Extent of Judicial Intervention in IBC: Unwrapping the Conundrum around Commercial Wisdom of CoC

[By Prakriti Singh]

The author is a student of Hidayatullah National Law University.

 

Introduction

The Insolvency and Bankruptcy Code, 2016 was enacted to provide a speedy debt resolution mechanism and ensure value maximization of assets. The Code has provided legal recognition to the fact that business failures are normal and there should be effective remedies to rescue the Corporate Debtor. The Code brought an end to the prior existing defaulters’ paradise in India, introduced the Corporate Insolvency Resolution Process (CIRP) which provides a sound procedure for different stages from admission of default to the approval of resolution plan.

The Code has brought a regime which prevents judicial intervention in commercial decisions, empowers the stakeholders and entrusts a duty upon the adjudicating authorities to uphold the spirit and procedural sanctity of the Code. The adjudicating authority is required to ensure that the Resolution Plan approved by the CoC is consistent with Section 30(2) of the Code. The Commercial Wisdom of the CoC is paramount in the CIRP.

The judiciary itself has circumscribed its role in the CIRP and held that the CoC has the financial expertise to take financial decisions. However, it is the role of the adjudicating authority to ensure balance between stakeholders. The CoC, in exercise of its commercial wisdom, cannot waive off the obligations and statutory liabilities of the Corporate Debtor.

In the case of Employees’ Provident Fund Organisation v. Dommeti Surya Rama Krishna Saibaba, (EPFO case) the Chennai Bench of NCLAT has set a dangerous precedent for the exercise of commercial wisdom of CoC. It refused to interfere with the approval of a Resolution Plan, which did not provide for the full payment of PF dues. This ruling failed to take note of the Jet Airways case and Rainbow Papers case. Through this article, the author intends to analyze the reasoning and impact of the recent ruling.

Case Summary

The Appellant was affected by the order of the Adjudicating Authority, wherein the Resolution Plan was approved on the grounds that the Resolution Plan is compliant with the procedure laid down under the Code and does not violate any provision. The Appellant challenged the order and contended that the Corporate Debtor failed to pay the ‘Employees’ Provident Fund’ (EPF) dues. The Adjudicating Authority had expressed satisfaction with the Resolution Plan. However, the exclusion of EPF dues is in contravention of Section 36 (4) (a) (iii) of the code, which prescribes that the sums owed to employee fund, including provident fund (PF) shall be excluded from the Liquidation Estate of the Corporate Debtor. Due to the approval of the Resolution Plan, the Corporate Debtor has got a waiver on the amount due to the Employees.

The Appellate Authority dismissed the Appeal. It took note of the Apex Court ruling in Arun Kumar Jagatramka v. Jindal Steel and Power Limited and Another and held that the fulfilment of the objectives of the Code requires that the intervention of judiciary is kept at the minimum level. The NCLAT took note of the ruling in Vallal RCK v. M/s. Siva Industries and Holdings Limited and Others, that the CoC has the expertise to take the decisions in the CIRP and hence, circumscribing the intervention by judiciary and the authorities is justified.  Since the Adjudicating Authority was satisfied that the Resolution Plan does not contravene any provision of the Code, the Appellate Authority will not interfere in the commercial wisdom of CoC.

Unsettling the Jurisprudence

The Appellate Authority, in its ruling, referred to previous ruling under the Code giving paramount status to the CoC. However, it failed to take note of rulings which dealt with the payment of PF dues by a Corporate Debtor undergoing CIRP.

In Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia Resolution Professional of Jet Airways (India) (Jet Airways case), the Appellant had approached the Appellate Authority on similar grounds. Although the Resolution Professional failed to make complete payment of the PF and gratuity dues, the Adjudicating Authority had approved the Resolution Plan. The rationale behind excluding the gratuity and PF dues from the liquidation estate of the Corporate Debtor is that even in case of the insolvency of the Corporate Debtor, the interests of the workmen shall be safeguarded. The CIRP cannot be a medium to escape the obligations under labour laws.

Although the Respondent contended that the Commercial Wisdom of the CoC cannot be subjected to judicial review, the Appellate Authority set up a remarkable precedent by scrutinizing the Resolution Plan and ensuring that the same does not contravene the Code. In K. Sashidhar v. Indian Overseas Bank, the Apex Court stressed upon the need to minimize judicial intervention to achieve a speedy resolution. Even in Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta, the Apex Court had held circumscribing the role of Adjudicating Authority to be crucial for the Code. In Kalpraj Dharamrishi v. Kotak Investment Advisors Ltd, it was held that although the role of the Adjudicating Authority is minimal, it is bound to ensure that the procedure and spirit of the Code is upheld.

