Re-evaluating the need for a Code of Conduct for the Committee of Creditors- An Analysis of Kalinga Allied Industries

[By Satwik Mohapatra]

The author is a student of National Law University, Odisha.

The National Company Law Appellate Tribunal (NCLAT), in Kalinga Allied Industries India v. CoC of Bindals Sponnge Industries Limited (Kalinga Judgment), set aside the order of the National Company Law Tribunal (NCLT). The Tribunal ruled that the Committee of Creditors (CoC) cannot consider the new Resolution Plan outside the scope of Corporate Insolvency Resolution Process (CIRP) and withdraw their approval of the first Resolution Plan. Additionally, a plan that is submitted to NCLT  with  requisite majority is irrevocable and binding between the CoC and the Successful Resolution Applicant (SRA). This judgment sheds light on the unrestricted power of the CoC to make decisions under the ambit of “commercial wisdom” and highlights the need for a standard practice code for the CoC amidst the recent ongoing debate to regulate them. The author  has discussed the facts of the case and analysed tribunal’s verdict in the light of Insolvency Bankruptcy Board of India’s (IBBI) suggestions

 Brief Facts

An application for the initiation of CIRP was admitted against the Corporate Debtor (CD), Bindals Sponnge Industries Ltd., and Expression of Interest was issued, pursuant to which Kalinga Allied Industries submitted its Resolution Plan. After many discussions, Kalinga Allied Industries submitted a revised Resolution Plan, which obtained the approval of the CoC with the requisite majority. Following which, an application under Section 30(6) of the Insolvency & Bankruptcy Code 2016 (Code) was filed before the NCLT for the approval of the Resolution Plan.

During the pendency of the application, Hindustan Coils Ltd., a third-party that was not a part of CIRP, filed an application before the NCLT seeking consideration of the Resolution Plan submitted by them. Their plan offered a value 12% higher than the value offered by Kalinga Allied Industries, the SRA.

The NCLT allowed the CoC’s application that sought direction to reconsider the resolution plan of Hindustan Coils or any other entity and approve a suitable plan. The SRA objected to this order and filed an appeal under Section 61 of the Code.

Tribunal’s Verdict

The Appellate Authority chalked out the issue in question as being whether the CoC, having already consented to a resolution plan, can seek direction to consider a third-party resolution plan that was not part of CIRP and withdraw their approval after more than 2 years.

NCLAT had previously directed that an application by a person outside the ambit of CIRP will not be entertained and remanded the matter to the Adjudicating Authority. This was never challenged by the CoC and has since been final. Furthermore, the Appellate Authority rejected the CoC’s argument that their decisions are based on “commercial wisdom” and are therefore non-justiciable and supreme, as stated in K. Sashidhar v. Indian Overseas Bank & Ors., and observed that the issue pertains to NCLT’s authority to direct CoC to consider a resolution plan outside the scope of CIRP and the binding value of the resolution plan.

The Appellate Authority relied on the Ebix Singapore Pvt Ltd  v. CoC of Educomp Solutions Ltd & Anr (Ebix Judgment) to answer the first question that NCLT has residuary jurisdiction under Section 60(5). Furthermore, NCLT cannot do what the Code specifically does not give it the power to execute. Moreover, allowing any sort of withdrawal or modification to the Resolution Plan would defeat the objective of the Code and result in unnecessary delay. Furthermore, the NCLAT stated that the effect of the CoC withdrawing an approved revival plan would be similar to the effect of the SRA withdrawing a resolution plan, as specifically discussed in the Ebix Judgement.

NCLAT laid down that the current framework of the code lacks any scope for modification or withdrawal of the plan, which has received the requisite majority approval of the CoC. Furthermore, once submitted to the Adjudicating Authority, the resolution plan is binding and irrevocable. Moreover, belated submissions cannot be considered even if they provide for a higher value, as the same would have a detrimental effect on the timelines laid down in the Code as well as the already approved resolution plan.

Analysis of Tribunal’s Verdict

The precedent that had been set by the Ebix Judgment was that a Resolution Plan that has been presented before the Adjudicating Authority and received majority approval cannot be withdrawn from consideration  by the SRA. The apex court held that such withdrawal is not only not permitted under the framework of the Code but also defeats the time bound objective of the code. The Kalinga Judgment acts as an extension to the Ebix Judgment by holding that a Resolution Plan that has received the assent of the CoC cannot be withdrawn after it has been presented to the Adjudicating Authority, as the same has binding value. Withdrawal of the plan by the CoC would have the same consequences as those discussed by the Apex Court.

