Sanctity Of Legal Process Vis-À-Vis Maximisation Of Value Under The IBC: A Watertight Case?


The Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code”) since its enactment has become a routine subject of exchange in the legal community due to its dynamic character. It has proved to be a milestone of the Indian legislature inasmuch as it has successfully improved the Indian insolvency and bankruptcy laws by simplifying and bringing them under one umbrella.

The Code mandates the creation of a Committee of Creditors (hereinafter “COC”) for managing the transactions of the corporate debtor during Corporate Insolvency Resolution Process (hereinafter “CIRP”). Be it as it may, the Code places its complete faith in the commercial wisdom of the COC for protecting the commercial interest of the stakeholders and as well as for reviewing and selecting the resolution plans (hereinafter R-Plan) submitted by the rival Resolution Applicants (hereinafter “RA”). Even the Insolvency Law Committee reinstated in its report that one of the primary objectives of the Code is to respect the ‘commercial wisdom’ of the COC. However, it has been observed that under the guise of commercial wisdom, ofttimes COC misuse its wide discretionary powers thereby, abusing the due process laid down by law.

Therefore recently, on 5th August 2020, the Hon’ble NCLAT passed an elaborate order in the case of Kotak Investment Advisors Ltd. v. Krishna Chamadia, where it observed that, while the COC is indeed fully authorised to exercise its discretionary powers in pursuance of its commercial wisdom, however it doesn’t mean that COC has unfettered powers under the guise of its commercial wisdom to instruct the Resolution Professional (hereinafter “RP”) to adopt an arbitrary or an ab-initio illegal procedure or a procedure which violates the principles of natural justice in the conduct of CIRP. The author attempts to analyse the decision of NCLAT along with its implications in the article.

I. Constitution of COC- steering body of the CIRP

Though, unlike Part III (insolvency and bankruptcy for individuals and partnership firms), Part II of the Code doesn’t define the COC for Corporate Persons, but harmonious reading of Code’s provisions would give a fair idea about the purpose, constitution, functions, and powers of the COC. Once all the claims of corporate debtor are collated, under s.21(1) of the Code, the Interim Resolution Professional is required to appoint the COC under s.18(c) of the Code. As a general rule laid down under s.21(2), the COC primarily consists only of financial creditors however, if a corporate debtor doesn’t has any financial creditor, then as per Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter the “CIRP Regulations”), the COC will consist of, 1) operational creditors, and 2) one representative each, elected by workmen and employees.

The Code helms the COC as one of the steering bodies of the CIRP. As a result, various provisions of the Code acknowledge the significance accorded to the COC at the different stages of the CIRP.

The RP is obliged to carry out every act in conducting business of the corporate debtor with COC’s prior approval. More specifically, s.28 of the Code lays down certain decisions which can’t be taken without prior clearance from the COC, like raising interim finance or changing capital structure of corporate debtor etc.  

The COC remains in the saddle even at the very end of the CIRP. According to s.30(4) of the Code, for a valid approval, the R-Plan must be approved by at least 66% members of the COC. Regulation 39(3) of the CIRP Regulations, while further relying upon COC’s commercial wisdom, provides that the approved plan must have been strictly scrutinised and measured by the COC. And, once the COC approves the R-Plan, the RP becomes bound under s.31 of the Code to place it for review before the NCLT.

Most importantly, the Code doesn’t subject the COC’s decision of approving the R-Plan to per se judicial review as the NCLT i.e. Adjudicating Authority (hereinafter “AA”) is obliged under s.31 of the Code to approve the R-Plan submitted to it by the RP. It may not grant such approval only on the basis of the limited grounds mentioned under s.30(2) of the Code. Similarly, NCLAT can examine appeals from such challenge only on the grounds mentioned under s.61(3) of the Code. On similar lines, the Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta and Ors., laid down the doctrine of commercial wisdom and crystallised the law on this point by observing that COC exercises its “commercial wisdom” while accepting, rejecting or abstaining the R-Plans submitted by the RAs to it.

In this manner, the Code has conferred exclusive access to negotiations and the final hand in taking commercial decisions, to the COC.

II. Commercial wisdom- “Non reviewable”

Accruing to this statutory backdrop, Courts have adopted a deterrent approach in interfering with the commercial decisions taken by the COC.

The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, while interpreting the Code’s preamble held that; as the fundamental aim of the Code is to revive and run the corporate debtor as a going concern, to balance the interests of all stakeholders, and to maximise the value of its assets, thus, CIRP can’t be at odds with the interests of the corporate debtor. And thus, paramount importance must be given during the CIRP to protect corporate debtor’s interests. In this context, the Court upheld the BLRC report which pegged the financial creditors (who constitute the COC) of the corporate debtor as the most qualified persons to manage and revive the said corporate debtor.

