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  • Writer's pictureRFMLR RGNUL


This post, the selected entry of the RFMLR-IBBI Blog Series Competition, 2021, is authored by Nency Shah, third-year law student at the Institute of Law, Nirma University & Devanshu Anada, fourth-year law student at the Gujarat National Law University, Gandhinagar, Gujarat.

1. Introduction – Outlining the Problem

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted primarily with the twin objectives of time-bound insolvency resolution and value maximization of the assets of the stressed Corporate Debtor (“CD”). The efficacy and success of the IBC depends upon the expeditious resolution of the stress of CD by a resolution plan, approved by the Committee of Creditors (“CoC”) as constituted under Section 21(1) of the IBC. To ensure expeditious resolution of the stress, the code separates the commercial aspects of the insolvency proceedings from the judicial aspects of the same, and this separation lies at the heart of IBC. It ensures that the Adjudicating Authority i.e., the National Company Law Tribunal ("NCLT") plays a very limited role in the insolvency process and only acts as a safeguard to ensure that the resolution plan does not contravene any provisions of the code and that the CD continues as a going concern after its resolution. This means that it cannot interfere in the decision-making process of the CoC.

The supremacy of the commercial wisdom of the CoC has been upheld by several Supreme Court rulings. However, this creditor-in-control approach, although in line with the IBC, has been subject to rampant misuse in the recent past causing a delay in completion of the CIRP and disregard of the interest of other stakeholders of the CD. This misuse of the commercial wisdom bestowed upon the CoC has been pointed out by the NCLT in various cases such as those which involve huge haircuts in the resolution plan, scheme to transfer control of the CD to related parties, etc. and have been highlighted in detail in the latter part of this article.

The conduct of the CoC is not subject to any regulations and is also protected from judicial scrutiny under the Code. So, there can be virtually no challenge to the resolution plan approved by the CoC, howsoever unfair or perverse to the interest of stakeholders it might be. Owing to this limitation, the 32nd Parliamentary Standing Committee on Finance recommended that there is a need to have a code of conduct for the functioning of CoC which will define and circumscribe their decisions. Following this, the Insolvency and Bankruptcy Board of India (“IBBI”) came up with a discussion paper containing a draft code of conduct for CoC inviting public comments on whether such a code should be specified by the board to ensure transparency, fairness and accountability of the CoC. In this blog, the authors analyze the viability of the proposed code in light of its far-reaching implications. Certain alternative approaches have also been suggested in an attempt to reach a middle ground where the commercial wisdom of the CoC is preserved and the pitfalls of judicial scrutiny of the actions of CoC are also avoided.

2. Issues Arising out of The Unregulated Operation of CoC

The basic crux of Section 21(1) of the IBC is rooted towards making the creditors adopt a combined approach in terms of the process of insolvency, as against going on independently. The CoC is bestowed with analytical and critical decision making and is hugely responsible for its commercial wisdom which is supreme in nature and out of the purview of judicial scrutiny. However, there have been several instances where this commercial wisdom exercised by the CoC has been questioned by the NCLT as being unfair, perverse and against the objectives of IBC.

2.1.Issue of Large Haircuts

One of the instances where the commercial wisdom of the CoC was brought into question was the acceptance of large haircuts on company’s total dues by the CoC. It is of pertinence that a normal amount of haircut is necessary for the process of insolvency; however, the problem lies with the large amounts of haircut coupled with its frequency and a remarkable reduction in the amount of recovery, post these haircuts. The report of the standing committee has pointed out this issue while stating that the financial creditors have been taking disproportionately large and unsustainable haircuts. It was seen in one case that the financial lenders like public and private sector banks, non-banking financial institutions, and other financial lenders to the company, have taken a haircut of Rs. 3.22 lakh crore approximately, or 61.22% of the admitted claims while undergoing the Corporate Insolvency Resolution Process ("CIRP"). The haircuts on the claims have thus arisen from an average of 55% in previous years to 60% in the financial year 2020-2021. The first quarter itself witnessed haircuts of around 74% against the claims made by lenders from the defaulters. IBBI data provides that exorbitant haircuts exceeding 90% of the total dues or sarcastically hinted as “total shave”, have also been accepted by the creditors. Some of these include Deccan Chronicle (95%), Lanco Infra (88%), Ushdev International (94%), Videocon Industries (95.85%), Siva Industries (93.25%) and Zion Steel (99%).

2.2. Delay in the process of passing the resolution plan

It has been observed by the standing committee in its report that the delay in the resolution process has increased, with more than 71% of cases pending for more than 180 days, which marks a deviation from the objective of IBC of time-bound insolvency resolution. The delay in the process of approving/rejecting the resolution plan has been spotted in a number of cases wherein the process of speedy disposal contemplated by IBC could not be achieved due to the delaying tactics of CoC.

It is seen in many cases that the banks who are members of CoC send their representatives to the meetings of the CoC who are not authorized to take any decisions without obtaining internal approvals from the financial creditors. Such delay in process should be appropriately regulated by IBBI and it should be stipulated that only competent members who are authorized to take decisions are nominated to the CoC. To address this issue, the IBBI in its proposed code of conduct has also included a clause that a member of the CoC shall nominate only such representatives who have sufficient authorization to participate in meetings and make decisions during the process.

In some cases, the CoC, in exercise of its significant discretion, have accepted late and unsolicited resolution plans. The CoC in these cases have allowed bids even after the H1 bidder. These late unsolicited bids become a part of the delay, as these create tremendous procedural uncertainty and hence genuine bidders are discouraged from bidding at the right time. These issues lead to the overall process being vitiated and result in further value erosion.

