Commercial Wisdom and The Power of the COC
Jahanvi
3rd Year, B.A. LL.B (Hons.), Chanakya National Law University, Patna
Abstract
In the article titled “Commercial Wisdom and the Power of the COC”, the author delves into the concept of commercial wisdom and its significance in decision-making processes. Furthermore, the author conducts a critical examination of court rulings that pertain to the exercise of commercial wisdom by the Committee of Creditors. By exploring these landmark judgments, the article aims to provide insights into the evolving judicial interpretation of commercial wisdom within the framework of insolvency laws.
Introduction
Enacted in 2016, the Insolvency and Bankruptcy Code (IBC) streamlined the laws addressing insolvency and bankruptcy. A key objective of the IBC is to safeguard creditors’ interests. Upon a default by a corporate debtor (the individual who has received a loan from a creditor or bank), the Corporate Insolvency Resolution Process (CIRP) is triggered. Subsequently, the Interim Resolution Professional (IRP) forms the Committee of Creditors (CoC) under Section 21[1] of the IBC to achieve this goal. The CoC plays a crucial role in overseeing the debtor’s resolution, ensuring the protection and prioritization of creditors’ rights.
The Committee of Creditors (CoC) is composed of the financial creditors of the corporate debtor and serves as the decision-making body for the debtor’s administration. This committee wields significant authority, making crucial decisions through a majority vote. Specifically, the CoC has the power to review and approve a Resolution Plan with a 66% majority vote of the voting shares, as stipulated in Sections 30[2] and 31[3] of the IBC.
The Committee of Creditors (CoC) is endowed with commercial wisdom, rendering its decisions immune to challenge. Despite debates regarding the potential arbitrariness of such extensive power, numerous Supreme Court rulings have affirmed the necessity and benefits of the CoC’s commercial judgment. This authority is deemed essential for safeguarding creditors’ interests during the Corporate Insolvency Resolution Process (CIRP). The Supreme Court has consistently upheld that the CoC’s decisions, based on their commercial expertise, are crucial in ensuring the efficient and effective resolution of insolvency cases.
Examining the Role of Commercial Wisdom
The Committee of Creditors (CoC) exercises its commercial judgment to assess the feasibility of resolution plans concerning the liabilities and assets of the corporate debtor. Yet, the scope of this ‘commercial wisdom’ wielded by the CoC remains a subject of ongoing debate, notably concerning judicial oversight that occasionally intervenes in CoC decision-making.
The Supreme Court’s development of the doctrine of the Committee of Creditors (CoC) commercial wisdom draws upon the recommendations of the Bankruptcy Law Reforms Committee (BLRC). Initially viewed by Indian courts as non-justiciable, the doctrine gained prominence through the landmark case K. Sashidhar v. Indian Overseas Bank[4]. Over time, the Supreme Court has not only endorsed but also elevated the commercial wisdom principle to a foundational doctrine. This evolution underscores the judiciary’s reliance on the CoC’s expertise in insolvency matters, emphasizing its role as a cornerstone principle guiding the resolution process under the Insolvency and Bankruptcy Code.
The Committee of Creditors assumes a critical role in the Corporate Insolvency Resolution Process (CIRP), leveraging its collective expertise to determine the future course of action for the Corporate Debtor (CD)—whether to revive operations or opt for liquidation. Composed of a diverse group of financial creditors with varying interests, the CoC operates under the statutory framework defined in Section 28[5] of the Insolvency and Bankruptcy Code. This framework imposes exclusive responsibility on the CoC for its decisions and actions. Significantly, the approval threshold outlined in Section 30(4)[6] highlights the CoC’s substantial influence in shaping the CD’s destiny. Thus, the exercise of commercial acumen by the CoC is pivotal, aligning with the overarching objectives outlined in the Code to facilitate fair and effective resolution processes.
The Insolvency and Bankruptcy Code mandates a rapid resolution process, ideally concluded within 270 days, after which liquidation becomes mandatory. The Code accords supreme importance to the commercial wisdom of the Committee of Creditors (CoC), emphasizing their pivotal role in ensuring the timely completion of proceedings. This provision underscores the trust placed in the CoC’s judgment to navigate complex financial decisions without judicial interference.
While the commercial wisdom wielded by the CoC is shielded from judicial review, there remains a notable absence of discourse regarding the inherent risk of bias. This risk arises from the possibility that CoC members may prioritize their financial interests above broader economic or social concerns. Such bias could result in decisions that disproportionately favor specific creditors, raising concerns about the fairness and impartiality of granting such extensive authority to the CoC.
Judicial Interpretations of Commercial Wisdom
The court’s role in interpreting and applying this concept has evolved, shaped by landmark cases and legislative intent. While judicial deference to the CoC’s expertise is often affirmed, debates continue on the scope, limitations, and potential biases inherent in this discretionary power.
