Tribunals can’t interfere with CoC’s commercial decisions: SC

Commercial decisions taken by the committee of creditors (CoC) with regard to resolution of a corporate debtor under the insolvency regime can’t usually be held up for judicial review by the relevant tribunals, the Supreme Court has reiterated.

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This is for the third time since March 2019 that the apex court has ruled against the attempts by the National Company Law Tribunal (NCLT) and appellate body NCLAT to interfere with the merits of the CoC’s majority business decisions regarding distribution of the proceeds of resolution among various classes of stakeholders.

The court’s holding on to the view that the tribunals have little residual equity jurisdiction upon the CoC’s well-laid-out mandate will help fast-track resolutions. The SC’s repeated rulings would make it impossible for the dissenting financial creditors (who could potentially act at the behest of an unsuccessful bidders) or operational creditors to appeal against the CoC’s commercial decisions in future, in so far as the committee hasn’t violated the procedures outlined in the Insolvency and Bankruptcy Code (IBC).

In the latest ruling, by three-judge SC bench comprising Justices AM Khanwilkar, BR Gavai and Krishna Murari set aside an NCLAT order, which had annulled the decision of CoC to accept a resolution plan for corporate debtor Ricoh India, submitted by Kalparaj Dharamshi & Rekha Jhunjunwala. In issuing the order, the NCLAT had upheld the challenge posed by unsuccessful bidder Kotak Investment Advisors (KIAL) to the COC-approved resolution. Kotak’s challenge was on grounds that the Kalparaj’s plan was submitted beyond the prescribed time limit; the court, however, noted that both the bidders submitted revised plans after the time-line quoted by KIAL.

Quoting the two earlier rulings — K Sashidhar/Indian Overseas Bank, March 2019 and Essar Steel, November, 2019) – the SC bench said: “…the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis… the appellate authority ought not to have interfered with the order of the adjudicating authority (CoC) by directing the successful resolution applicant to enhance their fund inflow upfront.”

It further said: “the legislative scheme, as interpreted by various decisions of this Court, is unambiguous. The commercial wisdom of CoC is not to be interfered with, excepting the limited scope as provided under Sections 30 and 31 of the I&B Code”.

Section 30 is concerning submission of the resolution plan, including eligibility criteria for bidders and Section 31 deals with the procedures for approval of the plan.

The apex court also noted that the CoC’s decision was taken by a thumping majority of 84.36%.

The only creditor voted in favour of KIAL is Kotak Bank, which is a holding company of KIAL, having voting rights of just 0.97%.

In fact, in the Essar Steel case, the apex court had held that operational creditors and dissenting financial creditors are entitled only to their notional liquidation value and not more. It stressed that the final discretion of what to pay and how much to pay to each category or sub-category of creditors is vested with the CoC. The NCLT, of course, is required to ensure that the CoC facilitates the corporate debtor continue as a ‘going concern’ during the resolution process, the value of the assets are maximised and the interests of all stakeholders, including operational creditors have been taken care of.

Under the IBC rules, only financial creditors are part of the committee of creditors (CoC) that decides on a resolution plan and selects the winning bidder. Where a stressed firm goes for liquidation, operational creditors are placed behind financial creditors (who account for a large share of the default claims) to get proceeds, as they are typically unsecured. Typically, if a stressed firm is liquidated, financial creditors are usually third in the preference order to get the proceeds – after the clearance of the cost of resolution and workers’ dues.

The NCLAT ruling in the Essar Steel case had the potential to subvert these norms, The tribunal said secured financial creditors ought to share recoveries in a resolution plan inter se (irrespective of the ranking of their security positions) and with the trade creditors, on a ‘pari passu’ basis.

Under the IBC, promoters who are wilful defaulters are barred from bidding. In other cases, promoters can bid if they clear their dues first or if the default period is less than one year.