It is pertinent to mention that the Supreme Court in another case, i.e. in K. Shashidhar v. IOB and Ors., observed certain intrinsic assumptions with regards to COC to explain the Code’s rationale for conferring it wide discretionary powers. The Court said that COC possess requisite expertise to analyse and assess the commercial viability of the R-Plans submitted to revive the corporate debtor and that its decisions are outcome of a thorough commercial analysis of the proposed resolutions based upon assessment, deliberations and voting and thus, judicial intervention in commercial decisions of the COC is barred to ensure completion of the CIRP within the timelines prescribed by the Code.

In a comparatively recent case of Karad Urban Cooperative Bank Ltd. v Swwapnil Bhingardevay, the Apex Court, while saluting the commercial wisdom of the COC, observed that the decisions taken by the COC under its commercial wisdom are non-justiciable. The Court even remarked that as compared to COC, the NCLT has merely a “hand’s-off” role during the entire CIRP.   

However, above decisions didn’t involve the issue of sanctity of process of law. These decisions are merely binding on the issue of exercise of “commercial wisdom” of the COC, and not whether the COC has the power to go beyond the process envisaged under the Code and mould it according to its whims and fancies under the guise of its “commercial wisdom”.  

III. NCLAT’s decision in the instant case

In the present case, the RP invited expressions of interest (EOI) from the interested RAs after initiation of the CIRP of corporate debtor, i.e. Ricoh India Ltd. After receiving EOIs, the RP issued process memorandum with the express approval of the COC to mandate the last date for submission of R-Plans. Two plans were submitted under the said deadline. Both the plans were opened by COC and discussions started within the COC in respect of these plans. However, after initiation of discussion and lapse of considerable time, the RP accepted two R-Plans which were submitted well beyond the last date of submission without issuing a fresh notice calling for EOIs. Most interestingly, one of these two plans, was approved by the COC as a successful plan and the RP moved an application under s.30(6) of the Code for the approval of AA. At this juncture, the unsuccessful RA (who submitted the R-Plan under the prescribed timeframe), filed miscellaneous application with the NCLT challenging the approval of the said plan.

The AA clubbed both the matters and rejected the miscellaneous application filed by unsuccessful RA thereby, accepting the application filed by RP for approval of the R-Plan. The AA placed its reliance on K. Shashidar (supra), and held that “the commercial decision of the COC for approval of R-Plan is non-justiciable and hence, is required to be sanctioned by the adjudicating authority.” This decision was challenged by the unsuccessful RA before NCLAT in the instant case.

The main issues before the NCLAT were 1) whether the RP with the approval of COC, was authorized to accept the R-Plans after the expiry of the deadline for submission of the Bid, without extending the timeline for submission of EOI? and 2) whether grant of approval by the COC to the RP, in accepting the R-Plan after the expiry of the deadline was under the commercial wisdom of the COC?

In consonance with the jurisdictional bounds laid down in Essar Steel (supra), the NCLAT, while answering both of the issues in negative, described the RP’s act of accepting the R-Plan which was submitted beyond the mandated cut-off date, though, with due approval of COC, as “material irregularity” under s.61(3)(ii) of the Code. The NCLAT held that:

“The act of the Resolution Professional to accept the R-Plan after opening the other bids, which were all submitted within the deadline for submission of R-Plan cannot be justified by any means and is a blatant misuse of the authority invested in the Resolution Professional to conduct CIRP.”

It also observed that COC in exercise of its commercial wisdom doesn’t possess the power to authorise RP to “adopt a procedure in the conduct of CIRP which is, ab-initio illegal, arbitrary and against the Principles of Natural Justice.”

The tribunal went on to remark that the RP with the prior approval of COC is fully authorised to call for fresh invitations of EOIs of R-Plans even after the expiry of last date of submission, provided that such timeline for submission of R-Plan can only be extended by publishing a fresh notice in Form ‘G’ under Regulation 36A of the CIRP Regulations. Lastly, NCLAT clarified that COC can’t accept R-Plans from those RAs who haven’t submitted EOI within the prescribed deadline. The NCLAT finally held that COC, under exercise of its commercial wisdom can’t adopt any special procedure for accepting R-Plan after expiration of the deadline otherwise it would tantamount to vitiation of CIRP.

IV. Conclusion

The NCLAT grabbed the opportunity with both hands and indisputably flagged the objectives in the preamble to the Code, which reads as “the objective of the IBC is resolution, in a time-bound manner, for maximization of assets”, and successfully established that the objective of maximisation of value doesn’t supersede the sanctity of the process under CIRP. The objective of maximisation of value of assets of the corporate debtor is intrinsically weaved with the sanctity of process and objective of speedy resolution and hence, must not be put upon a higher pedestal.  This submission gains certitude from the decision of the Supreme Court in the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta, wherein R.F. Nariman, J. said that “it is of utmost importance for all authorities concerned to follow…model timelines as closely as possible”. The decision of NCLAT in the instant case was commendable, for it dealt forensically with the meat of the matter, i.e. collision between maximisation of value and sanctity of law. However, it’s submitted that the Courts must further balance the conflict between maximisation of value and sanctity of process to build a water-tight case in near future by declaring the law on the basis of the objectives and provisions of the Code, the regulations and the BLRC report.

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