[Priya Garg is a 5th year student at West Bengal National University of Juridical Sciences (WBNUJS), Kolkata]
In this post, I view the Binani Cement case from the lens of an organisational governance enthusiast. I thereby highlight the lacuna that exist under the Insolvency and Bankruptcy Code, 2016 (IBC) towards ensuring that good internal governance practices are followed at the stage of corporate insolvency resolution process (CIRP) by those who lead this process, i.e. a company’s financial creditors and its insolvency resolution professional (RP).
The Binani Case
In this case, Binani Cement is the corporate debtor. One of its financial creditors files an application for initiating the CIRP against Binani, which gets accepted. While the CIRP is ongoing, Ultratech submits its bid with respect to its potential acquisition of Binani Cement. Its bid quotes a lower price than that offered by another resolution applicant, Dalmia. However, prior to the committee of creditors’ (CoC’s) announcement of its preferred bidder, Ultratech submits a revised bid at a higher value than that proposed by Dalmia and the former’s resolution plan is better than the latter’s in other aspects as well. However, the CoC and the RP choose to ignore the revised resolution plan for ‘technical’ reasons such as non-compliance with the procedural requirements for submitting the bid and exceeding the timeline laid down in this regard. Ultratech challenges the CoC’s and the RP’s acts before the National Company Law Tribunal (NCLT). Among other applicants, Binani Cement itself also files the application seeking withdrawal from the CIRP on account of it having reached a settlement with Ultratech outside the formal CIRP, whereby Ultratech has offered an attractive price and reasonable terms for its purchase. The case goes up to the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court. The NCLT, NCLAT and the Supreme Court, all held, in one way or the other, that the revised plan of UltraTech should have been considered by the CoC and the RP so as to meet the IBC’s objective — maximization of the value of the corporate assets for the benefit of all the stakeholders of the insolvent company, to promote entrepreneurship and increase credit availability.
Governance Concerns in Binani
The Binani case pointed out that the CoC’s internal governance was not democratic because, for instance, a couple of financial creditors attempted to exercise their dominance over the remaining financial creditors constituting the CoC. To me, this concern of lack of truly democratic governance practices resonates with that which arises in relation to a company’s shareholders’ or directors’ conduct in case of normal operations of a company. Further, regarding the CoC’s demeanour, the judiciary pointed out that its members deviated from their responsibility of ensuring that the concerns of all the insolvent company’s stakeholders are taken care of and that the CoC members only took care of their own claims. Furthermore, the tribunal pointed out that the CoC members grew overly technical while rejecting the revised bid of UltraTech; they ascribed an unjustified level of importance to abiding by the company’s process documents and did not mellow down even when their rigid approach was causing losses to the insolvent company.
Likewise, the judiciary accepted the majority of the concerns raised against the RP’s conduct. First, it accepted that the RP did not act independently and thereby acted in violation of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The tribunal conceded that the RP acted while owing his allegiance to those few financial creditors who played a role in his appointment. To me, this raising of eyebrows with respect to an RP’s conduct is very similar to the occurrence under company law regarding a director’s failure to address the concerns of the company’s stakeholders in his attempts to stay loyal to the select shareholders who appointed him. Second, the tribunal did not deny the petitioner’s argument that the RP failed in discharging his duty of ensuring that there is no material information asymmetry between the corporate debtor, CoC members, RP and other participants of the CIRP. One resolution applicant complained that it was not updated of the developments taking place at the CoC meetings nor was it provided access to the relevant commercial and legal documents. Similarly, the corporate debtor contended that the CoC members and the RP did not allow its directors to stay in the CoC meeting at all times which was in violation of section 24 of the IBC. Third, the tribunal rebuked the RP for acting like a puppet to the process document prepared at the stage of CIRP instead of taking his decisions keeping in mind and paying obeisance to the ultimate objective of the IBC—maximization of the value for the benefit of all the stakeholders of the concerned company. These issues are significant as they have arisen in previous cases, such as Essar Steel, as well.
Need for good Governance at the CIRP Stage
Currently, under law, once the CIRP kicks in, the board of directors of a corporate debtor get completely side-lined and the IBC has an overriding effect over all other laws applicable to the insolvent company. Resultantly, the CoC comprising of the ‘supposedly’ sophisticated creditors, i.e. financial creditors, and the RP together take over the control and management of the insolvent business.
