Corporate Law

Siva Tests IBC: The NCLAT’s Choice Between Commercial & Judicial Wisdom

Disha Lohiya, Anurag Singh


The article grapples with the principle of primacy of commercial wisdom of the Committee of Creditors. It examines and scope of the same and argues that the commercial wisdom of the creditors has to be limited in certain cases. To that effect, the article also engages with the ruling in the SIVA case.


Time and again courts and tribunals have reiterated the principle of primacy of commercial wisdom of the Committee of Creditors [“CoC”]. However, it’s important to note that Insolvency and Bankruptcy Code, 2016 [“IBC”] is not a debt recovery mechanism for financial creditors and therefore, their power has to be limited by the court/tribunal.

Recently, on 12th August 2021, the National Company Law Tribunal [“NCLT”], Chennai while heading the proposal of withdrawal under Section 12A of IBC decided to limit the extent of  CoC’s commercial wisdom. It further ordered for the liquidation of The Siva Industries and Holding Ltd. [“Siva”]. The application was filed by a Resolution Professional [“RP”] on behalf of creditors. On 25th August 2021, both the promoters as well as the creditors [“Appellant”] had appealed against the order of the NCLT.  The main contention of the appellant was that the NCLT had far exceeded its power while rejecting the commercial wisdom of creditors.

Through this article, the authors have tried to show that the commercial wisdom of creditors has to be limited in case of an application for withdrawal of Corporate Insolvency Resolution Process [“CIRP”] and that the NCLT is justified in applying judicial wisdom in such cases. In this article, the authors will discuss the ruling of NCLT in the Siva case and also critically examine the scope of commercial wisdom of the Committee of creditors.

Commercial Wisdom: Not a Holy Discretion

In Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta, [“Essar Steel case”], the Supreme Court [“SC”] upheld the existence of some inherent assumptions relevant to the CoC, including the concept of “commercial wisdom”. It held that:

  1. the CoC has the expertise to appraise the Corporate Debtor (CD)’s viability ( Sashidhar v. Indian Overseas Bank) and verify the commercial feasibility of the proposed plan;
  2. their actions are the result of a thorough examination and assessment of the proposed plan, and
  3. their decisions are the outcome of deliberations and voting at CoC meetings.

These assumptions, however, must not be misconstrued as absolute and must be viewed in light of the IBC’s fundamental objectives and the inherent checks and balances that regulate this concept in the first place.

The Supreme Court in Kalpraj Dharamshi v. Kotak Investment Advisors Limited has held that “that the appeal is a creature of statute and that the statute has not invested jurisdiction and authority either with NCLT or NCLAT, to review the commercial decision exercised by CoC of approving the resolution plan or rejecting the same”. It should be highlighted, however, that commercial wisdom is restricted to approving or rejecting the resolution plan. It doesn’t go any farther than that.

The SC stated in Swiss Ribbons Pvt. Ltd. v. Union of India, that the IBC was implemented with the primary goal of reviving and preserving a corporate debtor as a going concern by maximizing its asset value and by taking into account the interests of all stakeholders. The Devil, on the other hand, is in the details. When interpreting the IBC’s preamble, the main objective is to save the “savable businesses”, rather than “every business.”

Ruling in Silva’s case

A. Breaking Down of Amount Value

Siva Industries’ total debt ₹4,863 crore
One time settlement [“OTS”] policy ₹328.21 crore
Haircut 93.5%
Liquidation value ₹229.00 crores
Operational Debt ₹461.02 crore
Other Debt ₹40.55 crore

 B. Judicial wisdom in rejecting the OTS Policy

The court rejected the OTS policy of the promoters because of the following reasons:

  1. Business restructuring plan disguised as settlement policy

The OTS scheme given in the name of the Business restructuring plan is not something that was envisaged by the drafters of the code. The main intention for including the promoters under Section 29A is to preclude them from giving a resolution plan as they are the ones whose fault led to the initiation of CIRP proceedings in the first place. The intention is not to give them back the control of the company. However, the NCLT was able to catch sight of the intentions of the promoters whose OTS policy was given in the guise of a business restructuring plan.

Section 29A disallows defaulting promoters from bidding for stressed assets and submitting a resolution plan. It is pertinent to note that the OTS made by the promoters was nothing but a resolution plan. It exposed the creditors to deep haircuts and allowed the absconding promoters to get back the control of the debt-ridden company by only paying 5% of dues. The NCLT also observed that- “This also raises doubt about the functionality of the CoC. Such an act of CoC can never be treated as an act of commercial wisdom.

In the matter of Bank of Baroda, v. Mr. Sisir Kumar Appikatla, the AA rejected the resolution plan approved by the CoC on the grounds that the Resolution Plan of resolution applicant was only used as a ploy to gain control of the CD by the very person who had pushed the CD into insolvency. While rejecting an appeal by a Financial Creditor (FC) in the matter, the NCLAT observed: “This in itself raises eyebrows. This is further compounded by approval of the Restructuring Plan camouflaged as Resolution Plan emanating from an ineligible person which renders the role of the Committee of Creditors questionable. Such circumstances justify raising of inference of complicity.”

