Insolvency case: Lenders’ decisions questioned

MUMBAI: A series of judgments in the Supreme Court has established the unbridled power of the committee of creditors (CoC) in insolvency cases. However, the CoC wisdom has come under question in the Videocon and Siva Industries case, which has strengthened calls for a code of conduct proposed by the Parliamentary standing committee on finance last week.
In the early years of the Insolvency and Bankruptcy Code (IBC), the Supreme Court had upheld the unquestionable nature of the commercial wisdom of the CoC in the Essar judgment. The apex court had also affirmed that the tribunals do not have any right to question CoC’s wisdom, including on dissenting creditors in another case. Besides, there are several other orders giving financial creditors the upper hand.
Lenders have also been accepting bids after deadlines, citing value maximisation, they have also accepted bids close to liquidation value, leading the Parliamentary panel to question their actions.

The National Company Law Tribunal (NCLT) has also questioned the behaviour of the CoC in two cases. In the Videocon case, the NCLT raised doubts on the confidentiality clause being in real-time use after it turned out that the bid put in by Vedanta’s Twin Star was close to the confidential liquidation value assigned by lenders.
“Commercial wisdom of Coc is like the basic structure of the IBC process. Any deviation there may have wider dysfunctional implications. However, to address growing concerns about indiscretion in decision making of CoC, there is now a felt need to have a professional code of conduct for CoC as suggested by standing committee on finance, and penal provisions for acts of misconduct, if any,” said Hari Hara Mishra, director, UV ARC.
More recently this week, the NCLT Chennai bench shot down a proposal put forward by the CoC to withdraw insolvency proceedings against Sivasankaran’s Siva Industries in order to do a one-time settlement. “The NCLT observed that without receiving even a single penny from the promoter of the corporate debtor, the CoC has voted in favour of withdrawal of insolvency proceedings and this is what gave an impression that it is not a settlement but a business-restructuring plan. Hence, NCLT was of the view that the powers of the adjudicating authority cannot be circumscribed on the ground that ‘commercial wisdom’ of the CoC would prevail over any other provisions of the IBC,” said Nirav Shah, partner, DSK Legal.
Shah added that while the unquestionable commercial judgment of the CoC is not getting weakened, this rationale cannot be said to be applicable to the one-time settlement proposal that the tribunal is required to consider before approving the same. A senior advocate who appears on behalf of lenders said that while the rights of lenders are not in doubt, a code of conduct for financial creditors was required.