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A WORD TO THE WISE: THE PROPER ROLE FOR THE COMMITTEE OF CREDITORS IN INSOLVENCY RESOLUTION
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A WORD TO THE WISE: THE PROPER ROLE
FOR THE COMMITTEE OF CREDITORS IN INSOLVENCY RESOLUTION
AUTHORED BY - SAHIL GANGAR & PARTH CHANDAK
Abstract:-
The doctrine of commercial wisdom,
though not in itself problematic,
Could, in the long term, throttle the
legislative goal of the Code.
Over time, the doctrine itself as
well as the wider resolution approach
Have to be developed with intent to
reach the economic goal of the
Code, to assist IBC reach its
intended maximum potential,
As intended. Having traced the
origins and followed the development of the commercial
Wisdom doctrine in Part I, I go on to
examine the BLRC Report
And also IBC and the regulatory
framework anew, in an
Effort to determine the correct role
of the Committee of Creditors
In the approval process of the
resolution plan. Part III tries
To learn from the 'feasibility'
analysis under the US Bankruptcy
Code as a good model of how
deliberative and analytical the
Process should be needed to be. I
attempt to envision
The resolution process anew in Part
IV with a more sustainable
Process to resolution and redrafting
the 'commercial wisdom'
Doctrine to its current structure.
A Word to the Wise: The Optimal Function of the Committee of Creditors in
Insolvency Resolution
While the concept of commercial
wisdom itself is not inherently flawed, its long-term implications could hinder
the legislative objectives of the Insolvency and Bankruptcy Code (IBC). The
commercial wisdom doctrine and the broader resolution mechanism must evolve to
align with the Code’s economic objectives, ensuring that the IBC reaches its
highest potential. This paper traces the origins and development of the
commercial wisdom doctrine in Part I. Part II reassesses the BLRC Report, the
IBC, and the regulatory framework to determine the Committee of Creditors’
proper role in the resolution plan approval process. Part III analyzes the
‘feasibility’ evaluation model under the U.S. Bankruptcy Code, illustrating how
a structured, deliberative approach enhances the decision-making process.
Finally, Part IV envisions a refined resolution process, suggesting a more
sustainable structure for the commercial wisdom doctrine in its current form.
I. Introduction
Five years is a short span in the
life of a legal framework, insufficient to fully assess its impact. The
Insolvency and Bankruptcy Code, 2016 (IBC), represents a complex economic
reform aimed at resolving insolvencies. The core process involves soliciting
bids for resolution plans, evaluated in a collective and transparent manner by
the company’s financial creditors. These plans must comply with IBC
regulations, ensuring debt repayment while providing a roadmap for the
company’s future operations.
The authority to approve resolution
plans rests with the Committee of Creditors (CoC), comprising financial
creditors. Their approval initiates a two-tier validation process, wherein the
Tribunal, acting as the Adjudicating Authority, gives the final sanction. Once
the Tribunal endorses a resolution plan, it becomes legally binding on all
stakeholders, including employees, members, creditors, and government agencies.
A crucial aspect of this framework is
the fresh slate doctrine, which stipulates that any claims arising before the
approval process cannot survive unless explicitly included in the resolution
plan. The CoC wields significant influence over existing contractual and legal
rights, affecting even secured creditors and government entities. The
twin-stage approval process is pivotal in assessing the IBC’s efficacy,
ensuring insolvency resolution and asset value maximization.
The commercial wisdom doctrine
governs this approval process. The Tribunal does not have the authority to
scrutinize the merits of a resolution plan, as CoC’s decisions are presumed to
reflect financial expertise. Evaluating complex financial metrics—such as
revenue projections, debt-equity ratios, and asset valuation—requires
specialized knowledge, which financial creditors possess.
