The role of the committee of creditors (CoC) in a corporate insolvency resolution process (CIRP) has increasingly been scrutinized and clarified by various courts and tribunals, including the Supreme Court. There have also been amendments to the Insolvency and Bankruptcy Code, 2016 (code).
The principal responsibility of the CoC is to decide either to approve or reject a resolution plan proposed by a resolution applicant (RA) by considering its feasibility and viability and the manner of distribution of the resolution amount. This is set out in section 30(4) of the code, which since the Insolvency and Bankruptcy Code (Amendment) Act, 2019, includes the CoC’s authority to consider the manner of distribution of the resolution amounts.
In many recent instances, however, creditors, particularly operational creditors and dissenting financial creditors, have challenged resolution plans approved by the CoC, mainly on the grounds that those resolution plans are unfair and discriminatory.
The main matter that emerges from these disputes is the primacy of the CoC’s decision with respect to a resolution plan. While the code recognizes the central role that the CoC plays in approving a resolution plan, some benches of the National Company Law Tribunal (NCLT) have held that the tribunal has the power to reject or modify resolution plans as approved by the CoC, if found to be unfair or discriminatory.
Subsequently, the Supreme Court, in K Sashidhar v Indian Overseas Bank, confirmed that the decision of the CoC in approving or rejecting a resolution plan is final and binding, and is not open to challenge or scrutiny, unless the factors prescribed under section 30(2) of the code were not complied with. The court held that approval or rejection of a resolution plan is a commercial decision of the CoC, and that no inquiry can be made into the justness or fairness of such approval or rejection. The basis of this finding is consistent with the well established principle of law that the courts and tribunals should not ordinarily interfere with the opinions of expert economic bodies such as the CoC.
However, even after this decision of the Supreme Court, the National Company Law Appellate Tribunal (NCLAT), in Standard Chartered Bank v Satish Kumar Gupta, held that the manner of distribution of amounts under the resolution plan is not a commercial decision and therefore modified the resolution plan approved by the CoC. The NCLAT also held that the CoC cannot negotiate the terms or manner of distribution of amounts under the resolution plan.
In reaction to the NCLAT judgment the legislature enacted the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (amendment act), by which parliament sought to reverse the effect of that decision. Interestingly, the amendment act clarifies that the CoC may decide to liquidate a corporate debtor at any time after it has been set up, and before confirmation of the resolution plan. This clarification reinforces the CoC’s ability simply to resolve to liquidate a corporate debtor even before a resolution plan is placed before it. In accordance with the K Sashidhar case, the CoC’s decision to liquidate a corporate debtor cannot be challenged. It is therefore axiomatic that any decision of the CoC approving a resolution plan that conforms to the minimum distribution specified under the code cannot be challenged.
The amendment act re-emphasizes that the CoC’s decision on a resolution plan cannot be the subject of routine inquiry, and reinforces the Supreme Court’s decision in the K Sashidhar case. This has come as a welcome relief to financial creditors.
It should be noted that the amendment act does not clarify whether the CoC has the right to negotiate the resolution plan with the RAs. It is likely that it does, on the ground that a resolution plan, though a document of statutory sanction, is essentially a contract between the creditors and stakeholders on the one hand (represented by the CoC), and the RAs on the other. The CoC should therefore be allowed to make counter-offers to the RAs’ offers, and to negotiate the terms of the resolution plan. The report of the Bankruptcy Law Reform Committee in November 2015 suggests that debt resolution is a matter to be negotiated by the creditors. This view is fortified by the fact that the CoC cannot reverse its decision by a subsequent resolution once it has approved a resolution plan, which means it has accepted the offer of an RA.
In order to strengthen the implementation of the code, the role of the CoC in negotiating a resolution plan must be clarified, either by legislative amendment or by judicial pronouncement.
Charanya Lakshmikumaran is a partner and Gopal Machiraju is a senior associate at Lakshmikumaran & Sridharan.
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