Supreme Court upholds creditors committee sovereignty under the IBC

The Supreme Court in a recent judgment has categorically held that commercial wisdom of the Committee of Creditors (CoC) is sacrosanct and not subject to judicial review..“Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan”, the Court held..The Supreme Court bench of Justices AM Khanwilkar and Ajay Rastogi was hearing appeals in two cases, for which liquidation orders were passed under the IBC, Kamineni Steel & Power India and Innoventive Industries..While Innoventive Industries went straight into liquidation for not being able to gather the (then) necessary 75% of voting share of financial creditors constituting the CoC, Kamineni’s resolution plan despite having only 66% of voting share was approved by the NCLT Hyderabad Bench. The NCLAT, however, overturned this ruling in the case of Kamineni and remanded the case back to NCLT for liquidation. In the case of Innoventive, appeals were filed by the promoter as well as the worker’s union arguing that the dissenting financial creditors did not provide ‘reasons’ for not chosing to opt the resolution plan..Several innovative arguments were advanced on behalf of Innoventive as well as Kamineni for pulling the companies out of liquidation – the voting threshold of 75% is not mandatory and even if it is considered to be so, those who abstain should not be included and the remaining votes should be allotted on a pro-rated basis; the voting threshold has been reduced to 66% during the pendency of these appeals, and should now be applied to both the cases; since the dissenting financial creditors failed to offer any reason for rejecting the resolution proposal, they did not do so in good faith but with malicious intent; CoC, being the custodian of public interest, is under a statutory duty to exercise its power under Section 30(4) of the IBC reasonably and fairly (Section 30(4) posits an obligation upon the CoC to adopt a resolution plan which is ex facie more viable than liquidation)..The Supreme Court reading the law strictly, found that the 75% threshold is mandatory, “any other interpretation would result in rewriting of the provision and doing violence to the legislative intent”..It further held that the NCLT and NCLAT, while admitting a resolution plan, can only consider factors enumerated in Section 30(2) and 61(3) respectively. Section 30(2) requires the Resolution Professional to confirm whether the resolution plan is in compliance with certain enumerated matters. The NCLT is required to ensure that has been done by the Resolution Professional. Section 61(3) provides limited grounds on which the NCLAT may hear an appeal from the NCLT order..However, in both cases, the application was filed under Section 33, that is for initiation of liquidation. In such a case, the NCLT is obligated to initiate liquidation process under Section 33(1) of the IBC. The NCLAT under 61(3) limits the grounds under which the NCLAT may hear an appeal. The Court found that upon receipt of a “rejected” resolution plan the NCLT is not expected to do anything more; but is obligated to initiate liquidation process under Section 33(1) of the I&B Code..“The legislature has not endowed the NCLT with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors“, the Court held.“The legislature, consciously, has not provided any ground to challenge the ‘commercial wisdom’ of the individual financial creditors or their collective decision before the adjudicating authority. That is made non justiciable.“, the Court further held..Insofar as the retrospective applicability of the lowered threshold is concerned, the Court noted the contents of the Insolvency Law Committee Report which recorded that, “empirical record suggests that the apprehension regarding companies are being put into liquidation by minority creditors is premature and further that the objective of the Code is to respect the commercial wisdom of the CoC“. The Court then explicitly held that 2018 amendment having come into force w.e.f. 6th day of June, 2018, will have prospective application and apply only to the decisions of CoC taken on or after that date concerning the approval of resolution plan..Both appeals were dismissed accordingly..Read the Judgment