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Synopsis

The Delhi High Court has directed the Insolvency Bankruptcy Board of India (IBBI) to formulate a Code of Conduct for taking recourse against the Committee of Creditors (CoC) by other stakeholders in the Corporate Insolvency Resolution Process (CIRP) in instances of negligence by the CoC.

Justice Purushaindra Kumar Kaurav, presiding over a single-judge bench, directed the IBBI to frame the guidelines for the conduct of the Committee of Creditors preferably within three months.

“Accordingly, this court is inclined to partly allow the instant petition with respect to prayer (a). The IBBI is directed to frame/finalise a code of conduct/guidelines in accordance with its stand set out in the instant case, principles mentioned hereinabove and as per other relevant considerations, within a reasonable period of time, preferably, within three months from the date of the passing of this judgment, for the effective functioning of the CoC, without diluting the sanctity of the „commercial wisdom‟ of the CoC and the legislative intent of the IBC,” the order reads.

The high court heard a petition from a former director of a company for which Corporate Insolvency Resolution Process (CIRP) was initiated in 2018.

The company, initially valued at Rs. 300 crores, experienced a significant reduction in value by the Committee of Creditors (CoC) during the CIRP, resulting in the sale of the company yielding only about Rs. 10 crores for the 11 banks involved.

As of the balance sheet dated 31.08.2018, the company's assets were valued at over Rs. 274 crores.

The resolution professional had suggested to the CoC that interim finance be raised to maintain the company as a going concern. However, the CoC rejected this proposal without providing any clear justification.

The denial of the opportunity for the company to operate as a going concern had a substantial impact on its fair value.

Additionally, the petitioner was not allowed to bring in investors to settle the outstanding dues owed by the company. The petitioner filed the petition, seeking recourse against the CoC's actions.

After hearing the parties and referring to various landmark judgements of the Apex Court the high court noted that,

“…it is vividly seen that the CoC takes the driver’s seat in this entire voyage of CIRP of Corporate Debtor and the „commercial wisdom‟ of the CoC functions in the same way as the Global Positioning System (GPS) works for the driver in any journey, leading the way to the intended destination. The commercial wisdom of the CoC is placed on the highest pedestal in a sense that even the Adjudicating Authority is not empowered to lift the veil on the merits of the decision,” the order reads.

Furthermore, the bench observed that considering the significant role the CoC plays in the entire CIRP and the sanctity of the “commercial wisdom” of the CoC which is protected by the legislative mandate from unnecessary interference, there is a compelling need for the code of conduct/guidelines for the effective working of the CoC to fulfil the bonafide objectives of the Code.

The high court emphasized that once a decision is made by the CoC, aggrieved parties are deprived of legal remedies. Therefore, the court directed the Insolvency Bankruptcy Board of India (IBBI) to formulate guidelines addressing these issues to ensure fairness and transparency in the CIRP process.

“The need for a code of conduct assumes greater importance in light of the fact that once a decision is taken by the CoC, the aggrieved party is deprived of the legal remedies, except to a limited extent. Therefore, what attains significance is that the decision-making process should itself be infused with sufficient safeguards of reasonableness, fair-play, proportionality and adherence to the principles of natural justice,” the order states.

Case title: Kunwer Sachdev vs IDBI & Ors