One of the objects of the Insolvency and Bankruptcy Code, 2016 is stated to be “balancing the interests of all stakeholders”.
This object and purpose have recently been the subject matter of judicial interpretation as well as arguments in some of the significant resolution cases undertaken under the provisions of the code. One of the questions raised in this context has been to judicially review the terms of a resolution plan to confirm whether it “balances the interests of all stakeholders” or not.
The issue to be deliberated is whether the National Company Law Tribunal is required to review the terms of a resolution plan in reference to this objective as if it was a substantive provision of the code, especially when the judicial review under section 31 of the code circumscribes it to compliance with section 30(2) of the code. Evidently, section 30(2) does not mention any such parameter. Even the regulations framed pursuant to section 30(2)(f) only require a resolution plan to clearly state how it deals with each of the stakeholders’ interests and not require “balancing” of such interests.
On a closer look, it appears that the code itself in its framework “balances the interests of all stakeholders” by creation of a statutory platform for insolvency resolution before liquidation, where different stakeholders have been given different roles, responsibilities and rights under the code to achieve a balance in the interest of all stakeholders.
For instance, the code entitles financial and operational creditors including workmen, employees and government as operational creditors as well as corporate debtors to initiate the corporate insolvency resolution process against the corporate enterprise.
When it comes to granting authority to make commercial decisions to either resolve or move towards liquidation, that right has been given to all financial creditors, whether secured or unsecured, while keeping operational creditors out of the decision making process in this regard. However, to counter-balance the same, a safeguard of minimum payment of liquidation value to operational creditors has been built in to the statute.
Finally, if an insolvency resolution was to fail, and the corporate was to go into liquidation, the balance is sought to be achieved by de-prioritising the government dues to priority No.5 and bringing unsecured financial creditors above the rest of the unsecured operational creditors. Thus, it is the ecosystem created by the statute that achieves the object of “balancing the interest of all stakeholders”, and each of the above-mentioned provisions under the statute itself is a balancing act.
Thus, the object of the code to balance the interest of all stakeholders is achieved through the ecosystem of mutual rights, responsibilities and roles allocated among different stakeholders under the code itself, and not by imposing an obligation either on the resolution applicant or the committee of creditors to seek to achieve the same by way of a commercial proposal in a resolution plan beyond the parameters prescribed under section 30(2) of the code.
The principles of statutory interpretation in this respect are well settled, and it is well established that while an object or preamble of a statute may be used as a tool for interpretation, the same does not substitute the substantive provisions of the statute itself. The Supreme Court of India, in Tribhuban Parkash Nayyar v The Union of India (1970) explained this principle as follows:
“A preamble is a key to open the mind of the legislature but it cannot be used to control or qualify precise and unambiguous language of the enactment. It is only when there is a doubt as to the meaning of a provision that recourse may be had to the preamble to ascertain the reasons for the enactment and hence the intention of the parliament.
“If the language of the enactment is capable of more than one meaning, then that one is to be preferred which comes nearest to the purpose and scope of the preamble. In other words, preamble may assist in ascertaining the meaning but it does not affect clear words in a statute. The courts are thus not expected to start with the preamble for construing a statutory provision, nor does the mere fact that a clear and unambiguous statutory provision goes beyond the preamble give rise, by itself, to a doubt on its meaning.”
In this view of the matter, introducing an excessively discretionary requirement into validity of a resolution plan by adding to or supplanting substantive provisions into section 30(2) by requiring the resolution applicants and/or the committee of creditors to “balance the interests of all stakeholders” either through equal or almost equal treatment to each of the class of creditors would be contrary to express provisions of the statute, rather than aid in achieving the object of the code.
Shardul S Shroff is executive chairman and head of insolvency and bankruptcy practice, and Misha is a partner in that practice at Shardul Amarchand Mangaldas