The RP is vested with the responsibility to run the company as an independent official until the new management assumes its position. Interestingly, as clarified in the law reform process and by various cases, even when the CIRP has kicked in, the insolvent company has to be carried out by its RP as a ‘going concern’. This means that the business operations would be carried on in the similar fashion as they were before the CIRP came into picture, subject to exceptions such as the commencement of the moratorium period under the IBC. The judiciary’s surveillance over an RP’s decisions is limited. Under the IBC, since CIRP is a commercial step, the adjudicating authority’s role remains limited to examining the adherence to the procedural aspects of the IBC. Deciding upon the commercial case of a resolution plan is left entirely to an RP’s discretion.
On the other hand, CoC members are responsible for taking several crucial decisions relating to the insolvent company by casting their votes in their meetings. One such decision is approving the resolution plan among various resolution plans received by the committee for the revival of the insolvent business. The CoC’s decision in this regard is subject to very limited judicial scrutiny because the tribunal reviews only one resolution plan that the CoC members have approved and not all the resolutions plans or expression of interests submitted to the corporate debtor’s CoC.
Further, the quantum of the discretion that the IBC has granted to the CoC members and the RP in other ways as well is worth taking note of. For instance, as clarified in Binani, the CoC has the discretion to approve a resolution plan by placing reliance not only the price quoted in such plan but also upon other factors. This existence of the multiple grounds to adjudge upon the viability of a resolution plan leaves enough space for the CoC members to apply their commercial sense, wisdom and judgment. Under these situations, where the CoC members or the RP have to take decisions, as highlighted in the Binani Cement case as well, their exercise of discretion must be guided by the ultimate objective of the IBC’s CIRP, i.e. maximizing the value of corporate debtor’s assets for the interest of all the stakeholders of such debtor. Therefore, both the CoC members and an RP could, for instance, disregard the terms and conditions laid down by them in the process document released by them when they had called for the resolution plans or expressions of interest, if meeting the goal of maximizing the insolvent company’s value so requires.
Hence, first, the CoC’s and an RP’s duties are onerous. Second, both the entities have been conferred immense discretion. Third, the decisions so taken carry significant implications not only for the concerned companies but also for the Indian economy. Hence, while the CIRP is in progress, the monetary stakes are high and the human nature of falling prey to the temptations of making short-term gains and other frailties may creep in to mar the sanctity of the CIRP process. It is in this backdrop that at the stage of CIRP, the operators of the company, namely the CoC members and the RP, should be subject to an elaborate code of conduct so they could stay true to their responsibilities.
Inadequacies in the Status Quo and the Recommendations
CoC’s Duties and Liabilities
The CoC members’ position is somewhat comparable to that of a company’s board of directors in terms of the responsibilities the former set of people are required to discharge in relation to the corporate debtor. However, the nature and the extent of the CoC’s obligations are nowhere similar to those of a company’s directors. Several corporate law experts have raised their concern that the CoC members have not been imposed with the fiduciary duties despite the onerous nature of the task that they are required to perform. Further, under the IBC or its regulations laying down the code of conduct for a company’s RP, there is no mention of the duties of the CoC members. Hence, at present, as highlighted before, the sole guiding point for the CoC members regarding their demeanour is only that they should work towards fulfilling the IBC’s objectives as laid down in its preamble.
As in the case of directors or key managerial personnel under the Companies Act, 2013 in India, the duties of CoC members, both for each financial creditor member individually and the CoC as a whole, should be laid down in more specific or detailed terms to improve their internal governance at the stage of CIRP. Further, there should be a greater level of transparency in the CoC meetings as well to address the concerns that have been raised in relation to the instances of mismanagement and taking of wrongful decisions in the CoC meetings.
Towards this end, the resolution applicants whose resolution plan reaches an advanced stage of scrutiny must be given the legal right of being heard prior to the CoC’s announcement of its final decision upon a resolution plan. Such resolution applicants should be given an option to waive this right as well, in case they find its exercise unnecessary. This suggestion would not only ensure that there is greater element of transparency in selecting the most deserving resolution plan but it would also reduce the chances of any subsequent litigation, as it happens frequently, by the resolution applicant’s subsequent argument of the lack of good faith and reasonableness on the part of the CoC members.
