Decision of the Committee of Creditors if in Contravention of Law, Cannot be Validated by the Principle of Commercial Wisdom

The Supreme court, in a judgement rendered in M.K Rajagopalan v. Dr. Periasamy Palani Gounder & Anr. on 03rd May 2023, upheld the order of the NCLAT wherein the Successful Resolution Applicant, in pursuance of his submission of two resolution plans, one in his individual capacity and the other in the capacity of managing trustee of the trust, was declared ineligible in terms of Section 88 of the Indian Trust Act, 1882 [advantage gained by fiduciary]. The division bench of the Supreme Court also held that the principles underlying the decisions of the Supreme Court respecting the commercial wisdom of Committee of Creditors cannot be over-expanded to brush aside a significant shortcoming in the decision-making of Committee of Creditors when it had not duly taken note of the operation of any provision of law for the time being in force.

Brief facts of the dispute were that the Tourism Finance Corporation of India filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] seeking initiation of a Corporate Insolvency Resolution Process [“CIRP”] against Appu Hotels Limited [Corporate Debtor]. The National Company Law Tribunal [“NCLT”] admitted the Corporate Debtor into CIRP in the year 2020. The Resolution Plan submitted by the Successful Resolution Applicant for the Corporate Debtor was approved by the Committee of Creditors and thereafter by the NCLT.

Thereafter, approval of the Resolution Plan was challenged before the National Company Law Appellate Tribunal [“NCLAT”] on various grounds. NCLAT rejected the resolution plan so approved by the Committee of Creditors and the NCLT. The matter was remanded to Committee of Creditors, with direction to the Resolution Professional to proceed with CIRP from the stage of publication of Form ‘G’, for inviting Expression of Interest afresh as per the Insolvency and Bankruptcy Board of India Regulations, 2016 [“CIRP Regulations”].

Further, the Successful Resolution Applicant was declared ineligible in terms of Section 88 of the Indian Trusts Act, 1882 and disqualified in terms of Section 164(2)(b) of the Companies Act, 2013 [disqualification as the director of a company in case of failure to repay the deposits accepted]. The Successful Resolution Applicant filed an appeal before the Supreme Court against the NCLAT’s order.

The Supreme Court, inter alia, observed that there was no provision in the Code which mandates that the related party should be paid in parity with the unrelated party. So long as the provisions of IBC and CIRP Regulations are met, any proposition of differential payment to different classes of creditors in the resolution plan is, ultimately, subject to the commercial wisdom of the Committee of Creditors and no fault can be attached to the resolution plan merely for not making the provisions for related party. Therefore, even while respecting the commercial wisdom of Committee of Creditors, in the present case, the resolution plan in question could not have been approved by the Adjudicating Authority for two major reasons: one, for the ineligibility of the resolution applicant; and second, for not placing the revised resolution plan in the Committee of Creditors before seeking approval from the Adjudicating Authority.

By - Prachi Pandey

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