit violation of the law.
Recently, the Ld. NCLAT made a crucial observation in Vantage Point Asset Management Pte. And Ors v. Ashish Arjunkumar Rathi and Ors. Further expounded the aforesaid principle.3 It held that the Resolution Applicant's making the highest offer does not create an obligation on the CoC to approve their resolution plan. The Ld. Tribunal further explained that it is unacceptable to assume that the CoC, which is comprised of leading financial institutions, was unable to comprehend the financial aspects of the Resolution Plan.
III. Exceptions to the Rule
While the judiciary has generally adopted a hands-off approach, there are certain exceptions where judicial interference is needed. For example, judicial intervention is encouraged when a resolution plan gives preponderance to a financial creditor over an operational creditor or violates the IBC. Further, the Court's intervention should also correct the CoC's decisions, which seem to be influenced by personal interests and mala fide intentions.
InVijay Kumar Jain v. Standard Chartered Bank, the Supreme Court emphasized that the resolution process is transparent and fair.4 The Apex Court pointed out that while it is imperative to preserve the CoC's financial prudence and decisional autonomy, it is equally important to protect the rights of other stakeholders.
IV. Challenges and Criticisms
Despite the limited scope of judicial interference, there have been instances where the CoC's decisions have been criticized for lacking transparency or favouring certain stakeholders. There have been allegations against CoC that its commercial decision is often impacted by the influence exercised by majority financial creditors, who are more invested in protecting their interests than other stakeholders, including operational creditors and employees. Consequently, more proactive scrutiny of the resolution process has been demanded. Further, the CIRP has also suffered delays due to the absence of explicit guidelines for the CoC to follow while evaluating resolution plans. The absence of these has often resulted in unnecessary protraction of the process. The adjudicating authority's hands have often been forced due to the ambiguities that arose due to the aforesaid problems. This has raised questions about the potential of IBC in achieving time-bound and effective resolution of insolvency.
V. Conclusion
The fetters imposed by the IBC upon the judiciary in intervening with the selection process adopted by the CoC reflect the legislative intent of giving preponderance to the financial prudence of the committee of creditors. The judiciary has consistently upheld the autonomy of the CoC, emphasizing that its decisions are not subject to judicial review unless there is a clear violation of the law or material irregularities. However, the need for transparency, fairness, and accountability in the resolution process cannot be abandoned. The financial prudence and autonomy exercised by the CoC while selecting the SRA has to consider other stakeholders' interests and adhere to the cardinal tenets laid down in the IBC. With the gradual evolution of IBC, a proactive approach that consistently addresses the problems arising out of the resolution process is the need of the hour for sustained economic growth and stability.
Footnotes
1 Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors., 2019 INSC 1256.
2 K. Sashidhar v. Indian Overseas Bank, 2019 INSC 148.
3 Vantage Point Asset Management Pte. And Ors v. Ashish Arjunkumar Rathi and Ors Company Appeal (AT) (Insolvency) Nos. 1619, 1620 of 2024, 1621, 1622 of 2024, 1696
and 1697 of 2024
4 Vijay Kumar Jain v. Standard Chartered Bank and Ors., 2019 INSC 122.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
