The Insolvency and Bankruptcy Code, 2016 (code) was enacted to enable corporate insolvency resolution of financially stressed corporate debtors in a time bound manner, so as to maximise the value of their assets. The decision to rehabilitate or liquidate a corporate debtor lies with the committee of creditors (committee), comprising the corporate debtor’s financial creditors. The code allows the committee sufficient freedom and flexibility to explore, negotiate and, subsequently, choose the most suitable option for the corporate debtor.
The committee may approve a resolution plan depending on its feasibility and viability which, as of 2018, is to be determined on the basis of an evaluation matrix comprising qualitative and quantitative parameters and other criteria such as liquidation and fair value. Qualitative parameters include the experience of the resolution applicant (RA), that is the person or entity submitting the resolution plan, the financial strength of the RA, and risk assessment and mitigation plans. Quantitative parameters include upfront cash recovery, the terms of the resolution plan, fresh equity infusion, and restructuring and merging.
While prescribing parameters for determining viability, the code also recognises the supremacy of the committee’s commercial wisdom. Once the committee has approved a resolution plan, the National Company Law Tribunal (NCLT) may only interfere on the limited grounds stipulated in sections 30(2) and 32, read with section 61(3) of the code, which include the ineligibility of a RA under section 29A, the maximization of assets, and non-compliance with timelines (Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta, K. Sashidhar v Indian Overseas Bank, and Arcelor Mittal India Pvt Ltd v Satish Kumar Gupta). The NCLT, the appellate tribunal and the courts may not question whether the committee has correctly evaluated the parameters in reaching its decision.
This principle of non-interference with commercial decisions of the committee is a primary reason for the success of the code in the short period of its existence. In Committee of Creditors of Amtek Auto Limited through Corporation Bank v Dinkar T. Venkatsubramanian, the resolution process for the corporate debtor, one of the country’s 12 major defaulters, failed. The Supreme Court, relying on the commercial wisdom of the committee, permitted the resolution professional to invite fresh offers for the resolution of Amtek instead of liquidating the company.
The courts have repeatedly relied on, and deferred to, the commercial wisdom of the committee. In Maharashtra Seamless Limited v Padmanabhan Venkatesh and Ors, the Supreme Court upheld the approval of a resolution plan even though the upfront payment contemplated by the resolution plan was lower than the liquidation value of the corporate debtor. However, in SBI v Ushdev International Ltd., the NCLT held that the committee, in rejecting the resolution plan, had displayed a lack of ‘basic commercial wisdom’ and of ‘common prudence’. The NCLT accordingly, approved the resolution plan. An appeal against this decision is pending before the National Company Law Appellate Tribunal and it remains to be seen how, after the conclusion of the case, the sanctity of the committee’s decisions will be affected.
The jurisprudence on the validity and scope of the committee’s commercial decision is still developing. The Insolvency and Bankruptcy Board of India is resolute that all proceedings be completed in a time bound manner, whereas the committee is entrusted with ensuring that the most commercially viable plan be approved. All the while the corporate debtor has to be kept as a going concern. Though the pandemic has created much uncertainty that the framers of the code could not have anticipated, it will be interesting to see how the committees, tribunals and courts proceed with insolvency resolution requiring firm timelines for resolution. Although, in certain instances, the NCLT has excluded the period of lockdown from the period within which the resolution plan has to be approved, committees continue to race against the clock to ensure that the maximum value of corporate debtors is realized and that speedy resolutions are concluded.
Sonam Gupta and Sneha Jaisingh are partners at Bharucha & Partners. Divyam Sharma, an associate, also contributed to the article.
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