The Preamble of Insolvency and Bankruptcy Code 2016 (Code) contemplates to consolidate and govern insolvency laws in a time-bound manner with a view to maximise the value of assets and balance the interest of all stakeholders. Section 30(4) of the Code empowers the Committee of Creditors (CoC) consisting of financial creditors, may approve a resolution plan by a vote of not less than 66% voting share as per their “commercial wisdom”. Further, the Supreme Court in the case of India Resurgence Arc Pvt. Ltd. v. Amit Metaliks Limited & Anr., has observed that the commercial wisdom of CoC cannot be judicially interfered by the Adjudicating Authority or the Appellate Authority as it remains within the four corners of Section 30(2) of the Code. Once it is established that all of the required standards have been met, the judicial review procedure cannot be extended to include quantitative analysis of a specific creditor or stakeholder who may have his own complaint. Pertinently, by virtue of this, the power to approve or reject the resolution plan falls entirely in the scope of commercial wisdom of the CoC.
Recently, the Chennai Bench of National Company Law Tribunal (NCLT) in the matter of State Bank of India v. Subrata M. Maity, was posed with a peculiar question of whether any member of CoC can withdraw his consent after approving the resolution plan but before it is approved by the Adjudicating Authority. The authors in this article aim to analyse the pandora’s box underlying the above-mentioned ruling and further layout suggestions to rectify the same.
FACTUAL MATRIX OF THE CASE
The State Bank of India (SBI), a member of the CoC, filed an application with the Adjudicating Authority, demanding that the concluded vote on the resolution plan be nullified. It claimed that the Resolution Professional had made severe procedural errors while conducting CoC sessions, and had violated Regulations 39(2), 39(3), and 39B to 39D of the Code. SBI alleged that they have voted in favour of the plan “under protest” and the final plan was never laid before the CoC for discussion, thereby, the collective wisdom of the CoC could not be reached.
In response, the Respondent by refuting the arguments of SBI stated that there was no procedural abnormality in accommodation of the resolution plan to the CoC. The updated plan on numerous occasions was submitted to the CoC where they verified and approved the same. Notably, the Respondent further stated that the resolution plan was passed with a 100% majority and the share of the SBI in voting was 32%. Thus, if the SBI had not voted in favour of the resolution plan, then also the resolution plan would have passed with a majority of 68% i.e., above the required approval.
ANALYSIS OF THE JUDGEMENT
The NCLT noted that there is no provision in the Code concerning voting under protest. The only option available to the members of the CoC is to vote for or against the resolution plan. If by any chance the SBI had doubts about the viability of the plan, it had voted against the plan. The NCLT held that “if the Applicant is unable to arrive at a conclusion regarding the resolution plan, it appears that there is a lack of clarity in the commercial wisdom of the Applicant. The CoC members who have acted in favour of the resolution plan, cannot subsequently come up with another new commercial wisdom regarding the viability of the plan. It will only lead to absolute chaos and if such applications are entertained, then no resolution plan can be completed on time.”
The said judgment has created a horrible conundrum in the field of insolvency. The NCLT Chennai has affirmed that no member of CoC can withdraw his consent once a resolution plan was passed and its approval is pending before the Adjudicating Authority. However, NCLT has not identified the grey area where the approval of resolution plan by the CoC was on the basis of concealment of any material fact by the successful Resolution Applicant regarding the plan which, if not concealed, will make the resolution plan unviable.
At that time, if any member of CoC found such concealment after approving the resolution plan and further wanted to withdraw his consent from the said approval, then denying the same will consequently transgress the fundamental purpose of the Code, i.e., restoring and keeping the corporate debtor as a going concern. In such cases, the approval of plan is on the basis of exercising erroneous commercial wisdom by CoC due to concealment of material facts pertaining to the plan and after knowing about such concealment, they should be allowed to rectify their commercial wisdom by withdrawing their consent from the approval before the NCLT approves the plan. Even, Section 31 of the Code states that once the NCLT has approved the plan, then it will be binding on every creditor. But, if the approval of NCLT is pending, it doesn’t create a binding nature of the plan on any financial creditor.
The Apex Court interpreted the Preamble of the Code in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., and observed that the Code was enacted with the essential goal of restoring and keeping the corporate debtor as a going concern by reorganizing insolvency resolution of corporate debtors in a time-bound manner. Further, time and again, in a catena of judgements, various courts and tribunals have interpreted and emphasised the essentiality of commercial wisdom of the CoC. The Supreme Court in the landmark judgement of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors., elucidated that when the financial creditors exercise their commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account the key features of the Code before it arrives at a commercial opinion to pay off the dues of financial and operational creditors.
Further, in Kundan Care Products Limited v. Amit Gupta, the National Company Law Appellate Tribunal (NCLAT) has strongly held that a plea for withdrawal of a resolution plan will be accepted, if the plan is found to be unviable, unfit for implementation or is based on incorrect assumptions.
Furthermore, the Supreme Court in the case of K. Sashidhar v. Indian Overseas Bank & Ors., held that “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.” Moreover, in the judgement of Maharashtra Seamless Limited v. Padmanabhan Venkatesh, the Apex Court has reaffirmed that the commercial wisdom of CoC cannot be judicially interfered with by NCLT/NCLAT and the same rationale is implemented in Kalpraj Dharamshi & Anr. v. Kotak Investment Advisors Limited & Anr.
In the same vein, in the matter of Karad Urban Cooperative Bank Limited v. Swwapnil Bhingardevay & Ors., the Supreme Court held that if all of the factors that should be considered in determining whether or not the corporate debtor can continue to function as going entity have been presented to the CoC, and the CoC has made a conscious effort to accept the resolution plan, the adjudicating authority will have to go into hands-off mode.
After analysing the aforementioned pronouncements and provisions, the authors are of the opinion that the Apex Court must clear the mist and should allow any financial creditor to withdraw his consent from the approval of the resolution plan if the plan is not approved by the NCLT and it is found to be unviable, unfit for implementation or is based on incorrect assumptions that consequently hinder the cardinal objectives of the Code. Appositely, rejecting the plan and withdrawing consent from the approval of the resolution plan should also be considered as a part of the new commercial wisdom of the financial creditor. It is much better than fallacious commercial wisdom that is based on any concealment of material facts due to which the primary goal of the Code has injured.
Pertinently, as noted the commercial wisdom of CoC cannot be interfered with, aside from the restricted ambit of judicial review as provided under Sections 30 and 31 of the Code. Moreover, the issue concerning the independence of the CoC vis-à-vis the jurisdiction of the NCLT/NCLAT has been reliably dealt by the courts and the commercial wisdom of the CoC has been given foremost importance for ensuring timely completion of the insolvency process.
There is no room for doubt that the feasibility and viability of the resolution plan can be best determined by the CoC as the members of CoC is the expert body to determine whether the plan is fit for implementation. Accordingly, the duty that has been planted upon the CoC is one that cannot be avoided and cannot be questioned, besides on restricted grounds.