[Kartikey Sanjeev Bhalotia and Arshit Kapoor are 2nd year students at the National Law University Odisha]
While overruling a decision of the National Company Law Appellate Tribunal (NCLAT), the Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh (decided on 22 January 2020) accepted the decision of the committee of creditors (CoC) approving the appellant’s resolution plan which quoted an upfront payment at an amount lesser than the liquidation value of the corporate debtor. The Court deferred to the commercial wisdom of CoC and ruled that the NCLAT exceeded its jurisdiction by delving into the rationale behind the CoC’s acceptance of the resolution plan.
This post will analyse the principle of commercial wisdom as laid down by the Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta,and delve into the inherent limitations imposed by the basic aims and objectives of the Insolvency and Bankruptcy Code 2016 (IBC) on the CoC. The post would then move on to analyse whether a CoC that accepts a resolution plan with upfront payment lesser than the liquidation value of the corporate debtor would be considered acting within the aforementioned inherent limitations. It would conclude by arguing that the decision in Maharashtra Seamless has expanded the ambit of commercial wisdom too far and has taken a leap forward towards numbing the checks and balances on the powers of the CoC inherent under the IBC.
Commercial Wisdom: Not a Holy Discretion
The Supreme Court in Essar Steel reinstated the existence of certain intrinsic assumptions relating to the CoC on which the principle of ‘commercial wisdom’ has been recognised. The assumptions are: that the CoC has the requisite expertise to assess the viability of the corporate debtor and verify the commercial feasibility of the proposed resolution plan; that their actions are a consequence of a thorough examination and assessment of the proposed resolution plan; and that their decisions are a result of deliberations and voting in the CoC meetings. However, these assumptions cannot be misinterpreted to be taken as absolute, and over and above the basic aims and objectives and inherent checks and balances within the IBC, which govern this principle in the first place.
While interpreting the preamble of the IBC in Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court observed that the IBC was enacted with the primary objective of reviving and keeping a corporate debtor as a going concern by maximisation of the value of assets and balancing the interests of all the stakeholders. The Court thus observed that the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests.
The aforementioned objectives of the IBC were considered again by the Supreme Court in Essar Steel while deliberating upon the powers of an adjudicating authority (AA) to delve into the merits of the decision of the CoC on the acceptance or rejection of a resolution plan. The Court held that when the CoC exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the IBC before it arrives at a commercial decision to pay off the dues of financial and operational creditors.
The Court, therefore, held that the limited judicial review available to an AA is to consider several factors: that the CoC has taken into account the fact that the corporate debtor needs to maintain itself as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of; and upon observing a failure on the part of the CoC in fulfilling these parameters, it may send a resolution plan back to the CoC to re-submit such plan after satisfying the aforesaid parameters. Therefore, the Supreme Court has been categorical that the discretion given to the CoC in taking commercial decisions about a corporate debtor, including the acceptance or rejection of a resolution plan comes with its boundaries. Exceeding the limits would defy the very objective of the IBC. It hence becomes important to weigh the Supreme Court’s decision in Maharashtra Seamless on the parameters laid down by the Court itself.
Maharashtra Seamless: Going Beyond Bounds?
In this case, the Supreme Court approved the resolution plan of Maharashtra Seamless Limited (MSL), which proposed an upfront payment of Rs. 477 crores, an amount which was Rs. 120.54 crores lower than the liquidation value of the corporate debtor. The NCLAT in its order directed MSL to increase the upfront payment to match the liquidation value in order to be eligible to take over the corporate debtor. This was on the ground that the acceptance of the resolution plan with a bid lower than the liquidation value of the corporate debtor would militate against the statement and object of the IBC. However, the Supreme Court did not subscribe to the NCLAT’s ruling and held that it was completely within the CoC’s commercial wisdom to approve MSL’s resolution plan. The Court held that it is not up to the AA to look into the merits of the decision of the CoC and, therefore, the NCLAT acted beyond its jurisdiction in evaluating the merits of MSL’s resolution plan and in ordering for its reconsideration.
The authors believe that the decision by the Supreme Court goes against the grain of the intrinsic limitations enshrined within the IBC, which it has reiterated in cases such as Swiss Ribbons and Essar Steel. Earlier in this post, we have already sought to demonstrate how commercial wisdom as a principle has been subjected to the limitations of aims and objectives of the IBC, being (i) maintaining the corporate debtor as a going concern; (ii) maximizing the value of assets; and (iii) balancing the interest of all stakeholders. We argue that in the present case the decision of the CoC goes against all of these three basic objectives of the IBC and, thus, did not fall within the ambit of commercial wisdom of the CoC.
Note that it is decisions that ensure maximization of the value of assets which help a corporate debtor to have the capability to keep itself as a going concern once the resolution process is completed. Therefore, the acceptance of a resolution plan with a bid lower than the liquidation value (being the value of assets which a corporate debtor is likely to realise from its assets if no better bargain is received) does in no way maximise the value of assets of the corporate debtor. Moreover, the Supreme Court observed in Swiss Ribbons that the preamble to the IBC does not, in any manner, refer to liquidation, and has been kept as an option only to be availed of as a last resort. Therefore, the acceptance of the aforementioned resolution plan would be a premature step having the effect of violating the settled law. The authors believe that this excessive expansion of the scope of commercial wisdom might pose a hindrance in the enhancement of the viability of credit in the hands of the banks and financial institutions, and therefore, might have nullifying effects of the virtues of the IBC.
Maharashtra Seamless can be seen as a starting point for a boundless expansion of commercial wisdom as a principle. In this post, we strove to show how the Supreme Court, while recognising the concept of commercial wisdom, imposed an unwavering limitation upon the powers of the CoC by subjecting it to the preamble, and basic aims and objectives of the IBC. The Court in unequivocal terms held in Essar Steel that the CoC must necessarily fulfil these objectives of IBC in order to exempt their decisions from a merit-based examination by an AA. It was shown how the decision of accepting a resolution plan bid at an amount lower the liquidation value goes against the basic aims and objectives of the IBC. The authors believe that, by bringing this decision within the scope of commercial wisdom, the Supreme Court has left open this niche area of law to unprecedented results, which might have the consequence of defying the very purpose of enacting the IBC.
That said, we do not make a case against the very concept of commercial wisdom; rather, we believe that it is required in order to carry out the resolution processes of the corporate debtor in a time-bound manner. However, its scope cannot be so expanded as to defy the very aims and objectives of the IBC, and it should, therefore necessarily be subjected to restrictions inherent in the IBC.
– Kartikey Sanjeev Bhalotia & Arshit Kapoor