II. Role of the Committee of Creditors in Resolution
and the Commercial Wisdom Doctrine
Evolution of the Commercial Wisdom Doctrine
The Supreme Court formally
established the commercial wisdom doctrine in K. Sashidhar v. Indian Overseas
Bank. The doctrine finds its roots in the Bankruptcy Law Reforms Committee
(BLRC) Report, which confines the Tribunal’s role to procedural oversight while
assigning business decisions to the CoC. In subsequent cases like Committee of
Creditors v. Satish Kumar Gupta, the Supreme Court upheld that the Tribunal
could not question the commercial prudence of the CoC’s decisions but could
review whether the CoC had adhered to legal and procedural norms.
Several rulings illustrate the
application of this doctrine. In Maharashtra Seamless Ltd. v. Padmanabhan
Venkatesh, the Supreme Court upheld a resolution plan that allowed the sale of
assets at a value lower than liquidation price, emphasizing the CoC’s
commercial judgment. Similarly, in Karad Urban Coop. Bank Ltd. v. Swapnil
Bhingardevay, the Court refrained from second-guessing the CoC’s evaluation of
a plan’s feasibility.
Legality vs. Commercial Prudence: Issues under Section 31
Under Section 31 of the IBC, the
Tribunal’s jurisdiction varies depending on whether a matter concerns
commercial prudence or legal compliance. Commercial prudence covers viability,
feasibility, creditor classification, and operational strategies, areas where
the Tribunal cannot interfere. However, when legal violations occur—such as
breaches of IBC norms or infringement of third-party rights—the Tribunal
possesses full authority to review the resolution plan. Landmark rulings such
as MCGM v. Abhilash Lal and Jaypee Kensington v. NBCC demonstrate judicial
intervention when resolution plans contravene legal mandates.
Expansion of the Commercial Wisdom Doctrine
Recent cases have seen an expansion
of the doctrine’s scope. In Kalpraj Dharamshi v. Kotak Investment Advisors
Ltd., the Supreme Court upheld a resolution plan submitted beyond the
stipulated deadline, citing the CoC’s commercial wisdom. Similarly, in the
Binani Cements case, a late-submitted plan was approved, reinforcing deference
to CoC decisions. However, in Ngaitlang Dhar v. Panna Pragati Infrastructure,
the Court acknowledged that procedural irregularities could be grounds for
challenging CoC decisions.
III. The Optimal Role of the Committee of Creditors:
Understanding Legislative Intent
Insights from the BLRC Report
The BLRC Report underscores the
expectation that the CoC will apply economic reasoning in identifying
insolvency causes and selecting viable resolution plans. It differentiates
between financial failure (solvable through restructuring) and business failure
(where survival is unlikely). The CoC’s decision-making should prioritize
economic viability, organizational capital, and long-term business prospects.
Regulatory Framework and Evaluation
Criteria
The IBC and CIRP Regulations outline
key resolution plan attributes:
Clear implementation and monitoring
mechanisms
Strategies to address default causes
Viability and workability
Capability of the resolution
applicant to execute the plan
The CoC is required to assess
feasibility and viability systematically, using an evaluation matrix that
incorporates both qualitative and quantitative factors. Courts have emphasized
the importance of informed decision-making, as seen in Vijay Kumar Jain v.
Standard Chartered Bank, where access to relevant data was deemed essential for
effective CoC deliberations.
IV. Comparative Insights: U.S. Bankruptcy Code
Feasibility Analysis
The U.S. Bankruptcy Code mandates a
feasibility analysis under Section 1129(a)(11), ensuring that a reorganization
plan is grounded in realistic projections. Case precedents highlight the need
for objective assessments:
In Re: American Capital Equipment
LLC: A speculative plan reliant on litigation proceeds was rejected.
In Re: WR Grace & Co.: A plan
supported by financial projections and expert opinions was approved.
In Re: Star Ambulance Service: A plan
lacking financial disclosures and viability assessments was denied.
Key feasibility factors include:
Capital structure and financial
stability
Economic conditions and market
prospects
Managerial competence
Future cash flow projections
These criteria provide a structured
approach to insolvency resolution, offering lessons for enhancing CoC
decision-making under the IBC.
V. Towards a Refined Resolution Framework
Despite its early-stage challenges,
the IBC must evolve beyond a focus on quantitative parameters like resolution
numbers and payouts. Economic reasoning, business viability, and market
conditions should take precedence. The CoC must provide transparent
justifications for their decisions, ensuring that approval processes mature
over time.
