Recently, in Rathi Graphics Technologies Limited v Rajkumar Rathi & Ors, the National Company Law Tribunal (NCLT), relying on Supreme Court decisions and the report of the Bankruptcy Law Reform Committee, held that committees of creditors (CoC), interim resolution professionals, resolution professionals (RP), liquidators, the Insolvency and Bankruptcy Board of India, insolvency professional agencies and information utilities, together called the IBC institutions, established under the Insolvency and Bankruptcy Code, 2016 (code), are statutory public authorities and, therefore, are agencies or instruments of the state under article 12 of the constitution. As a result, the principles of natural justice apply to proceedings under the code. The NCLT’s reasoning was based on the fact that IBC institutions carry out functions of public importance that closely resemble governmental functions, and have a significant impact on the national economy. In the present case, the CoC had refused to consider a plan by a potential resolution applicant on the grounds that it was submitted after the deadline prescribed by the CoC. The CoC instead approved a plan from another bidder. Significantly, while the CoC had refused to grant an extension to the potential resolution applicant, it had done so for the successful bidder. The resolution applicant whose plan was disregarded challenged the resolution plan on the grounds that the CoC had approved the resolution plan with undue haste, arbitrarily, and in an unfair manner. The committee had acted without following due process.
The NCLT held that there was sufficient time remaining for the completion of the corporate insolvency resolution process and that, instead of applying the principles of natural justice, the CoC had adopted a biased approach. The NCLT also held that the approved plan violated section 30(4) of the code and its regulations, as the CoC had failed to consider the feasibility and viability of the plan before voting on it and the RP had not obtained a performance security from the successful bidder before approaching the NCLT for approval of the plan. The NCLT, therefore, directed that a fresh invitation for expressions of interest be issued to potential resolution applicants according to law.
Although the CoC argued to the contrary, the NCLT held that the principle of equity is inherent in the code, especially in section 60(5), rule 11 of the NCLT Rules, 2016, and section 30(2), under which the NCLT must ensure that distributions under a resolution plan are “fair and equitable”.
The CoC had also contended that, in approving a resolution plan, the commercial wisdom and prerogative of financial creditors, which had their own private interests, were paramount and not justiciable. However, the NCLT held that the RP and CoC were bound to follow the processes prescribed by the code and that the process of approving a resolution plan is distinct from the actual decision to approve a plan using commercial wisdom. While the NCLT cannot question the commercial wisdom of the CoC in approving a resolution plan, it is empowered to examine the approval process and set aside that process, including the resolution plan, if the NCLT finds the process to be arbitrary or unreasonable. As an instrument of the state, the CoC cannot claim the exercise of commercial wisdom in order to exclude due process.
The NCLT’s decision has been appealed to the National Company Law Appellate Tribunal (NCLAT). While the NCLAT has given interim directions that no further steps should be taken under the NCLT’s judgment, the operation of the judgment has not been stayed.
The decision of the NCLT is significant, given that the supremacy of the CoC’s commercial wisdom has been at the forefront of recent commercial insolvency jurisprudence. The application of principles of natural justice in IBC proceedings will deter abuse of process and ensure a level of transparency and accountability. However, following this decision, IBC institutions including CoCs will now face being sued under the constitution. Courts must ensure that parties do not bring frivolous cases, which will only disrupt the time-bound processes at the heart of the insolvency mechanism under the code. If it is upheld, the NCLT’s decision will have a significant effect on future insolvency proceedings under the code.
Sneha Jaisingh is a partner and Amogh Joshi is a senior associate at Bharucha & Partners.
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