IBC | Supreme Court Cautions Against Excessive Judicial Review, Criticises Trend Of Unsuccessful Bidders Seeking To Reopen CoC Decision

The Supreme Court today criticised growing trend of unsuccessful resolution applicants converting challenging almost every commercial decision of the Committee of Creditors under the guise of procedural impropriety and turning the insolvency process into a protracted adversarial contest.

“The appeals before us typify the growing strategic use of the judicial system by unsuccessful resolution applicants who seek to reopen almost every commercial decision under the guise of procedural impropriety. This converts the corporate resolution process into a protracted adversarial contest and erodes the value of the corporate debtor. Such an approach incentivises delay, rent seeking and strategic obstruction and is fundamentally inconsistent with the economic logic and statutory design of the IBC”, the Court observed.

A bench of Justice BV Nagarathna and Justice R Mahadevan cautioned against judicial review of CoC decisions beyond the narrow scope under IBC.

“The IBC represents a conscious legislative choice to prioritise speed, certainty and creditor driven decision making over exhaustive judicial scrutiny. Experience shows that unsuccessful bidders will always try to spin commercial decisions of the CoC as procedurally faulty in order to secure a second shot through litigation by filing applications or making representations. However, courts need to remain vigilant against any temptation to expand the scope of review beyond the narrow boundaries prescribed by the IBC”, the Court said.

The Court further highlighted, “Excessive review also encourages strategic litigation. Stakeholders with little to no economic interest in the corporate debtor may resort to litigation as a bargaining tool to delay implementation of the resolution plan or extract concessions, thereby converting the insolvency process into an adversarial contest. Such conduct takes the process away from its objective of value maximization.”

The Court emphasised that predictability and finality are essential to a robust insolvency regime, and judicial review beyond scope of IBC undermines both.

“Predictability and finality are thus essential to maintaining a robust insolvency regime. Judicial intervention beyond the narrow statutory confines undermines both predictability and finality. Recognising this, the IBC deliberately confines judicial review to strict statutory compliance under sections 32 and 63. Respecting these limits will preserve the economic sense of the IBC and ensure that insolvency remains a predictable, time bound and market driven process”, the court observed.

The Court made these observations while dismissing appeals filed by Torrent Power Ltd., Vantage Point Asset Management Pvt. Ltd. and Jindal Power Ltd. (unsuccessful applicants) against approval of Sarda Energy and Minerals Ltd.'s resolution plan for SKS Power Generation (Chhattisgarh) Ltd.

Finding no material irregularity under Section 61(3) of the Insolvency and Bankruptcy Code, 2016 and noting that the resolution plan has already been implemented, the Court affirmed the judgments of the NCLAT and NCLT approving the plan.

Doctrine of Commercial Wisdom

The Court held that the commercial wisdom of the CoC enjoys primacy and cannot be supplanted by judicial review by the NCLT, the NCLAT or even the Supreme Court.

“The law having been settled that the commercial wisdom of the COC enjoys primacy and cannot be supplanted by judicial review. Neither the NCLT nor the NCLAT nor even this court is empowered to substitute its assessment in place of the commercial decision arrived at by a requisite majority of the COC”, the Court observed.

The Court noted that the IBC marks a shift from a court-centric model to a creditor-driven process. At its core lies the doctrine of commercial wisdom, which vests decisive authority in the CoC, comprising financial creditors who bear the economic consequences of failure, the Court highlighted.

It observed that decisions on viability, valuation and acceptable haircuts are inherently commercial and not judicial. The adjudicating authority performs a supervisory role to ensure statutory compliance and procedural fairness, but does not second-guess economic decisions of the CoC, the Court said.

The Court stated that the appeals before it typify the growing strategic use of litigation by unsuccessful resolution applicants who seek to reopen commercial decisions.

On the issues arising in the present case, the Court rejected the appellants' contention that the Resolution Professional committed material irregularity while performing his duties. It noted that the RP acted strictly on the instructions of the CoC.

The CoC identified ambiguities and directed the RP to seek clarifications from all resolution applicants. The Court pointed out that the RP did not take any independent or unilateral decision but communicated the CoC's queries and placed all responses before it.

The Court held that such conduct is not material irregularity under Section 61(3). “When the RP acts on the instructions of the COC, such conduct cannot by any stretch of imagination be characterised as material irregularity within the meaning of Section 61(3)(2). To hold otherwise would be to conflate the statutorily distinct roles of the RP and the COC and to indirectly subject decisions of the COC to judicial review contrary to the scheme of the IBC”, the Court held.

It further held that the appeals did not fit within any of the statutory grounds for interference and no question of law arose in the appeals. The Court also observed that the resolution plan has been approved by the NCLT and NCLAT and has since been implemented, leaving no scope for intervention.

Case no. – C.A. No. 11746-11747/2024

Case Title – Torrent Power Limited v. Ashish Arjunkumar Rathi