[Gaargi is a student at National Law Institute University, Bhopal.]
The Insolvency and Bankruptcy Code (IBC) has been in effect since 2016 with an aim of reorganizing the company going through insolvency. There was a paradigm shift from the former insolvency laws as IBC was a more creditor friendly legislation. Under the IBC, financial creditors are a part of the committee of creditors (COC) who are the supreme decision making party in a corporate insolvency resolution process (CIRP). It considered the fact that creditors hold the highest stakes in a company which puts them in a better position to adjudge the situation during insolvency process.
The Supreme Court of India in its judgment of K Sashidhar v. Indian Overseas Bank and Others held that the commercial decision of COC for approval of resolution plan is non-justiciable and hence, is required to be sanctioned by the Adjudicating Authority. The Indian courts have time and again given a wider interpretation to the commercial wisdom of the COC for approval of a resolution plan with a sole restriction that the resolution plan must comply with Section 30(2) of the IBC. The issue arises when the resolution plan fulfils the requirements of Section 30(2) but fails to take into account certain key features of the IBC.
The article aims to address the issues relating to flexibility given to the COC and the resolution professional (RP) in the name of commercial wisdom while approving a resolution plan since the Adjudicating Authority has no role in evaluation of the commercial decision of the COC. These issues are in the form of approval of unsolicited plan and delay in completion of CIRP. Furthermore, it deals with the question of whether there is a need of code of conduct for the COC by discussing certain guiding principles for creditors and resolution professional around the globe while approving a plan.
Why there is a need for code of conduct
IBC was consolidated with an objective to provide time-bound insolvency process for maximisation of value of assets of such persons. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (CIRP Regulations) provides a model timeline for the CIRP. The resolution plan should be approved within 165 days since the commencement of CIRP.
The timelines are not enforced strictly since resolution plans are being approved by the COC even after the expiry of the deadlines. In Kalpraj Dharamshi and Another v. Kotak Investment Advisors Limited and Another, the Supreme Court of India allowed the acceptance of the resolution plan after the expiry of the deadlines since it was a decision based on the commercial wisdom of the COC. Commercial wisdom of the creditors became an important ground than assessing the qualitative analysis of the resolution plan. Similar view was also observed in Supreme Court of India’s judgment in Ghanashyam Mishra and Sons Private Limited through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director and Others. The acceptance of such resolution plan delays the entire CIRP and may raise objections on the arbitrary conduct of the COC.
It is pertinent to note that delay in CIRP will also lead to reduction in the value of assets of the corporate debtor. Further, increased delay in process causes erosion of stakeholder confidence in process. According to the Insolvency and Bankruptcy Board of India (IBBI), of the 4,500 cases that have been admitted, only 14% of the 4,500 CIRP applications have been settled, while the rest are either closed or still under investigation. Of the ongoing cases, 75% have already exceeded the mandatory time limit of 330 days.
Another issue was raised in Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Others, wherein the COC approved a resolution plan which was valued below the liquidation value by 87.10% of the votes. The Supreme Court of India noted that there are no provisions in the IBC or the regulations which provide that the bid of any resolution applicant has to match the liquidation value arrived at in the manner provided in Clause 35 of the CIRP Regulations. Furthermore, courts cannot intervene on the merits of the resolution plan which is approved based on the commercial wisdom of the COC.
This wider interpretation of the scope of ‘commercial wisdom’ may be detrimental to the aims and objectives envisioned in the IBC. The court in the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, held that the COC cannot approve a resolution plan that goes against the objective of the code. Approving a resolution plan bid that is less than the liquidation value violates the fundamental principles and objectives of the code.
The current practice of Indian courts giving primacy to ‘commercial wisdom’ can be seen as a starting point for the unlimited power of COC under the garb of ‘commercial wisdom’. The Supreme Court of India has restricted the scope of judicial review in relation to decisions of the COC to Section 30(2) of the Code. The provisions of Section 30(2) fail to cover an important objective of the code that is timely resolution of the corporate debtor. There is no mention of adhering to the timelines which has led the COC to discuss resolution plans submitted even after the deadlines hence resulting in delayed resolution process as well as haircuts in total dues. The haircuts on the claims have arisen from an average of 55% in previous years to 60% in the financial year 2020-2021.
Furthermore, courts have failed to take note of the reasoning behind the commercial decision of the COC. There are no regulations or guidelines to assess the conduct and the decisions making process of the COC. The IBBI has realised an urgent need for such code of conduct which will define and circumscribe the decisions of the COC since they have larger implications for the efficacy of the IBC.
Practice around the globe
The COC is the most appropriate body to resolve and revive the corporate debtor thus making it more necessary to further strengthen their framework. While deliberating on the powers of the creditors, it is worthwhile to refer to the position of such creditors under the insolvency scheme in international jurisdiction. In the USA, Section 1129 (a)(7) of the US Bankruptcy Code (US Code) provides that a resolution plan can only be approved if it meets certain ingredients including vote of at least one impaired class where there are classes that are impaired under the plan. The US Code also provides for creation of a group of unsecured creditors for the purpose of representing their interest.
In the UK, the role of RP is equivalent to that of an Administrator. The Administrator has broad scope of powers and can do anything necessary or expedient for the management of the affairs, business and property of the company, keeping in mind the best interest of the creditors. The British court has provided for a ground to judge the decisions taken by the Administrator. In Re Charnley Davies Ltd (No.2), the court noted that the administrator is to be judged not by the standards of the most meticulous and conscientious member of his profession, but by those of an ordinary, skilled practitioner. In order to challenge the decision of the administrator, one has to prove that the administrator has made an error which a reasonably skilled and careful insolvency practitioner would not have made.
Proposed draft and suggestions
In India, the IBBI proposed the draft Code of Conduct that requires the COC to maintain integrity and objectivity while exercising decisions and refrain from any such action which is detrimental to the objective of the IBC, not engage in any illegal means, cooperate with the resolution professional and so on. The issue with the current draft is that the IBBI has failed to mention how the code will be implemented (i.e., whether it will be incorporated in the statute / regulation or whether it will merely be in the nature of guidelines having no implication in case of non-compliance). Furthermore, the purpose of bringing such code of conduct in force was to check in the unlimited powers given to the COC in the name of ‘commercial wisdom’. The terms used in the draft code such as “objectivity”, “integrity” are quite broad and do not provide any additional clarity to the current scenario. The draft code has merely provided an additional ground to challenge the resolution plan without providing any concrete substance to grounds of challenge and hence will further delay the process of CIRP.
It becomes important to suggest changes to the Code of Conduct that further strengthens the framework of insolvency in India. This can be done by restricting the scope of decision making powers of COC within a scheme of guiding principles. IBBI can consider adopting certain guiding principles for the COC which are similar to that of US Code such as Section 1129 (a)(7) or establish certain grounds to judge the commercial decisions of the COC as they have for an Administrator in the UK. Another important principle could be that the commercial decision of the COC should be backed up with fair reasoning. Introducing better due diligence of the resolution applicants will further help in speedy resolution process. Such principles will strengthen the ability of the COC to exercise its commercial wisdom for the benefit of the corporate debtor along with fulfilling the objective of value maximization and balancing the interest of various stakeholders.
The proposed Code of Conduct is a positive step towards creating an effective regime for implementing insolvency laws in India and ensuring transparency in the entire resolution process. At the same time, a potential drawback is that more lawsuits may arise as a result of the implementation of the Code of Conduct, thereby delaying the resolution process. While regulating the unfettered commercial wisdom of the COC, caution must be exercised to ensure that it is not misused and does not result in a succession of legal proceedings.