While judicial intervention should
remain limited, courts must act as external catalysts for reform when
necessary. The Supreme Court’s stance in Committee of Creditors v. Satish Kumar
Gupta acknowledges the need for CoC accountability. Given IBC’s experimental
nature, its long-term success hinges on its ability to adapt and address
systemic inefficiencies.
Conclusion
The IBC represents an ambitious
economic experiment. However, its success depends on ensuring that CoC
decisions are rooted in sound economic reasoning. A more structured and
transparent approach, drawing from international best practices, will
strengthen the resolution framework and safeguard stakeholder interests.
References
1. Swiss Ribbons v Union of India (2019)
4 SCC 17 [19], [120] (Supreme Court of India).
2. There are some mandatory requirements
for effective participation. For instance, financial creditors related to the
corporate debtor lack voting rights, but this does not apply to banks and
financial institutions that gain related party status through enforcement of
their rights: see, IBC, provisos to s 21(2).
3. IBC, s 30(4).
4. The Tribunal is empowered to reject
the resolution plan too. Section 31(1) of IBC deals with approval; Section
31(2) with rejection.
5. IBC, s 31(1); Committee of Creditors
v Satish Kumar Gupta (2020) 8 SCC 531 [105] – [107] (Supreme Court of India).
6. (2019) 12 SCC 150 (Supreme Court of
India).
7. TK Vishwanathan and others, ‘Report
of the Bankruptcy Law Reforms Committee’ (November 2015) (‘BLRC Report’).
8. The BLRC Report has been extensively
relied on by the Supreme Court for interpretive guidance in a host of critical
rulings on the subject: Innoventive Industries Ltd v ICICI Bank (2018) 1 SCC
407 [12], [13] (Supreme Court of India); K Sashidhar (n 8)[54], [55], [62];
Swiss Ribbons (n 1) [14], [15], [68]; Arcelormittal India (P) Ltd v Satish
Kumar Gupta (2019) 2 SCC 1 [68]–[70] (Supreme Court of India); Mobilox
Innovations (P) Ltd v Kirusa Software (P) Ltd (2018) 1 SCC 353 [18]– [21] (Supreme
Court of India); Anuj Jain v Axis Bank (2020) SCC Online SC 237 [108] (Supreme
Court of India).
9. BLRC Report, paras 2, 3.4.2, 3.4.3,
4.2, 5, 5.3.1, 5.3.3, and 5.3.4.
10. K. Sashidhar (n 8) [52]–[55].
11. Committee of Creditors (n 5).
12. Ibid [72], [73]
13. (2020) 11 SCC 467 [27] – [30]
(Supreme Court of India).
14. The Supreme Court found no provision
in IBC that would invalidate such a plan, there being no mandate in the IBC
that the bid at resolution must match the liquidation value of assets.
15. (2020) 9 SCC 729 [14] – [18] (Supreme
Court of India).
16. Bhaskara Agro v Super Agri Seeds
(2018) SCC Online NCLAT 340 (National Company Law Appellate Tribunal).
17. IMR Metallurgical Resources AG v
Ferro Alloys Corp (8th June 2020) Company Appeal (AT) (Insolvency) No 272 of
2020 [12] (National Company Law Appellate Tribunal).
18. Santosh Walokar v Vijay Kumar V Iyer
(24th January 2020) Company Appeal (AT) (Insolvency) No 871-872 of 2019 [26]
(National Company Law Appellate Tribunal).
19. Praveen Kumar v. VSL Securities (9th
June 2020) Restoration Application No 01 of 2020 in Company Appeal (AT)
(Insolvency) No 308 of 2020 (National Company Law Appellate Tribunal).
20. Sreeram E Techno School v. Beans and
More Hospitality (11th September 2019) Company Appeal (AT) (Insolvency) No 936
of 2019 [5] (National Company Law Appellate Tribunal).
21. The source of this power can be
traced to Section 30(2)(e) of IBC read with Section 31(1), which mandates the
Tribunal to ensure that the resolution plan does not violate any law in force.
