[By Rishi Raj]
The author is a student at Maharashtra National Law University, Aurangabad.
INTRODUCTION
When a company defaults in repayment of loans, the non-performing assets and debts are restructured as a going concern or the company goes into liquidation. So, the uncertainty leads to the dilemma that what factors drive a company’s future of survival?
The Bankruptcy Law Reforms Committee (BLRC) report, 2015 has observed that “it’s the Committee of Creditors (the “CoC”) is only one correct forum for evaluating proposals to keep the entity as a going concern, including decisions about the sale of business or units, retiring or restructuring debt, and making an appropriate decision”.
It is noteworthy that the proper disposition of a defaulting company is a business decision which can be made only by the creditors. Further, there is a plethora of judgements by the Supreme Court wherein it reiterated the BLRC report of 2015. The Supreme Court giving the paramount status to the CoC stated in equivocal terms that the Adjudicating Authority or the Appellate Authority cannot intervene in the decisions made by the CoC in respect to the feasibility and viability of a resolution plan.
FEASIBILITY AND VIABILITY: A CLOSE INSPECTION OF A RESOLUTION PLAN
Reference can be made to Section 30(4) of the Insolvency and Bankruptcy Code, 2016 (the “Code”) which provides that before approving a resolution plan, the CoC must consider the feasibility and viability of a resolution plan. However, the term “feasibility and viability” of a resolution plan has not been defined anywhere.
The NCLAT in Next Orbit Ventures v. Print House (Media) Pvt. Ltd. & Anr. for a better understanding of the terms “feasibility and viability” referred to Black Law’s dictionary. The NCLAT observed that feasibility means analysing the strength and weaknesses of an existing business and viability is a study of existing business sustainability. It went one step further and opined that the feasibility can be economic, legal, market and real estate feasibility etc. which is ultimately going to link with the profitability of the business and integration of all these factors for the survival of the business.
The Code casts the duty on the CoC to safeguard their own and as well as of investors’ interests while assessing the viability of a resolution plan. The Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta (Essar Steel) wherein it was observed that it should be assumed that the financial creditors are aware of the viability of the corporate debtor and feasibility of the proposed resolution plan.
On similar lines, the NCLAT in M/s Bhaskara Agro Agencies v. M/s. Super Agri Seeds Pvt. Ltd. stated that:
“So far as the viability and feasibility of the resolution plan are concerned, there are experts available with the creditors to find out the viability and feasibility of the resolution plan and the Adjudicating Authority or the Appellate Authority cannot seat in appeal over the decision of the CoC.”
However, the assessment of feasibility and viability of a resolution plan is difficult and in absence of any fixed or unique approach and the assessment will be the outcome of the collective decision of the CoC. Hence, the wisdom of CoC should prevail to decide the fate of the debt-laden corporate debtor. The creditors act solely on the basis of a comprehensive review guided by the resolution professionals (RP) and the team of experts, who assess the feasibility and viability of the proposed resolution plan by taking account of all the available information and any other alternate investment opportunity for survival.
COMMERCIAL WISDOM: THE NON-JUSTICIABLE STATUS
It’s the CoC who have to use their commercial wisdom to choose whether or not to rehabilitate the corporate debtor by accepting the proposed resolution plan. Further, the tribunal must keep in mind the commercial wisdom of the creditors to the proposed resolution plan, who have made a decision about the plan's usefulness and propriety by supporting it by taking the required majority 66% vote of CoC as prescribed under Section 12(2) of the Code.
The principle of non-interference with the commercial decision of the CoC is the primary reason for the success of the Code. The Supreme Court in Essar Steel carved out certain intrinsic assumptions regarding CoC on which the principle of the commercial wisdom of the CoC has been recognised. The assumptions are: [i] that the creditors are well aware of the viability of the corporate debtor and feasibility of the proposed resolution plan [ii] their act solely depends on the basis of the comprehensive assessment made by their team of experts and [iii] their decisions are made solely on the basis of opinions expressed by them.
While relying on the commercial wisdom of the CoC in the Committee of Creditors of Amtek Auto Limited through Corporation Bank v. Dinkar T. Venkatsubramanian the Supreme Court permitted the resolution professional to invite fresh offers for the resolution of Amtek instead of liquidating the company. Further, similar views were taken into account by the Supreme Court in Essar Steel and held that the commercial wisdom of the CoC has been given the paramount status and that is free from any judicial intervention to ensure completion of the resolution process within the stated timeline which is prescribed under the Code.
A LIMITED RESTRICTION ON THE JUDICIAL INTERVENTION
There are certain limited grounds on which the decision of CoC regarding the “approval” of a resolution plan can be challenged. The grounds on which the NCLT can intervene against the decision of CoC have been set out in section 31(1) in consonance with Section 30(2) of the Code and the Appellate Authority under Section 32 in consonance with 61(3) of the Code.
The Supreme Court in K Sashidhar v. Indian Overseas Bank laid down that it is clear that there is a limited judicial review available, which cannot go against the decision of CoC. The review has to be within the four corners of Sections 30 and 32 of the Code and what is important is that the provisions investing jurisdiction to NCLT and NCLAT to review the decision of CoC have not made commercial wisdom as a ground to approve or reject the resolution plan and the same is non-justiciable. Further, a reference may be made here to Maharashtra Seamless Limited v Padmanabhan Venkatesh and Ors., wherein the Supreme Court relying on the commercial wisdom of the creditor upheld the resolution plan even though the upfront payment contemplated in the resolution plan was lower than the liquidation value of the corporate debtor.
Neither the Adjudicating Authority nor the Appellate Authority has been provided with the jurisdiction to reverse the decision of CoC and they have to be within their limited jurisdiction provided under the Code. Further, they are not allowed to act as a court of equity or exercise their plenary powers which are not provided to them by the statute.
CONCLUDING REMARKS
It can be concluded from the above judgements by the Supreme Court that the commercial wisdom of the CoC shall be paramount for deciding the future course of business. Further, this is not the first time where the CoC decision was in question and every single time, the Supreme Court while upholding the commercial decision of CoC has stated in unequivocal terms that the appeal is a creature of statute and the statute has not provided any jurisdiction and authority either with NCLAT/NCLT to review the commercial decision that is practised by CoC.
Further, a question of concern often arises relating to the decision taken by the CoC which is who is to be held accountable for the wrong decision of the CoC while practising their ‘commercial wisdom’. What is to be done in cases where the CoC has willingly sacrificed the business of the corporate debtor irrespective of the feasibility and viability of the resolution plan? Till now neither the Supreme Court nor the Insolvency Bankruptcy Board of India has responded to these questions. Hence, at this juncture, Lawmakers should take a step forward and include the commercial decision of the CoC under the preview of judicial review and CoC should be held accountable for their mala fide intentions while approving or rejecting a resolution plan.