Law stands above commercial wisdom

Law stands above commercial wisdom

The Supreme Court’s 3 May judgment, in MK Rajagopalan v Dr Periasamy Palani Gounder & Anr, shows insolvency resolution plans must be approved by a committee of creditors before being put to an adjudicating authority.

The court upheld an order by the National Company Law Appellate Tribunal (NCLAT) that the successful resolution applicant was ineligible in terms of section 88 of the Indian Trust Act, 1882 (advantage gained by fiduciary). The applicant had been pursuing two resolution plans, one in his individual capacity and the other in the capacity of managing trustee of the trust.

A division bench of the Supreme Court also held that the principles of respecting the commercial wisdom of a committee of creditors could not be overexpanded to brush aside a significant shortcoming in the committee’s decision-making in not duly taking note of the operation of any provision of law.

The brief facts of the dispute were:

  • The Tourism Finance Corporation of India filed a petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), seeking initiation of a corporate insolvency resolution process against Appu Hotels (corporate debtor);
  • The National Company Law Tribunal (NCLT) admitted the corporate debtor into the insolvency process in 2020;
  • A resolution plan submitted by the successful resolution applicant was approved by the committee of creditors, and after by the NCLT;
  • Thereafter, the resolution plan’s approval was challenged before the NCLAT on various grounds, and the NCLAT rejected the resolution plan. The matter was remanded to the committee of creditors, with a direction to a resolution professional to proceed with insolvency proceedings from the stage of publication of form G to invite fresh expressions of interest under the Insolvency and Bankruptcy Board of India Regulations, 2016;
  • Further, the successful resolution applicant was declared ineligible under section 88 of the Indian Trusts Act, 1882, and disqualified under section 164(2)(b) of the Companies Act, 2013 (disqualification as the director of a company in case of failure to repay the deposits accepted); and
  • The successful resolution applicant filed an appeal before the Supreme Court against the NCLAT’s order.

The Supreme Court found no IBC provision to mandate that a related party should be paid in parity with an unrelated party. As long as the IBC and insolvency process provisions are met:

  • Any proposition of differential payment to different classes of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of the committee of creditors; and
  • No fault can be attached to the resolution plan merely for not making the provisions for a related party.

Therefore, even while respecting the commercial wisdom of a committee of creditors, the resolution plan in question could not have been approved by the adjudicating authority for two major reasons:

  • For the ineligibility of the resolution applicant; and
  • For not placing the revised resolution plan to the committee of creditors before seeking approval from the adjudicating authority.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at Readers should not act on the basis of this information without seeking professional legal advice.