In Jet Airways Case, the Appellate Authority balanced the Commercial Wisdom with its function of ensuring procedural compliance. Regulation 38(1A) of CIRP Regulations and Section 30(2) of the Code cannot be compromised due to the decisions taken in exercise of Commercial Wisdom of the CoC. As there was a statutory obligation upon the Corporate Debtor, the claim of PF dues made by the workmen were to be accepted. The Successful Resolution Applicant is bound to make the payment of the balance amount of PF. As the PF is excluded from the Liquidation Estate, the workmen are entitled to full payment of the same. The Adjudicating Authority must fulfill its role in the CIRP. Anything more or less than that would throw a spanner in the CIRP.

Another case with similar facts, Tourism Finance Corporation of India v. Rainbow Papers Ltd was not referred to in the present ruling. In the Rainbow Papers case, the Appellant contended that the exclusion of PF dues from the Resolution Plan was violative of Section 36(4)(iii) of the Code. The PF dues do not fall under the category of “assets of the Corporate Debtor”. Hence, the Successful Resolution Applicant is bound to pay the same. In above-mentioned EPFO case, the Appellate Authority has failed to scrutinize the Resolution Plan and left the Resolution Plan to the complete discretion of the CoC.

Commercial Wisdom of CoC and Role of Adjudicating Authority

As observed in the Swiss Ribbons case, the Code is a commercial legislation and if it is to be used to effectively solve the practical problems existing in the realm of debt resolution, the judiciary should refrain from a pedantic interpretation. Although judicial intervention is circumscribed, experimentation is of paramount importance to the Code. The judiciary should have an experimental and problem-solving approach. The Real Estate Sector in India has witnessed large scale defaults. This power of experiment, trial and error to achieve the desired objects witnessed a spectacular implementation in Flat Buyers ruling. The Appellate Authority effectively recognized mischiefs in CIRP against a real estate company. It devised a new method of CIRP- reverse CIRP. The Appellate Authority strived to strike a balance between procedural sanctity and effective implementation of the Code.

The Appellate Authority adopted an innovative approach. In normal CIRP, the Resolution Applicants are third parties. In the exercise of the power of experimentation, the Appellate Authority examined the possibility of resolution reaching its final stage without the resolution plan of a third party. This experiment, if successful, would prevent the liquidation of the Corporate Debtor. It would also safeguard the rights of the homebuyers and they would get recourse to possession. This reverse CIRP, with procedural safeguard, is an effective utilization of the power of experimentation.

Therefore, the 6 years of the Code are replete with instances where the Adjudicating Authority and the Appellate Authority have safeguarded the procedural sanctity. In addition to this, the authorities have even made experiments to the usual CIRP laid down under the Code to provide the most effective debt resolution mechanism. In the present case, the NCLAT, while giving regard to the paramount status of the CoC, did not consider it necessary to intervene with the contraventions made in the Resolution Plan. It even did not refer to rulings which had dealt with appeals of workmen on the grounds of non-payment of PF dues.

Expected Ramifications

Through this ruling, the Appellate Authority has given the CoC the sole authority, as opposed to the paramount status. On the grounds of the competence of the CoC, the workmen were denied their PF dues. There is a huge possibility that in the future, this sole discretionary power may be misused by the CoC. In the future, the Code may witness instances where the CoC, in exercise of their authority of what to pay and how to distribute, exclude another category of dues of the Corporate Debtor. Similar exclusions in the future would violate the objective of balancing the interests of all the stakeholders.

Conclusion

Although the commercial wisdom of the CoC is supreme, the unregulated functioning of the CoC is a mischief. A Code of Conduct for the CoC has been proposed to circumscribe the functioning of the CoC, in order to maximize the efficacy of the Code. The approach taken by the Appellate Authority in the present case, failing to take note of the contraventions and leaving the responsibility to the paramount CoC will make the Code of Conduct futile. The Adjudicating Authority should minutely scrutinize the procedural and provisional sanctity of the Code. The CoC possess the expertise to take the best business decisions. This expertise, combined with a regulatory code and an active judiciary would be the right step in achieving the objectives of the revolutionary Code in the Indian Insolvency Regime.

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