Knowledge Centre

Committee of Creditors: Role and Commercial Wisdom

INTRODUCTION

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 (‘Code’). The first set of provisions of the Code came into effect from 05.08.2016. Majority of the Part I (Preliminary) and II (Insolvency Resolution And Liquidation For Corporate Persons) of the Code had come into effect by 15.12.2016.

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 professional 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)[1]. All the creditors of such a company were created into an organism and that has been referred to as Committee of Creditors (‘CoC’)[2] of the company.

ROLE OF THE COC

The CoC has been enabled under the Code, like the board of directors, to take the decisions in respect of the Corporate Debtor, during the currency of the corporate insolvency resolution process (‘CIRP’). As a part of this enabling system, the Adjudicating Authority while commencing the process of CIRP for a company, appoints a resolution professional, who co-ordinates 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.

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 take decisions in respect of the Corporate Debtor in the CoC.

One such crucial aspect in this power, lies the right of the CoC to consider and then approve a resolution plan with respect to a company (as per Sections 30 and 31 of the Code). This approval is subject to the final approval of the resolution plan by the concerned Adjudicating Authority (Section 31 of the Code. Over the period of three years of the Code having been in effect, the Adjudicating Authority, then the National Company Law Appellate Tribunal (‘Appellate Tribunal’) and the Hon’ble Apex Court of India have time and again given weightage to commercial wisdom of CoC, to finalise the next course of action of the Corporate Debtor and thereby, bring resolution to the Corporate Debtor.

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 for 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 binds 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.

JUDICIAL PRONOUNCEMENTS ON ‘COMMERCIAL WISDOM’ OF THE COC

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 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 Ors.[3] the Hon’ble Supreme Court conclusively held that the legislature, while enacting the Code, has consciously ensured that no ground is available to question the ‘commercial wisdom’ of the individual financial creditors or the collective decision of the CoC before the Adjudicating Authority, in approving or rejecting a resolution plan and such commercial considerations are outside the scope of judicial review. The Supreme Court further held that the amendment made to Section 30 (4) of the Code in June, 2018 [which introduced the requirement for the CoC to consider the feasibility and viability of a resolution plan before approval] was a mere restatement of the factors that the CoC was required to consider in any event, whilst considering 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 vs. Satish Kumar Gupta and Ors.[4], holding that, it  is clear  that the scope of judicial review while approving resolution plans was required to be within the four corners of:
  1. Adjudicating Authority: Section 30(2) of the Code;
  2. Appellate Tribunal: Section 32 read with Section 61(3) of the Code;

and which in 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:

1. that the Corporate Debtor needs to continue as a going concern during the insolvency resolution process;
2. that it needs to maximize the value of the assets of the Corporate Debtor; and
3. that the interests of all stakeholders including operational creditors has been taken care of.

CONCLUSION: QUESTIONS FOR CONSIDERATION

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.

However, the question then arises is whether the said power is unfettered or like every other power required to be balances 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 brain stormed about in our next release.

[1] The pecuniary value has been modified vide Notification dated 24.03.2020, and now the minimum amount of debt has been set at INR 1,00,00,000/- (Rupees One Crore Only).

[2] The CoC is a modified version of the Joint Lender’s Forum (as was constituted in pursuance of the circulars issued by the Reserve Bank of India).

[3] 2019 12 SCC 150

[4] 2019 SCC OnLine SC 1478