In the landmark judgment of Vallal RCK v M/s Siva Industries[7], the Supreme Court ruled that the adjudicating authority is not empowered to delve into the specifics of a settlement plan endorsed by the Committee of Creditors (CoC) during the evaluation of a resolution application under section 12A[8]. This decision underscores the Court’s stance on the autonomy and discretion accorded to the CoC in approving resolution plans. It highlights the judiciary’s adherence to the principle of non-interference in commercial decisions made by the CoC, emphasizing the need for courts to respect and uphold the decisions reached through the insolvency resolution process.
In the case of K Shashidhar v Indian Overseas Bank[9], the Supreme Court affirmed that the adjudicating body, such as the NCLT, lacks authority to challenge the autonomy of the Committee of Creditors (CoC). Judicial review is confined to grounds explicitly provided in the Insolvency and Bankruptcy Code, which functions as a comprehensive legal framework. Consequently, decisions of the CoC cannot be overturned by the National Company Law Tribunal (NCLT) or the National Company Law Appellate Tribunal (NCLAT), reiterating the principle of non-justiciability established in K Shashidhar[10]. However, recent developments, exemplified in MK Rajgopalachari v Dr Periasamy Gounder[11], critique this stance. The Supreme Court clarified that if CoC decisions violate existing laws, the defense of commercial wisdom does not shield them from judicial scrutiny.
Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta and Others[12], underscoring that adjudicating bodies must operate within the jurisdictional boundaries set by the Insolvency and Bankruptcy Code (IBC). It emphasized that these bodies should adhere to the provisions outlined in Section 30(2)[13] of the IBC, which mandates specific criteria for approving resolution plans. Furthermore, their judicial review authority must align with the constraints of Section 32[14] of the IBC, ensuring that their oversight remains within the framework intended by the legislation. This ruling reinforces the principle that while judicial bodies play a crucial role in the insolvency process, their intervention should respect the commercial decisions made by the CoC, provided these decisions comply with the legal standards established by the IBC.
The judiciary has consistently upheld the principle of commercial wisdom, reinforcing the autonomy of the Committee of Creditors (CoC) in insolvency proceedings but the case of MK Rajgopalachari v Dr Periasamy Gounder[15], illustrate that judicial review remains vital to ensure compliance with legal standards, balancing the CoC’s discretion with accountability.
Conclusion
Since the enactment of the Insolvency and Bankruptcy Code, the role of the Committee of Creditors (CoC) has become central to the resolution process. Empowered with significant autonomy and entrusted with the exercise of commercial wisdom, the CoC plays a pivotal role in deciding the fate of corporate debtors and balancing the interests of diverse financial creditors. The judiciary, through various landmark judgments, has underscored the importance of respecting the CoC’s decisions, emphasizing their expertise in navigating complex financial restructuring.
However, the judicial interpretation of commercial wisdom has not been without scrutiny. While courts have generally deferred to the CoC’s judgments, recent cases like MK Rajgopalachari v Dr Periasamy Gounder[16] have highlighted the necessity for judicial oversight. This case clarified that while the CoC enjoys significant discretionary powers, these decisions must align with the legal framework of the IBC. Judicial review ensures that CoC decisions are not arbitrary or in violation of established laws, thereby maintaining fairness and transparency in the insolvency resolution process.
The evolution of judicial interpretations has reinforced the principle that while the CoC’s decisions merit respect, they are subject to legal constraints to prevent misuse of authority. In conclusion, the judicial journey of interpreting commercial wisdom under the IBC has been transformative, recognizing the CoC as a cornerstone in effective debt resolution.
References:
[1] The Insolvency and Bankruptcy Code, 2016, § 21, NO. 31, Acts of Parliament, 2016 (India).
[2] The Insolvency and Bankruptcy Code, 2016, § 30, NO. 31, Acts of Parliament, 2016 (India).
[3] The Insolvency and Bankruptcy Code, 2016, § 31, NO. 31, Acts of Parliament, 2016 (India).
[5] The Insolvency and Bankruptcy Code, 2016, § 28, NO. 31, Acts of Parliament, 2016 (India).
[6] The Insolvency and Bankruptcy Code, 2016, § 30(4), NO. 31, Acts of Parliament, 2016 (India).
[8] The Insolvency and Bankruptcy Code, 2016, § 12A, NO. 31, Acts of Parliament, 2016 (India).
[9] Supra note 4
[10] Ibid
[11] https://indiankanoon.org/doc/146393726/
[13] The Insolvency and Bankruptcy Code, 2016, § 30(2), NO. 31, Acts of Parliament, 2016 (India).
[14] The Insolvency and Bankruptcy Code, 2016, § 32, NO. 31, Acts of Parliament, 2016 (India).
[15] Supra Note 11
[16] Ibid
