Commercial Wisdom of CoC vis-à-vis Proceedings u/s 65 of IBC

[By Jahnvi Pandey]

The author is a student of University of Petroleum and Energy Studies, Dehradun.



The Committee of Creditors (“CoC”) is said to be the custodian of public trust during the Corporate Insolvency Resolution Process (“CIRP”). The Insolvency and Bankruptcy Code, 2016 (“IBC“) envisages a doctrine of commercial wisdom by virtue of which CoC exercise their commercial decisions. Section 33(2) of IBC states that CoC can put the Corporate Debtor into liquidation anytime during CIRP but before the approval of the resolution plan.

In the case of Mr Pawan Kumar Goyal, IRP v. Alchemist XXXVII (“present case”), the National Company Law Tribunal (“NCLT”) issued a show cause notice (“SCN”) under Section 65 of IBC to the members of CoC for fraudulent initiation of liquidation proceedings. The SCN was issued to the CoC as they voted to initiate early liquidation of the Corporate Debtor. The decision to initiate liquidation proceedings was made without inviting a prospective resolution plan for the resolution of the Corporate Debtor.

This article aims to analyse the above case and seeks to address the issue of whether issuing SCN under Section 65 to the CoC will be deleterious to the commercial wisdom of the CoC.

Background of the case

The present application has been filed by Mr Pawan Kumar Goyal, an Interim Resolution Professional (“IRP”) of M/s. SARE Realty Projects Private Limited (“Corporate Debtor”), under Section 33(2) of IBC, to attain the liquidation order. The essential step in inviting a resolution plan is to publish a detailed expression of interest (“EOI”) in the format of Form-G. The EOI calls for resolution applicants to submit their respective resolution plans. The CoC did not take any initiative and instead deferred from approving the EOI contained in Form-G, leaving no scope for preparing resolution plans.

All five CoC meetings conducted by IRP discussed early liquidation of the Corporate Debtor. In the fifth CoC meeting, the liquidation proposal by CoC was put to a majority vote. Moreover, CoC preferred early liquidation because they could not find a prospective buyer even after trying to sell the corporate debtor’s project, and no liquid assets were present. The issue raised before the Tribunal was whether CoC justified the decision regarding early liquidation.

Decision of the Court

The Tribunal observed that the CoC had not initiated the resolution process as the early liquidation after being discussed in all meetings, got approved in the fifth meeting. This shows that all the courses of action by the CoC were pre-planned. The logic of putting the Corporate Debtor into liquidation because no prospective buyers are available for the said assets, was considered vague by the Tribunal. No resolution applicant was appointed to submit the plan to get a prospective buyer. Moreover, the Tribunal observed the importance of CIRP over liquidation, as the resolution process provides a fair chance for the Corporate Debtor to escape financial distress.

The Tribunal identified that the Corporate Debtor is a real estate company with assets and projects; hence, opting for early liquidation is arbitrary. The Tribunal observed that the pursuance of liquidation against the Corporate Debtor showcases mala fide intent considering the resolution process has been skipped altogether. Thereafter, the Tribunal ordered to issue SCN under Section 65 proceedings of IBC against the assenting members of CoC. The Tribunal’s final decision will depend upon the records presented by IRP and the reply to the show cause notice by CoC.


Impact of Section 65 on Commercial Wisdom of CoC

The presumption attained by the settled position of law is that CoC takes its commercial decision in accordance with the Corporate Debtor as a going concern and viable prospect of going ahead with any proposed resolution plan. The CoC’s commercial wisdom is of utmost importance, and hence, no judicial intervention in their commercial decisions is allowed. The limited scope of the judiciary indicates assessing whether the requirements enshrined in IBC are met concerning the submitted resolution plan. This leads to the conclusion that any judicial authority cannot overturn the collective business decision of the CoC.

Section 65 of IBC is a penalty provision against proceedings initiated with mala fide or fraudulent intentions. A significant penalty is imposed in cases where CIRP is commenced for a purpose other than resolution or liquidation. In the present case, action against CoC under Section 65 will create a bad precedent for further financial creditors to take decisions through free will. The CoC’s final decision considers all debts to be paid off in some or the other way to both financial and operational creditors.

