Commercial Wisdom of Committee of Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) stipulates a period that is 180 days which can be extended to a maximum of 330 days. In this period the Corporate Insolvency Resolution Process (CIRP) should be completed. Financial Creditor, Operational Creditor of the Corporate Debtor (CD), or the Corporate Debtor itself, can initiate the CIRP. When the CIRP is initiated by the Adjudicating Authority an Interim Resolution Professional (IRP) is appointed, who acts on behalf of the Directors of the Corporate Debtor.

Role of CoC

When the claims of various creditors are verified by the IRP, a Committee of Creditors (CoC) is constituted. This CoC Comprises of financial creditors and is the decision-making body for the Corporate Debtor's administration. The Code and the regulations made confer various powers on the CoC, including appointing the IRP as the Resolution Professional (RP), supervising their functioning and conduct, and even replacing the RP if the RP's conduct is not satisfactory[1].

It is agreed that the CD day-to-day operations are managed by the RP, however the CoC has the authority and responsibility to make decisions on all matters critical to the CD's operation. The Code[2] has listed various acts that the RP can do but with the prior approval of the CoC, such as creating a security interest over the CD's assets, Appointment of the Valuers / Advocates /Transaction Auditors, raising interim finance etc. The CoC ensures that sensible actions are taken to preserve the entity's value.

One of the most important roles of the CoC's is to determine the viability of the CD's business, examine the feasibility of future operations, the costs and expenses, and according to its commercial wisdom resolve to either proceed with the CIR process, including the decision to extend the timeline, to liquidate the CD[3] or to approve the Resolution plan (which is subjected to the final approval of Adjudicating Authority). Furthermore, an application of withdrawal of the insolvency application can only be filed before the Adjudicating Authority after the approval of 90 percent of the CoC's.

Committee of Creditors

Commercial Wisdom of CoC

The scope of the CoC's 'commercial wisdom' has always been a point of conflict, particularly in the context of judicial interference with the CoC's decision-making power.

Hon’ble Supreme Court in the case of K Shashidhar v. Indian Overseas Bank and Ors[4] highlighted the importance of CoC and held that -


[1] Section 27 of the Insolvency and Bankruptcy Code,2016

[2] Section 28 of the Insolvency and Bankruptcy Code,2016

[3] Section 33 of the Insolvency and Bankruptcy Code,2016

[4] Civil Appeal No. 10673/2018, February 05, 2019.

“The 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 fact that 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”

Similarly, in State Bank of India v. Ushdev International Limited, the Mumbai Bench of the National Company Law Tribunal (NCLT) observed that where the CoC does not exercise commercial wisdom with caution, the "NCLT can disregard such an illogical, unreasoned, unfounded, and unsound decision of the CoC.”

The Supreme Court's decisions in Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors[1] and Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India[2] highlighted the CoC's role and responsibility, which includes, but is not limited to, assessing the feasibility and viability of a resolution plan, the eligibility of the resolution applicant (RA), all attempts to keep the CD as a going concern with liquidation as the last (OCs). Nevertheless, if the CoC's commercial decision contravenes the basic contours of the IBC, the NCLT would be justified in applying its judicial wisdom and rejecting the CoC's decision on approval or rejection of a resolution plan.

In yet another recent case, Ghanashyam Mishra & Sons Pvt Ltd through the Authorized Signatory v. Edelweiss Asset Reconstruction Co Ltd through the Director & Ors[3], the Supreme Court referred to past decisions and reaffirmed that the commercial wisdom of the CoC is paramount and the scope of judicial review is limited to the extent provided by Sections 31 and 61(3) of the IBC.

It is significant to mention that the premise of commercial wisdom of CoC is based on the assumption that CoC is fully informed about the viability of the Corporate Debtor, the feasibility of the proposed Resolution Plan, and its impact on all stakeholders, and thus act in accordance with a thorough examination of the Resolution Plan. As a result, the CoC makes a collective decision based on this diligent assessment along with use of competent expertise.

