The jurisprudential essence of the supremacy of commercial wisdom of Committee of Creditors has been reaffirmed time and again by the Supreme Court and the Adjudicating Authorities. The concept is brilliantly amplified from K. Sashidhar v. Indian Overseas Bank & Ors. (2019 SCC OnLine SC 257) to Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. (2019(16)SCALE319). The Hon'ble National Company Law Appellate Tribunal, New Delhi in Sunil S. Kakkad v. Atrium Infocom Private Limited (MANU/NL/0301/2020) has provided deep insights into the concept of Commercial Wisdom as the Appellate Authority has waived off the mandatory steps for resolution of corporate debtor and allowed the direct proceedings for liquidation under the garb of Commercial Wisdom.
The Appeal in the instant case arose out of the admission of order of liquidation whereby the Committee of Creditors (hereinafter referred to as the "CoC") with 100 percent vote share decided to liquidate the Corporate debtor without inviting Expression of Interest for submission of resolution plan and the reasoning for the same is associated to its inactive/dormant state from last 5 years and no prospective chances of resolution could thereby be foreseen. The Appellate Authority has discussed the agendas of the CoC meetings in a chronological manner to explicate the steps that have been taken by the Resolution Professional in relation to Expression of Interest, resolution plan, eligibility criteria for resolution applicant, last date for submission of resolution plan, evaluation matrix, location of publishing EoI etc. which were decided to be deferred and later on the decision for liquidation was taken with 100 percent vote share on the grounds of inactivity and lack of prospective resolution. The Appellate Authority has refrained from interfering in the orders of liquidation stating that the commercial wisdom of CoC is non-justifiable and it has no jurisdiction to interfere in the same due to explicit mandate as given under 33(2) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as the "IBC") which talks about the power of CoC to take decision of liquidation any time before the approval of a resolution plan or even before preparation of information memorandum.
Interestingly, citing commercial wisdom and statutory framework, the Appellate Authority has avoided divulging into exploring the chances of insolvency resolution even though one prospective resolution applicant had showed willingness in one of the CoC meetings. Only the commercial decision of the CoC in evaluating a resolution plan is protected from judicial scrutiny but the concept of commercial wisdom has been artificially inducted herein to insulate the scope of judicial review as the decisions are taken while performing such other responsibilities by the CoC in the course of the resolution process remains subject to challenge under Section 60 of the IBC. As per Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors. ((2019) 2 SCC 1) and Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India (2019 SCC OnLine SC 73) the CoC is required to undertake best endeavours for resolution and liquidation has always been emphasized as last-resort but the present situation presents stark contrasts to the above supreme rulings.
There have been certain instances wherein the concept of commercial wisdom is calibrated to ensure the effective implementation of the purpose of the Code. The NCLAT in M.P. Agarwal v. Shri Lakshmi Cotsyn Ltd. & Anr. (Company Appeal (AT) (Insolvency) No. 620 of 2020) held that in accepting/rejecting a Resolution Plan/Settlement Offer, the decision of the CoC is final. Likewise, in Devarajan Raman, Resolution Professional (RP) v. Bank of India Ltd. (Company Appeal (AT) (Insolvency) No. 646 of 2020), held that fixation of fee is not a business decision depending upon the commercial wisdom of the CoC. The Essar Steel decision by the Apex Court has been momentous, but the restraints to the progression of the ambit of commercial wisdom are needed to prevent revolution against the purpose of the Code. The review of many strategical decisions by the CoC are attempted to be evaded in the name of Commercial Wisdom and the Adjudicating Authorities are quite vigilant of the same. One such case of SBI v. Ushdev International Limited (MANU/ND/1251/2018) supports this thread of argument wherein it is opined that the two pre-conditions for the existence of commercial wisdom include the existence of prudence and the existence of commercial data. The absence of common wisdom would absolutely take the case out of the purview of commercial wisdom and if the process of approval of a resolution plan is not in lines with the prescribes procedures, then the adjudicating authority has the right to pierce the veil and judicious x-ray of the procedures/plans may be done. This said order is pending in appeal with Hon'ble NCLAT and the reaffirmation of this progressive approach of these Tribunals is awaited.
The purposive approach has to be cautiously applied in rendering decisions by the adjudicating authorities. The obligation of exploring the panorama of possibilities, including restructuring, negotiation, resolution, etc. before triggering liquidation lies upon the Creditors' Committee and the three broad parameters of value maximization, balancing stakes and keeping of the entity as a going concern shall be kept in mind for selecting the most appropriate disposition. But in the case of Sunil S. Kakkad v. Atrium Infocom Private Limited (supra), the commercial wisdom in triggering immediate liquidation without testifying the feasibility, viability, and effective implementation of the prospective resolution applicant is not justified and Hon'ble NCLAT has stamped the illogical and unfounded decision of CoC. The primacy of commercial wisdom is accorded as creditors along with Resolution Professional are entitled to be acting in a fiduciary capacity in relation to the corporate debtor and this relation is found to be strained in the instant case as the decision of triggering liquidation without venturing into the hybridisation of resolution possibilities. The stale corporate debtor is rather required to be reinvigorated with the commercial wisdom of CoC but the wisdom here is incomprehensible.
The efficacy of the IBC can be ensured only if the active and progressive approach is reflected in the decision making of the CoC and the Adjudicating Authorities. The concept of commercial wisdom has to be interpreted with prudence and its evolution has to be vigilantly observed for striking the balance between the liquidation and reorganisation which is enshrined to be the base for the design of the Insolvency and Bankruptcy Code, 2016. It is hoped that the new judicial pronouncements will not act as a setback to the nascent stage of this concept but rather keep a reality check upon the decisions of CoC and ensure that the non-justiciability of the commercial wisdom does not provide sustenance to the arbitrary, unjustified, illogical decisions of the Creditors' Committee.
Anjali Jain is Partner & Head– Insolvency and Corporate Laws with Areness. Besides advising the firm's clientele on Insolvency, Banking and Corporate Law matters, she is also actively involved as a Resource Person with several National Law Universities. Also, she is heading the legal research division of the Firm through comprehensive research aimed at improvising and making the Insolvency and Banking Laws better suited to the country's economic and social circumstances. She is LLB from the University of Delhi and LLM from National Law University, Delhi. Also she is UGC NET qualified and has undertaken several certificate courses including the latest one from the Indian Institute of Corporate Affairs of Insolvency and Bankruptcy Laws.