Non-Justiciable Nature of Committee of Creditors' Commercial Decisions in Insolvency Proceedings

1. Introduction

The case of Rahul Khilnani & Anr. v. Atul Kumar Jain & Ors adjudicated by the National Company Law Appellate Tribunal (NCLAT) on September 23, 2022, marks a significant development in insolvency law in India. The appellants, Rahul Khilnani and H&R Enterprises, challenged the resolution plan approved by the Committee of Creditors (CoC) and subsequently by the National Company Law Tribunal (NCLT). The crux of the appeal revolves around the allocation of claims, where the operational creditors received only 2% of their claims, while workmen and other statutory dues were fully satisfied.

2. Summary of the Judgment

The NCLAT upheld the decision of the NCLT, dismissing the appellants' objections to the resolution plan. The tribunal held that the resolution plan was in compliance with Section 30(2)(b) of the Insolvency and Bankruptcy Code (IBC), 2016, and Regulation 38 of the Insolvency and Bankruptcy Board of India (IBBI) Regulations, 2016. The decision emphasized that operational creditors do not possess voting rights within the CoC, and their limited participation does not render the resolution plan invalid.

3. Analysis

3.1 Precedents Cited

The judgment extensively referenced several landmark Supreme Court cases to bolster its stance:

Vijay Kumar Jain vs. Standard Chartered Bank & Ors. (AIR 2019 SC 2377): Reinforced the limited scope of judicial review over the CoC's decisions.
Ang Industries Ltd. vs. Shah Brothers Ispat Pvt. Ltd. & Anr. (Company Appeal No. 109 of 2018): Emphasized adherence to the IBC provisions in settlement plans.
Swiss Ribbons Pvt. Ltd. vs. Union of India (2019 4 SCC 17): Highlighted the autonomy of the CoC in decision-making processes.
K. Sashidhar vs. Others: Clarified that commercial wisdom of the CoC is non-justiciable.
Kalparaj Dharamshi & Ors. vs. Kotak Investment Advisors Ltd. & Ors. (2021 166 SCL 583): Reinforced that appellate authorities should defer to the CoC's commercial decisions.

3.2 Legal Reasoning

The tribunal's legal reasoning centered on the interpretation of Section 24(3)(c) and Section 30(2)(b) of the IBC. It underscored that operational creditors, lacking voting rights within the CoC, have limited avenues to influence the resolution plan. The resolution plan's compliance with Section 30(2)(b), which mandates that the payment to operational creditors should not be less than what they would receive in liquidation, was pivotal. Moreover, the tribunal highlighted that the increased resolution plan value of Rs. 655.21 lakhs, compared to the liquidation value of Rs. 308.14 lakhs, demonstrated fairness and equity in distribution.

3.3 Impact

This judgment reinforces the principle that the CoC's commercial decisions are insulated from extensive judicial interference. By upholding the resolution plan despite the minimal allocation to operational creditors, the tribunal affirms the autonomy and finality of the CoC's decisions in insolvency proceedings. This sets a precedent for future cases, potentially limiting the scope for operational creditors to contest resolution plans unless significant irregularities are evident.

4. Complex Concepts Simplified

Committee of Creditors (CoC): A body comprising financial creditors (typically banks and financial institutions) who collectively decide the fate of the insolvent company.

Section 30(2)(b) of the IBC: Mandates that in a resolution plan, the amount paid to operational creditors should be at least equal to what they would receive in a liquidation scenario.

Commercial Wisdom: The collective business judgment exercised by the CoC in making decisions that are not purely based on legal entitlements but also on the economic viability and sustainability of the resolution plan.

Non-Justiciable: Refers to decisions or actions that are not subject to judicial review or cannot be examined by the courts.

5. Conclusion

The NCLAT's decision in RAHUL KHILNANI & ANR. v. ATUL KUMAR JAIN & ORS underscores the judiciary's stance on upholding the decisions of the Committee of Creditors, especially when such decisions align with the statutory provisions of the IBC. By affirming that the commercial wisdom of the CoC is non-justiciable, the tribunal has delineated the boundaries of judicial intervention in insolvency proceedings. This judgment is pivotal for stakeholders in the insolvency framework, offering clarity on the extent of judicial oversight and reinforcing the autonomy of the CoC in shaping the future of insolvent entities.