As has been laid down in Gujarat Urja Vikas Nigam Limited v. Amit Gupta, a delay in the completion of the insolvency proceedings diminishes the value of the debtor’s assets and hampers the prospects of a successful reorganization. Therefore, CIRP cannot be allowed to continue for an indefinite period. Moreover, the withdrawal of the plan submitted to the Authority with the necessary requirements would result in another level of negotiations. The decision of CoC to withdraw its approval will not just affect the SRA but other stakeholders too. The purpose of an insolvency resolution process is to collectively address the claims of all stakeholders including secured and unsecured creditors, employees, other claimholders, etc. For instance, in the insolvency resolution of a big conglomerate with thousands of workmen depending on the company for their wages, such workmen and their dues would be delayed and would result in them being in a disadvantageous position due to unnecessary delays in approving the resolution plan.

Apart from timely approving the resolution plan, the CoC is also tasked with the revival of the CD as a going concern. Being in the driver’s seat, the CoC takes  important decisions that ultimately decide the commercial viability of the CD. These decisions have to be taken keeping in mind two important objectives of the Code, which include maximization of the assets of the CD in a timely manner and balancing the interests of all stakeholders. However, there have been many instances when the creditors have accepted haircuts as high as approximately 95% . Also, the IBBI  Quarterly News Letter for July–September 2022 shows that the cumulative recovery rate for debt-ridden companies stands at 30.8%. As per Care Ratings’ Reports from as recent as November 2022, the low recovery rate of 30.8% implies that lenders took haircuts of around 70%. Moreover, this cumulative recovery rate is witnessing a downward trend.

These are worrying signs for debt-ridden companies, and the decisions that are taken to revive them have to be questioned. This unrestricted power of the CoC is a purely judicial creation. The code has not specifically  provided this  unrestricted power to the CoC. The decisions of the CoC have gigantic implications not just affect the revival or rehabilitation of a financially distressed company but also the economy. The Kalinga Judgment is a welcome step in today’s day and time where multiple stakeholders are leaning towards bringing a system of checks and balances within the CoC’s functioning.

Suggestions by the IBBI

The discussion paper released by the IBBI has proposed a code of conduct that lays down the functioning of the CoC and establishes a procedure for the effective resolution of the debt-ridden companies. The 32nd Report of the Parliamentary Committee on Finance has further raised the issue of the need for a standard code of conduct. It has been recommended to amend Section 196 of the Code to empower IBBI to issue guidelines for the CoC. Moreover, the insolvency laws of various nations have formulated guidelines to regulate the functioning of the participants.

However, any attempt to have a regulated code of conduct would result in a quagmire of litigation. This will affect the objective of the code. Additionally, it would also affect the freedom of the creditors to take decisions.  The possible solution to wriggle out of this dilemma can be that a Code of Conduct that comprises of standards and  best practices. The draft report released on 3 December 2022 by the  Insolvency Law Academy working on the Code of Conduct for CoC takes a similar approach.

The committee has recommended a Code of Conduct that is the culmination of  “Standards in Conduct and Performance.” A code of conduct cannot be a “one size fits all” code that can be applied to every scenario. When making commercial decisions, the CoC would be influenced by a code of conduct containing best practices. The committee further recommends that Financial Creditors (FC) should adopt these standards.

Additionally, it is recommended that IBBI act as a regulatory body. The meetings of the CoC are confidential but accessible to the IBBI. They are in the best position to watch over the decisions of the COC and take actions like notifying the CD in case the CoC is not acting in the best interest.

Conclusion

The motive behind a Standard Code of Conduct and Performance is to make sure that the CoC not only acts in a commercially prudent manner but also so that their powers are kept in check. The idea behind the Code is to revive the corporate debtor in a time bound manner while maximizing the value of its assets. The intent behind making these Standards non-binding is to  avoid any possible litigation that might arise and result in delay of resolution. Moreover, adhering to these standards  will result in maximization of the assets of the CD. This will help in achieving a successful resolution of the CD.

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