Second, there should be an explicit clarification within the IBC regarding the legality of the formation of the sub-committee which comprises of important and powerful financial creditors to mutually discuss the issues of importance in places or spaces other than the formal CoC meetings. This is because, as alleged in the Essar Steel case by one of company’s financial creditors, the formation of such sub-committee can lead to opaqueness in the affairs of the CoC because, for instance, the CoC members’ acts while they participate in the sub-committee meetings are not formally recorded unlike the minutes of the CoC meetings. Further, the creditors constituting the sub-committee are large and influential financial creditors having a dominant share of financial debt against the corporate debtor. Therefore, their united or mutual actions privately within the sub-committee meetings may subsequently lead to the suppression of the voice of the dispersed, minority financial creditors. The formation of the sub-committee, though carrying with itself its own set of advantages such as ensuring speedy decisions by arriving at consensus quickly, resembles with the idea of creating a ‘super board’ in case of a company during its life-cycle. A super board is a small set of powerful and influential directors, often the representative of the company’s promoters, who in turn dominate the remaining members of the board. Therefore, the IBC should be clearer on the legality of the formation of the sub-committee and their acts, as such a constitution is a practical reality in various resolution processes.
Duties and Liabilities of the RP
It is not debatable that under the IBC an RP is required to act independent of the control or influence of the corporate debtor. However, Binani Cement interestingly said that an RP is supposed to act independent of the influence of the CoC as well. This is a path-breaking observation because, within the IBC framework, the independence of an RP from a corporate debtor alone has been explicitly provided for. For instance, an RP cannot be a ‘related party’ to the corporate debtor. However, no such prohibition exists in relation to him being a related party to any of the financial creditors in the CoC. Therefore, the IBC and its accompanying regulations should lay down more norms to ensure that the RP is truly independent of the influence or control of the CoC members as well while he is working in coordination with them.
Further, besides his duty to manage the corporate debtor’s affairs in the interim period between the initiation of the CIRP and the institution of the new management at the corporate debtor’s office, an RP is required to ensure that the information asymmetry about the corporate debtor and the CIRP can be minimised among all the CIRP participants. This is why under the IBC regime, the corporate debtor, its operational creditors and resolution applicants can attend the meetings of the CoC and can demand from the RP some of the documents such as the minutes of such meetings. However, lacunae still remain in ensuring that the situation of information asymmetry at the hands of a company’s RP does not arise. For instance, while the information memorandum containing the essential details such as assets and liabilities can be circulated by an RP among the CoC members and resolution applicants, this provision of transmitting the information memorandum to the corporate debtor has not been provided for under the law. This is an unreasonable omission given it is the corporate debtor the operations of which are at stake while a CIRP is ongoing.
The IBC came in the backdrop of the corporate debtor’s controlling shareholders failing to pay the dues of their creditors, thereby making the trust of the creditors and their fund availability erode. Responding to the critical situation, law and policy makers found their solution in adopting an exact opposite stance to the then existing scenario that existed in case a company was declared insolvent. Hence, under the IBC, the entire control of an ailing company has been conferred upon complete outsiders, i.e., financial creditors and an RP. Further, the IBC had made several attempts to ensure that the corporate debtors, more specifically the company’s promoters, stay distant from the CIRP so as to not exercise their influence over it. However, the IBC seriously failed in adopting a probing attitude against the conduct of the company’s creditors and its RP. It failed to duly define their responsibilities and the rights of the other participants such as the corporate debtor and the resolution applicants to the CIRP while the CIRP is going on. In its present form, the IBC would soon attract various malpractices from the company’s creditors and RP, like those that arose from company’s controlling shareholders. For one, the concern of the Parliamentary Committee may get materialised: “The Code will result in gross abuse, massive corruption, favouritism and nepotism and it may help to generate black money also.”
– Priya Garg
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate persons) Regulations, 2016 (most importantly, Regulation 25).
 E.g. S. 166, The Companies Act, 2013.
 Regulation 3, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
 Section 24, Insolvency and Bankruptcy Code, 2016.
 Regulations 21(3) & 36, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
 Regulation 36(4), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
 See Regulation 36, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
 E.g. sections 17 & 18, The Insolvency and Bankruptcy Code, 2016.