[By Naman Kasliwal & Vaibhav Kesarwani]
The authors are students of Gujarat National Law University.
Introduction
In a recent case of Ramkrishna Forgings Limited v Ravindra Loonkar & Anr., the Supreme Court has set aside an order of the NCLT and NCLAT that had put the approval process of a resolution plan on hold. While the judgment has been lauded for its affirmation of the commercial wisdom of the Committee of Creditors (“CoC”) and the limited scope of judicial interference, a critical examination reveals underlying pitfalls that demand our attention. This blog seeks to delve into the intricacies of the judgment, shedding light on inherent drawbacks. By doing so, it aims to provide a comprehensive understanding of potential repercussions that could extend well beyond the immediate case, significantly impacting the landscape of insolvency resolution practices in India.
Background of the Case
ACIL, the Corporate Debtor, underwent the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency Bankruptcy Code (“IBC”). The CoC approved the Resolution Plan submitted by Ramkrishna Forgings Limited, referred to as the Successful Resolution Applicant (“SRA”). Subsequently, the Resolution Professional submitted an application under Sections 30(6) and 31 of the IBC to the NCLT, seeking approval for the resolution plan.
On September 1, 2021, the NCLT passed an order instructing the revaluation of the Corporate Debtor’s assets. As a result, the application seeking approval of the Resolution Plan was kept in abeyance, and the Official Liquidator was instructed to furnish exact value of assets. Against this order of NCLT, an appeal was filed by the SRA before the NCLAT under section 61 of the IBC. The NCLAT dismissed the appeal while noting the discovery of an avoidance transaction worth approximately Rs. 1000 Crores, justifying intervention due to the involvement of crores of rupees. Aggrieved by the NCLAT order, the SRA filed an appeal to the Supreme Court, arguing that the IBC inherently includes a mechanism for asset valuation of the Corporate Debtor, as outlined in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Thus, the appointment of an Official Liquidator for asset valuation, which is a creation of the Companies Act, 2013, is unnecessary.
Supreme Court’s Ruling
The Supreme Court, in its judgment, addressed the core issue of the extent of the NCLT’s jurisdiction and the role of the CoC in the insolvency resolution process. The Court emphasized that the Adjudicating Authority, in this case, the NCLT, has a limited role, primarily focused on approving resolution plans that align with the requirements of the IBC.
The Court rejected the NCLT’s order for re-valuation, highlighting that there were no objections raised by any party regarding the valuation or the resolution plan. It underscored the importance of the CoC’s commercial decision-making, stating that unless the resolution plan violates the provisions of the IBC, the NCLT should refrain from intervening. The Court referred to previous judgments, such as K Sashidhar v. Indian Overseas Bank, reinforcing the principle that the CoC’s decisions should not be subject to unnecessary judicial scrutiny unless there is a clear violation of statutory provisions, particularly the Sections 30 and 31 of IBC.
In allowing the appeal, the Supreme Court set aside the orders of both the NCLT and the NCLAT, directing the NCLT to pass appropriate orders on the approval application within three weeks. The Court’s ruling essentially upheld the commercial wisdom of the CoC, emphasizing that interference by the NCLT should be limited to cases where statutory provisions are infringed upon.
Harmonizing CoC Autonomy with Stakeholders Rights
Undoubtedly, the court’s emphasis on recognizing the commercial wisdom of the CoC is deeply rooted in the conviction that those with a significant financial stake are inherently best positioned to navigate the complexities of decisions in insolvency resolution processes. This recognition reflects an acknowledgment of the CoC’s intimate understanding of the financial intricacies involved and their vested interest in ensuring a successful resolution.
However, while this emphasis on financial acumen appears logical on the surface, it sparks legitimate concerns about potential biases within the decision-making framework. The considerable influence wielded by financial creditors, if left unchecked, introduces a risk of decisions that prioritize their interests at the expense of other stakeholders, particularly operational creditors or minority shareholders. The autonomy granted to the CoC, if not subject to adequate checks and balances, carries the inadvertent risk of fostering a decision-making culture that might lack the ethical scrutiny necessary to ensure fairness and equity. Striking a delicate balance between financial prudence and ethical considerations becomes paramount in maintaining the integrity of insolvency resolution processes and safeguarding the interests of all stakeholders involved.
The ruling in the Ramkrishna Forgings case appears to adopt a positivist stance on judicial intervention in the CoC’s decision-making process. The court underscores that the resolution plan does not exhibit any of the specific flaws outlined in section 31. However, this approach needs to be assessed in the context of the low recovery rates observed under the IBC. Instances exist where creditors are compelled to walk away with minimal returns, experiencing haircuts as substantial as 99%. Such outcomes might potentially result in non-financial creditors losing faith in the CIRP, as they lack a voice in endorsing resolution plans that entail significant haircuts. This might inadvertently create a chilling effect on challenges to CoC decisions. Stakeholders, including dissenting voices or those with legitimate concerns, may feel discouraged from raising objections if they perceive a reluctance on the part of the judiciary to intervene. This potential deterrence poses a risk to the checks and balances essential for a fair and transparent insolvency resolution process. The fear of facing an uphill battle against entrenched decisions could stifle dissent and hinder the constructive scrutiny that is integral to refining and improving the resolution process.
The potential drawbacks of unquestioningly relying on the commercial wisdom of the CoC have been acknowledged by the Insolvency and Bankruptcy Board of India (IBBI), which has therefore come up with a Code of Conduct and ethical framework for the CoC. Nevertheless, such an approach may prove to be ineffective if the reasons for judicial intervention in the CoC’s decisions are restricted solely to those explicitly listed in section 30, as observed in this case. Internationally, in countries like the UK and Singapore, despite the courts giving some deference and importance to the decisions made by administrators, similar to the CoC in the UK, these courts have devised judicial standards such as “unfair harm to creditors” and “misapplication of the company’s assets”. These standards go beyond the limited criteria outlined in section 30 of the IBC in India. Such broader grounds aim to alleviate agency costs and potential biases that may arise from stakeholders who are not part of the CoC.
Conclusion
While the Ramkrishna Forgings Limited judgment stands as a testament to the importance of the commercial wisdom of creditors and the desire for an efficient insolvency resolution process, its potential pitfalls cannot be ignored. As we navigate the evolving landscape of insolvency law in India, a nuanced approach that addresses the concerns raised in this critique becomes imperative. Striking a balance between autonomy and oversight, ensuring inclusivity for all stakeholders, and mitigating the risks of unjust enrichment should be at the forefront of our collective efforts.
The critique presented here is not a dismissal of the judgment’s merits but an invitation to engage in a more comprehensive dialogue about the intricacies and potential ramifications of the legal principles it upholds. As a preliminary step towards reform, the courts could contemplate setting an upper limit for the percentage of haircuts, beyond which a judicial revaluation may be warranted. This approach aligns with international practices and introduces a safeguard against disproportionately high haircuts that might undermine the confidence of non-financial creditors. Additionally, recognizing that a resolution plan can only be approved if it secures the vote of at least one impaired class, especially when there are impaired classes under the plan, adds an additional layer of protection for diverse creditor interests. In doing so, we pave the way for a more robust and equitable insolvency resolution framework—one that stands resilient in the face of challenges and instills confidence in all stakeholders involved.