The Insolvency and Bankruptcy Code, 2016 considers that CoC plays an integral role in running CIRP and it sets the highest levels of conduct and performance. It is the most appropriate body to attempt to revive and rehabilitate distressed CDs both commercially and prudently. However, it is important to consider steps that could be taken to further strengthen the framework of CoC under the Code, which can be done if India frames a code of conduct for the CoC, which would define the guiding principles for the CoC's conduct and ensure that its commercial wisdom is within the four walls of these guiding principles, with any deviations necessitating reasonable explanation or attracting legal implications.


[1] Civil Appeal Nos. 9402-9405 of 2018, October 04, 2018

[2] (2019) 4 SCC 17, January 25, 2019.

[3] 2021 SCC Online SC 313

The introduction of code of conduct could significantly strengthen the CIRP and maximise value for LegalPay is India’s first tech-driven fintech that specializes in legal and fund insolvency financing. Insolvency financing also widely known as interim financing, acts as oxygen to companies under distress and help companies under insolvency to run as a going concern and maximise the value of assets to protect the interest of stakeholders involved.

LegalPay provides funds to corporate debtors who are in need of Interim Finance that ranges from Rs. 30 Lakhs to 20 Crores. LegalPay is backed by a strong team comprising Company Secretaries, Lawyers (Alumni of India’s top-ranking college), MBA, Economists, and Charted Accountants. r all stakeholders through high levels of process conduct.

References:

  1. B. Sriram, A Code of Conduct for Committee of Creditors, IBBI - https://www.ibbi.gov.in/uploads/resources/6736e357f5c139e6402b038f4492e10b.pdf
  2. Faranaaz Karbhari and Akriti Shikha, India: Commercial Wisdom of Creditors, 21 June 2021, https://www.mondaq.com/india/insolvencybankruptcy/1080856/commercial-wisdom-of-committee-of-creditors-

 

Comments

Post a Comment

Popular posts from this blog

Investments in a new way - Alternative Investment Funds (AIF)

Image
An Alternative Investment Fund or AIF is an investment vehicle that privately pools investments from sophisticated investors, whether Indian or foreign, for investing according to a defined investment policy for the benefit of its investors. These funds are typically used by high-net-worth individuals and organisations since, unlike Mutual Funds, they require a sizable initial investment. AIF as a fund, is typically established or incorporated in India in the form of a Limited Liability Partnership (LLP) or Company or Trust or Body Corporate.[1] Incorporated in 2012 by the Securities and Exchange board of India, the market regulator's intent was to make equity markets more sophisticated for investors with a massive volume of wealth and distinct goals from the average Indian investor. Investors are cautioned not to confuse AIFs with the following financial instruments: Mutual funds, Collective investment schemes, Employee Stock Options Trusts, Employee welfare trusts or gratuit...
Read more

A brief overview - Litigation Funding

Image
“Litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation”   Bond and stock markets both witnessed bull runs from 1980 to 2021, resulting in higher returns for investors. These strong returns have made equity valuations at historically high levels and bond yields at historically low levels, implying that expected returns are currently lower than their historical averages. As a result, the current situation presents difficulties for conventional portfolios, such as a "balanced" 60 per cent equity/40 per cent bond portfolio.   This has caused numerous investors, both institutional and retail, to search for a variety of alternative investments , each with its own set of risks and returns. As a result, they have dramatically increased their allocations to alternative investments, which have significantly less exposure to the economic cycle risk of stocks and bonds as well a...
Read more

Assignment of NRRAs under Regulation 37A

Image
On 13 th November 2020, Insolvency and Bankruptcy Board of India (“ IBBI ”) issued the Insolvency and Bankruptcy Board of India (Liquidation Process) (Fourth Amendment) Regulations, 2020. One of the major purposes, for which this amendment was brought in was to ease the process of sale of liquidation assets. As we all are aware that realization  of some assets (such as continent claims, disputed receivables, disputed assets, refund from government etc.) have been an uphill task for any liquidator. Since realization  of these assets may take quite some time, they are referred in these regulations as ‘Not Readily Realizable  Asset’ or NRRA, which term has been introduced by inserting Regulation 37A. There is always a sense of urgency in a liquidation process and liquidator tries to ensure that the creditors of corporate debtors are able to realize maximum value of the assets of corporate debtor. However, these NRRAs create a sort of hurdle in this urgent process. Regul...
Read more