22. (2019) SCC Online SC 1479 (Supreme
Court of India).
23. Committee of Creditors (n 5) [81] –
[87].
24. (2021) SCC Online SC 253 [277] –
[279] (Supreme Court of India).
25. (2021) 10 SCC 401 [171], [172]
(Supreme Court of India).
26. CIRP Regulations.
27. Binani Industries v Bank of Baroda
(2018) SCC Online NCLAT 521 (National Company Law Appellate Tribunal); this
NCLAT ruling was upheld by the Supreme Court by a non-speaking order in
Rajputana Properties v Ultratech Cement (2018) SCC Online SC 3596 (Supreme Court
of India).
28. (2021) SCC Online SC 1276 [27] – [34]
(Supreme Court of India). On facts, the Court found no “material irregularity”
in the process and upheld the Committee’s approval.
29. Kalpraj Dharamshi (n 27).
30. Jaypee Kensington (n 26) [143] –
[147], [273] – [275].
31. This was, of course, not without good
reason. The resolution plan of the behemoth was slated to benefit a wide range
of interests, including innocent home buyers, and was thus crucial for the
economy. The last set of decisions in this line, viz. India Resurgence v Amit
Metaliks (2021) SCC Online SC 409 [12] – [21] and Pratap Technocrats v Reliance
Infratel Ltd (Monitoring Committee) (2021) 10 SCC 623 [33] – [48], simply apply
the commercial wisdom doctrine to issues such as distribution of payouts to
diverse classes of creditors, issues that lie in the proper realm of the
doctrine, and thus pose no problem.
32. This is found in the classic
formulation of the Supreme Court in Committee of Creditors (n 5).
33. BLRC Report, paras 2, 3.4.2, 3.4.3,
4.2, 5, 5.3.1, 5.3.3, and 5.3.4.
34. BLRC Report, para 3.2.
35. BLRC Report, para 3.2.1.
36. BLRC Report, para 3.2.2.
37. See, Baruch Lev, Suresh
Radhakrishnan, and Peter C Evans, ‘Organisational Capital: A CEO’s Guide to
Measuring and Managing Enterprise Intangibles’ (The Center for Global
Enterprise, January 2016) accessed 28 November 2022; C. Meyer and others,
‘Developing and Deploying Organizational Capital in Services vs. Manufacturing’
(2014) 26(4) Journal of Managerial
38. Issues 326.
39. Section 30(2)(d) and (f) read with
Section 31(1) and its proviso of IBC read together with Regulation 38(2)(c) and
38(3) of CIRP Regulations.
40. IBC, s 30(4).
41. CIRP Regulations, r 39(3) read with
IBC, s 30(4).
42. (2019) 20 SCC 455 [12], [13], [15],
[21] – [25] (Supreme Court of India).
43. Ibid [21]. The Court ultimately
directed the Committee of Creditors in that case to conduct fresh deliberations
after ensuring effective participation of all the stakeholders entitled to
attend the meeting as per Section 24 of IBC inter alia (see Para 25 of the
Judgment).
44. Chapter 11, Title 11 of the Code.
45. Section 1129(a)(11): “Confirmation of
the plan is not likely to be followed by the liquidation, or the need for
further financial reorganization, of the debtor or any successor to the debtor
under the plan, unless such liquidation or reorganization is proposed in the
plan.”
46. 9D Am. Jur. 2d Bankruptcy § 2884.
47. 688 F.3d 145 (3rd Cir. 2012).
48. 729 F.3d 332 (3rd Cir. 2013).
49. Re: Star Ambulance Service, 540 B.R.
251 (Bankr. S.D. Tex. 2015).
Article Information
A WORD TO THE WISE: THE PROPER ROLE FOR THE COMMITTEE OF CREDITORS IN INSOLVENCY RESOLUTION
Authors: SAHIL GANGAR, PARTH CHANDAK
- Journal IJLRA
- ISSN 2582-6433
- Published 2025/03/10
- Issue 7
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International Journal for Legal Research and Analysis
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