Commercial wisdom of CoC in approval or rejection of Resolution Plan
The Insolvency & Bankruptcy Code, 2016 (IBC/ Code) is creditor driven insolvency regime. Under the code there has been a pivotal role assigned to the creditors. The most fascinating feature of the code being that all the major decisions from the initiation till the end of the Corporate Insolvency Resolution Process (CIRP) is taken by the Committee of Creditors (CoC), which comprise financial creditors of a Corporate Debtor. Shubhangi Shukla (in pic), a young Company Secretary management trainee, explains this aspect of the law that holds commercial wisdom of the CoC sacrosanct.
Under sub regulation (1) of regulation 17 states that interim resolution professional shall file a report constituting of the committee of creditors to the Adjudicating Authority within two days of the verification of claims, wherein the Resolution Professional (RP) acts as only a medium between the CoC and the Adjudicating Authority (AA), that is, the National Company Law Tribunal (NCLT). Further the role of AA is to ensure that decisions taken by the CoC are in accordance with the provisions and basic principle of the Code — maximization of assets values. Towards the end of the CIRP, a Resolution Applicant (RA) proposes a Resolution Plan (plan) which is placed before CoC by the RP and upon several deliberations by CoC, the crucial decision pertaining to approval or rejection of a Resolution Plan is taken.
Under Section 30 of the code, a resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan:
(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the other debts of the corporate debtor;
(b)provides for the payment of debts of operational creditors in such manner as may be specified by the Board. The committee of creditors may approve a resolution plan by a vote of not less than 66 per cent of voting share of the financial creditors, after considering its feasibility and viability.
The resolution applicant may attend the meeting of the committee of creditors in which the resolution plan of the applicant is considered: The NCLT has to look into two basic check boxes, only then the plan stands approved and binding on all the stakeholders.
Firstly, whether the plan has been approved by not less than 66% of CoC members or not and secondly, whether the requirements stated under section 30(2) of the Code are being complied with or not. However, there are no provisions under the Code, which authorizes NCLT to modify or interfere with the merits of the plan. Hence the creditors have an upper-hand in the approval of the plan. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations in the CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority.
From above explanation, it is quite clear that once resolution plan is approved by requisite majority of CoC, the plan shall be presented before the AA for approval or rejection and giving no authority to the AA to either modify/question the plan. The committee of creditor holds a crucial power, which is the ability to consider and approve the resolution plan for a distressed company under section 30 and section 31 of the code. Since the code has been in effect, the NCLT, the National Company Law Appellate Tribunal (NCLAT), and the Supreme Court of India (SC) have consistently given weight to the commercial wisdom of the CoC in determining the future course of action for the Corporate Debtor and ultimately bringing resolution to the debt-ridden company.
This concept was looked broadly in one of the most spectacular judgments of Apex Court i.e. in the matter of Committee of Creditors of Essar Steel India Ltd Vs Satish Kumar Gupta and others, wherein it was held that: The decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of.
If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.
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