2.3. Instances of Misuse of Commercial Wisdom

The vitality of commercial wisdom of the CoC is often questioned in various instances. In the case of M/s. Andhra Bank; the transfer of control of the company was attempted to be passed on to the promoters of the company, who were ineligible as per Section 29A and were primarily responsible for the insolvency of the company. In the case of Bank of Baroda, the resolution plan of the resolution applicant was rejected by the Adjudicating Authority as it was merely used as a ploy to gain control of the CD by the very person who had pushed the CD into insolvency. It rendered the functionality of CoC to be doubtful when the restructuring plan was approved camouflaged as a resolution plan emerging from such ineligible person.

One other occasion was in the CIRP of Bhushan Power & Steel Ltd. where illegal fees were being paid by the resolution professional to the lender’s legal counsel and the same was included in the insolvency resolution cost. This showcased deliberate planning for contravening the law and disregarding the clear guidelines given in IBBI’s circular by the financial creditors and resolution professional. This further casts a shadow of doubt over the exercise of commercial wisdom by the CoC.

3. Viability of the Proposed Code of Conduct in light of its Implications

The motive of the IBBI discussion paper and standing committee report has been to cater to the alarming need of regulating the operation and conduct CoC in order to circumscribe the unregulated powers of CoC and protect the interests of all the stakeholders of the company. Regulation of CoC is also meant to ensure time-bound settlement of insolvency which is one of the primary objectives of the IBC. However, the proposed code of conduct itself faces obscurity with respect to its implementation; which is whether the code will be incorporated as “law” in regulations/acts or it will remain prescriptive in nature with the possible result of having no repercussions in case of non-compliance with the same. In addition to this uncertainty, there are various unintended implications of the code of conduct that might bring into question the efficacy of enacting such a code. These implications are discussed below:

3.1.Opens a door to the spate of litigation

The proposed code of conduct is worded in very broad terms which can be subjected to a myriad of interpretations if the code is made mandatory and is included within the meaning of “law” under any act or regulations. For instance, the words used in the proposed code of conduct, i.e. “maintain integrity” (clause a), “maintain objectivity while making decisions” (clause c), “ensure that the decision making is free from any fear, bias, favour or coercion” (clause j), etc. can be subjected to a wide array of interpretations. All such clauses lack clarity as to the medium of promulgation which leads to the code of conduct being susceptible to various interpretations leading to a spate of prolonged litigation and hence defies the purpose of speedy disposal of cases in IBC. This would potentially lead anyone to challenge the resolution plan on the ground that the code of conduct was not complied with by the CoC.

3.2.Judicial precedents disclosing unfettered exercise of commercial wisdom by CoC

The principle of judicial scrutiny has been well enunciated in the cases Essar Steel where the Court has upheld that, the purview of judicial review in approving the resolution plan shall only be limited to the grounds stated in the provisions of IBC itself; i.e. in Section 30(2) (in case of the NCLT) and Section 61(3) (in case of the NCLAT). The Court has further noted that it was a conscious decision of the legislature to not provide for any other grounds than the ones already mentioned in Sections 30(2) and 61(3) in order to challenge the commercial wisdom of the CoC before the Adjudicating Authorities. Thus, the Adjudicating Authorities lack jurisdiction to inverse the commercial wisdom of the dissenting financial creditors.

The Supreme Court in Maharashtra Seamless Limited emphasized on the supremacy of CoC and affirmed that, subject to the limited arena of judicial review that Section 30(2) and Section 61(3) provides, the Courts must defer to the commercial wisdom of the CoC while not interfering with the decision making of the CoC. In the case of Ebix Singapore Private Limited, the Court redefined that the Adjudicating Authority could not intervene with the CoC's majority decision and held that once a plan has been approved by the CoC, the Resolution Applicants cannot file an application to withdraw it. Therefore, it can be observed that the Court has no authority to delve into the merits of the commercial wisdom of CoC. The only instance where the NCLT might reject the resolution plan will be if it fails to meet the standards mentioned in Section 30(2).

If the proposed code of conduct is introduced in the IBC or CIRP regulations, it will undermine the established principle of commercial wisdom and will contribute negatively to the objectives of IBC. Enactment of such a code of conduct will also allow an additional ground for judicial review as it will be read within the meaning of the word “law” used in Sections 30(2) and 61(3). The non-compliance of the code will eventually act as a ground for attacking the approval of the resolution plan with the reasoning that it contravened with the provisions of law.

Therefore, the crux of all the implications aforesaid, conclusively suggests that if the draft code of conduct is adopted as the law then it will be open to being misused as a tool to challenge the resolution plans agreed upon by the CoC. The draft code of conduct is widely worded and open to numerous interpretations, thereby increasing the scope of challenge to the resolution plans. Thus, non-compliance with the code of conduct will become an additional ground for the judicial review of the resolution plan. This will de facto lead to questioning the commercial wisdom of CoC vitiating the whole process of CIRP and the primary objective of IBC. These unintended consequences certainly imply that the CoC will witness its downfall of supremacy which has been time and again affirmed by the Apex Court of India. However, on the other hand, if the code of conduct is made merely prescriptive, then the chances of it being rightly observed by the CoC are thin and hence it would defy the whole purpose of its formation as there is a possibility of it being blatantly ignored by the financial creditors.

In light of the shortcomings of adopting the code of conduct in its presented form, few alternative solutions are suggested by the author in the second part of the blog to balance the interests of the CoC along with ensuring fairness in the process.

The second part of the blog can be accessed here.


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