Committee of creditors: An instrumentality of state

By Shardul S Shroff, Ambarish and Roma Das, Shardul Amarchand Mangaldas & Co
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The Insolvency and Bankruptcy Code, 2016 suspends the board of directors of a company in insolvency, and such a company is managed by a resolution professional and a committee of creditors (CoC). The CoC determines the fate of the company. It can choose to liquidate or accept a resolution plan from a “resolution applicant” (essentially, an acquirer) for revival of the company. Given these wide powers, how the CoC arrives at its decisions assumes importance.

Shardul S Shroff
Shardul S Shroff

The members of the CoC are financial creditors, mostly banks. However, the CoC cannot take any decision that it finds commercially beneficial, and is constrained by the same public law standards as are applicable to state instrumentalities.

COC: INSTRUMENTALITY OF STATE

The Supreme Court of India has considered the issue of instrumentality of state in several cases, the most prominent being Ramana Dayaram Shetty v The International Airport Authority (1979) where the Supreme Court prescribed a non-exhaustive list of factors that confer the status of instrumentality of state.

Some of the factors listed in the Shetty case are: (1) whether the operation of the corporation is an important public function; (2) whether the corporation enjoys state conferred or state protected monopoly status; and (3) whether there is any control of the management and policies of the corporation by the state, and if so, what is the nature and extent of such control. The CoC meets all of these requirements, as explained below:

  1. The CoC is created by a statute, and is not a private body. The powers of the CoC, its constitution, operations and decision making are governed by the above-mentioned code and the rules and regulations framed thereunder;
  2. It performs an important public function in deciding the outcome of insolvency of a company, a role traditionally reserved entirely for courts and tribunals;
  3. The powers of the CoC are conferred by the code, and the code operates notwithstanding anything to the contrary contained in any other law. The CoC can approve a resolution plan that writes off amounts payable to operational creditors, including amounts payable to the government and tax due;
  4. The functions of the CoC cannot be performed by any other person or body, and the position of the CoC is similar to that in a state-conferred monopoly.

All of the above, and the wide powers of the CoC, leave no doubt that the CoC is an instrumentality of the state. Relatedly, the members of the CoC are often public sector banks, which themselves are instrumentalities of state.

Ambarish
Ambarish

CLASSIFICATIONS

Instrumentalities of state are required to abide by, among others, article 14 of the Constitution of India, which prohibits denial of equality before the law or the equal protection of the laws. Article 14 has been interpreted by the supreme court to include a protection against arbitrariness, and this imposes a duty on every instrumentality of state to act in a fair, transparent and non-arbitrary manner.

In the case of the CoC, this translates into an obligation to devise a procedure for selection of resolution plans that is transparent, non-arbitrary and fair. It also requires the CoC to lay down eligibility criteria for resolution applicants, and evaluation criteria for selection of resolution plans having regard to the objective to be achieved.

Put differently, the evaluation and eligibility criteria should be such that they facilitate selection of the best resolution for the business of the company in insolvency, and the same eligibility and evaluation criteria cannot be applied to every case without thought.

The CoC can benefit from well established jurisprudence on law related to tenders, as the submission of a resolution plan by potential resolution applicants is comparable to submission of tenders/bids where the most suitable offer is selected after following a competitive closed bidding process.

The law of tenders is well settled and provides for adherence to prescribed timelines and procedures, and meeting qualification criteria. It also means that the CoC must follow the process once it is specified, and cannot deviate from the process for commercial gains or otherwise.

That the CoC is an instrumentality of state and is bound to follow the basic principles of administrative law has also been observed by the Ahmedabad bench of the National Company Law Tribunal (NCLT) in Numetal Limited v Satish Kumar Gupta (2018). However, some of the recent decisions by various benches of the NCLT seem to suggest that the CoC may breach the process specified by it, and select a resolution plan outside the specified process. A judgment from the Supreme Court of India is required to finally settle this issue, and for efficient conduct of corporate insolvency resolution process.

SHARDUL S SHROFF is executive chairman, AMBARISH is a partner, and ROMA DAS is a senior associate at Shardul Amarchand Mangaldas

Shardul_Amarchand_Mangaldas_2Shardul Amarchand Mangaldas & Co 

Amarchand Towers, 216 Okhla Industrial Estate
Phase III, New Delhi, 110020, India
www.amsshardul.com

Contact details:

Tel: +91 99586 96900

Email: shardul.shroff@AMSShardul.com
Email: ambarish@AMSShardul.com
Email: roma.das@amsshardul.com