There is no deniability in considering the Corporate Debtor as the beneficiary of the resolution process, and liquidation should be a last resort. However, situations may arise where the corporate debtor is not left with assets and money to adjust and pay off the creditors’ debts. In such a situation, analysis can be drawn to prefer liquidation before resolution since the corporate debtor’s company is deprived of assets and is on edge. For such circumstances, Section 33 of IBC has been provided for the benefit of the CoC to avoid an unnecessary stretch of time when it would ultimately result in the liquidation of the corporate debtor considering the condition.

Therefore, penalising CoC for its commercial decision of early liquidation would curb different other financial creditors in future from deciding against those Corporate Debtors who do not have sufficient assets left to pay off the debts.

No detrimental effect due to skipping procedures

The present case cited a judgment titled Sunil S. Kakkad v. Atrium Infocom Private Limited & Ors. wherein there is no publication requirement of Form-G while passing an order of liquidation. In addition, a recent decision of NCLAT, Delhi, titled Jayanta Banerjee v. Sashi Agarwal, raised a question, i.e., “whether any of the procedures prescribed under the Code can be skipped on the pretext of the commercial decision of CoC.” The Tribunal observed that statutory requirements become mandatory before CoC gets to decide during CIRP to liquidate the Corporate Debtor.

These statutory requirements include inviting claims, forming CoC, and voting share allotted by Resolution Professional (“RP”) as per the schemes of IBC. Once the requirements are met, the CoC, under its commercial wisdom, can decide upon the fate of the Corporate Debtor in a bona fide manner. In cases where the CoC ascertains the incapability of the Corporate Debtor to settle the owed debt, the transition to directly vote for liquidation and skip the in-between procedure of CIRP is not detrimental.

It is pertinent to note that IBC does allow the CoC to put Corporate Debtor into liquidation under Section 33(2), provided it is done before approval of the Resolution Plan. Therefore, it can be deduced that mere skipping of procedures should not lead the Tribunal to initiate penalised proceedings under Section 65 as against the CoC.

Enforceability of CoC’s Code of Conduct

Recently, the Insolvency and Bankruptcy Board of India (“IBBI”) published a discussion paper on the Code of Conduct for CoC, which brought attention to the need to act reasonably and in the interest of all stakeholders while taking commercial decisions. In one of the judgments titled STCI Finance Ltd. through Subash Chandra Modi v. Parinee Developers Private Limited, the Tribunal observed that CoC deferred from issuing EOI and other activities which were supposed to be carried out by RP. Hence, it was held that the commercial wisdom of CoC is not allowed to be exercised at the cost of non-adherence to the provisions and regulations encapsulated under IBC.

To correct the commercial decisions of the CoC taken during the CIRP or liquidation processes, the discussion paper on the Code of Conduct for CoC should be made enforceable. This would bring regularity in the functioning of CoC, and the corporate debtors will continue to be kept as a going concern. The discussion paper proposes two broad aspects suggested by IBBI, i.e., first, decisions made by CoC must not lead to a conflict of interest with other stakeholders, and second, a particular emphasis must be placed on collective good rather than personal interest. Another 32nd Report of the Parliamentary Standing Committee on Finance recommended a priority need to have a set code of conduct necessarily adhered to by the CoC.

It becomes necessary to enforce the proposal made by the Board in the discussion paper so that necessary standards are being set to keep the Code of Conduct of CoC in check. The impact that would be created consequent to it is that non-cooperation of CoC can be curbed. One of the recent instances of State Bank of India v. M/s Suryajyoti Spinning Mills Ltd. wherein the CoC had opted for liquidation of the Corporate Debtor due to no resolution plan being sought as final by CoC within 330 days. Thus, “the object of the Code is certainly not to frustrate the proceedings by adopting a hyper-technical approach.”

Therefore, to resort such issues, the CoC must be mandated to function based on principles set out in the discussion paper instead of imposing a penalty against CoC under Section 65. In cases where CoC cannot keep up with the standards laid out, the Adjudicating Authority must order rectification.


The interpretation of statutes concerning IBC should be coherent to retaining the Code’s objectives. The settled notion is that liquidation ends a corporate debtor’s life. No direct liquidation of the corporate debtor is allowed per se under IBC, and liquidation can occur only at the behest of the failure of CIRP. Even the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 has aimed to promote “resolution over liquidation”. However, there must be avoidance of Section 65, which penalises creditors based on malicious intent. An alternative to avoid early liquidation can be the enforceability of the discussion paper, as it will set out strong standards that the CoC needs to comply with in reference to the Code of Conduct.


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