Commercial decisions are largely driven by incentive structures. Therefore, if legal policy favours a particular commercial outcome, the decision-making in that regard must be placed in the hands of entities most likely to be affected by such outcomes. This logic can also be applied to insolvency proceedings. The favoured policy outcome of the Indian insolvency law framework is the maximization of value of a corporate debtor. In the context of an insolvent company, the persons most likely to gain from such maximization of value are its creditors. Therefore, incentive structure wise, the creditors of a corporate debtor must be vested with the discretion of deciding in favour of such value maximization. However, the fate of an entity, its operations and human resources cannot rest on mere incentive structures. For optimum results, such creditors must also possess the ability to evaluate the commercial feasibility of their decisions and the commercial viability of the entity at stake. Accordingly, under the Insolvency and Bankruptcy Code, 2016 (“IBC”), this responsibility of making decisions regarding the resolution of a corporate debtor has been placed on a particular set of creditors of the corporate debtor. These creditors are banks and financial institutions, categorized as financial creditors of a corporate debtor. The law has specifically empowered such financial creditors to constitute a committee of creditors (“CoC”) to make decisions regarding the resolution / liquidation of a corporate debtor. Despite such special powers, CoCs often find their decisions being challenged before, and scrutinized by, judicial fora.
Such judicial scrutiny of commercial decisions is not surprising. Under the constitutional scheme, the judiciary has been assigned the task of delivering justice and ensuring fairness in all matters, including commercial decisions. While the intention is noble and in line with the usual role of the judiciary (even in erstwhile winding up proceedings), what is commercially viable and beneficial, may not always be just and equitable. This is why most resolution plans for restructuring / settling the debt of distressed companies have been scrutinized and occasionally modified by courts and tribunals. Such judicial intervention has ranged from decisions regarding distribution of funds brought in under a resolution plan to restarting the corporate insolvency resolution process.
The IBC, on its part, provides for a specific role of the judiciary. The task of the National Company Law Tribunal (“NCLT”) as the adjudicating authority is to ensure that a CoC approved resolution plan is compliant with the criteria mentioned in section 30(2) of the IBC. This was a conscious departure from the earlier winding up regime – to limit the role of the judiciary to performing supervisory functions in overseeing IBC procedures. Under the IBC, the limited grounds on which a CoC approved resolution plan may be rejected by the NCLT are: (a) if the plan is in contravention of any law; (b) if there has been material irregularity in exercise of powers by the resolution professional; (c) if there is no provision in the plan for dealing with operational debt; (d) if the insolvency resolution process costs are not to be paid in priority to all other debts; and (e) for any other reasons as specified by the Insolvency and Bankruptcy Board of India.
Despite such clarity in the plain text of the IBC, the Supreme Court had to reaffirm this position in February 2019. In K. Sashidhar v Indian Overseas Bank and Ors, the apex court clarified that “the legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC.” It further stated that financial creditors “act on the basis of thorough examination of the proposed resolution plan and assessments made by their team of experts”, while also acknowledging the ‘paramount status’ accorded to the commercial wisdom of the CoC. While the apex court has left no scope for argument in favour of judicial scrutiny of CoC decisions, a recent order in the case of Essar Steel India Limited has rekindled the judicial intervention debate. In the order, the NCLT has approved the resolution plan proposed by Arcelor Mittal India Limited but subject to the acceptance of certain suggestions of the tribunal. One of these suggestions is to relook and reconsider the method of distribution of the amount to be brought in by Arcelor Mittal India Limited. When appealed, the appellate tribunal has also upheld such order of the NCLT. Since then, this issue has moved from the appellate tribunal to the apex court and back. As a result, uncertainty surrounding the status of CoC approved resolution plans continues.
Uncertainties arising from judicial precedent hamper the predictability of outcomes in insolvency proceedings and add to the delay in completion of such proceedings. While timely resolution is one of the key underlying principles of the design of the IBC, predictability of law and outcomes is one of the primary principles of rule of law. Despite clarity in the text of the law and confirmation from the apex court, we seem to be turning the clock backwards on this issue. A judicial hands off approach is one of the key reforms suggested in the IBC. Only time will tell if this reform sees the light of another day.
Gausia Shaikh, Associate