Evolution of the committee of creditors’ authority

The role of the committee of creditors (CoC) in a corporate insolvency resolution process (CIRP) has increasingly been scrutinized and clarified by various courts and tribunals, including the Supreme Court. There have also been amendments to the Insolvency and Bankruptcy Code, 2016 (code).

The principal responsibility of the CoC is to decide either to approve or reject a resolution plan proposed by a resolution applicant (RA) by considering its feasibility and viability and the manner of distribution of the resolution amount. This is set out in section 30(4) of the code, which since the Insolvency and Bankruptcy Code (Amendment) Act, 2019, includes the CoC’s authority to consider the manner of distribution of the resolution amounts.

In many recent instances, however, creditors, particularly operational creditors and dissenting financial creditors, have challenged resolution plans approved by the CoC, mainly on the grounds that those resolution plans are unfair and discriminatory.

The main matter that emerges from these disputes is the primacy of the CoC’s decision with respect to a resolution plan. While the code recognizes the central role that the CoC plays in approving a resolution plan, some benches of the National Company Law Tribunal (NCLT) have held that the tribunal has the power to reject or modify resolution plans as approved by the CoC, if found to be unfair or discriminatory.

Subsequently, the Supreme Court, in K Sashidhar v Indian Overseas Bank, confirmed that the decision of the CoC in approving or rejecting a resolution plan is final and binding, and is not open to challenge or scrutiny, unless the factors prescribed under section 30(2) of the code were not complied with. The court held that approval or rejection of a resolution plan is a commercial decision of the CoC, and that no inquiry can be made into the justness or fairness of such approval or rejection. The basis of this finding is consistent with the well established principle of law that the courts and tribunals should not ordinarily interfere with the opinions of expert economic bodies such as the CoC.

Charanya Lakshmikumaran is a partner and Gopal Machiraju is a senior associate at Lakshmikumaran & Sridharan.