  1. Equivocal terms of the OTS proposal

Clause 2 of the settlement proposal posits the fact that the promoter has the ultimate power to change the terms of the plan even after the approval of the plan.

“Clause 2: Effective Date and Failure of the Settlement Plan

The proposal of the promoters and subjecting association with the committee of creditors. Therefore, norms of the approved settlement plan may be different from the terms approved hearing.”

The plan is backhanded and very arbitrary in nature as the weighing balance is tilted more towards the promoter’s benefit. However, once the CIRP is initiated, the proceedings are in rem and not in personam. Since the settlement plan governs the terms of the implementation, it looks more like a Resolution plan proposed under section 30 of the IBC.

  1. No strings attached to the CIRP proceedings if the OTS settlement fails

The CoC in its prayer for relief had asked the AA for liquidation u/s 33 in case of failure of the OTS proposal. However, such relief cannot be granted as once the CIRP is withdrawn, there cannot be any strings attached to the same. Therefore, once the CD comes out of CIRP, it cannot directly be pushed into liquidation as then the CD will be free from the rigours of CIRP. Hence, in subsequent events of default of OTS policy, the CoC cannot push the CD directly into liquidation. NCLT further reiterated that IBC is not a debt recovery mechanism for CoC. NCLT also noted that the CIRP proceeding then will have to be initiated de novo which ultimately defeats the purpose of IBC. One of the main purposes of IBC is the maximization of assets which includes timely resolution of insolvency. Thus, in case insolvency proceedings are initiated again against the CD it will lead to depreciation of assets of the company as well as delay in resolution of insolvency.

New Reasoning or Flawed Interpretation: Analysis

A. The commercial wisdom of the CoC regarding the withdrawal of the CIRP was always limited by the code.

1. Limited till acceptance or rejection of resolution plan only

The issue of the CoC’s autonomy in relation to the jurisdiction of AA has been constantly dealt with by the courts and tribunals. The CoC’s commercial wisdom has been given precedence over judicial intervention in order to ensure that the CIRP is completed within the stipulated schedule. It is now established law that the CoC is the expert body to assess the feasibility and viability of the plan, as the CoC alone is capable of dealing with the underlying complexity involved. Report of Bankruptcy Law Reforms Committee [“BLRC”] report stresses the notion that the CoC should be entirely responsible for making business decisions about the proper disposition of a defaulting enterprise.

As soon as the resolution plan is rejected by the CoC, the disposition power does not solely remain in the hands of the CoC. The power then comes into the hands of both CoC and AA to jointly decide the approval of withdrawal, unlike the resolution plan where the power relies solely with CoC.

  1. Limited by reasoning and AA wisdom at the stage of withdrawal Section 30A

Here, we need to see the intention of the legislature. A plain reading of Section 12A provides that the AA “may” allow the withdrawal of CIRP. Further, Regulation 30A provides that in case of withdrawal application after the constitution of CoC and after the issue of invitation for expression of interest under Regulation 36A, the applicant will have to justify the reasons for withdrawal after the issue of such invitation. ‘Stating the reasons’ simply point to the fact that the AA has the final say whether such withdrawal is permissible or not. Thus, judicial wisdom was inbuilt in the IBC code from the start. It hereby restricts the role of commercial wisdom of the CoC.

Hence, Section 12A read with Regulation 30A, provides the power to AA to decide whether such withdrawal should be allowed or not. Thus, in case of withdrawal, the power lies with AA rather than CoC to decide the viability of the withdrawal. Commercial wisdom of CoC doesn’t play a role in this it’s only limited to the resolution process.

B. Section 32A of IBC: A Backward Step

Section 32A provides that the liability of a CD for an offence committed prior to the commencement of the CIRP shall cease. Further, the CD shall not be prosecuted for such an offence from the date the resolution plan has been approved by the AA under Section 31 if the resolution plan results in the change in the management or control of the CD to a person who was not a promoter. Therefore, if the management of the company is given back to the promoter, then all the prior proceedings against the CD will revive. Thus, the withdrawal will lead to a backward step in the process of maximization of assets where the CD will have to entertain criminal proceedings which would have ceased Hence, it will not be wise to give back the control to the promoter. Otherwise, the CD will not be able to reap the benefit of this provision.

Conclusion: Skating on Thin Ice

Going by the judicial precedent in the Sterling case, the NCLAT rejected NCLT’s judgement and held that Coc’s commercial wisdom cannot be challenged. In that case, the promoter was a willful defaulter and had not mentioned the source of funds to the NCLT and the creditors. Therefore, the NCLT applied its judicial wisdom and rejected the OTS policy. NCLAT had the opportunity to settle the case in Sterling once and for all regarding the applicability of AA’s judicial wisdom in withdrawing the application u/s 12A read with Regulation 30A. However, the same was left out in the cold. As a result, it remains to be seen what decision the NCLAT will make in Siva’s case. Whether it will continue down the path of strict interpretation and reaffirm its faith in the CoC’s commercial wisdom, or take a different path and deliver a landmark judgement restricting the scope of commercial wisdom in withdrawal proceedings.

A code of conduct for the CoC could bring about a sense of transparency and avoid ambiguity of the kind alluded to in the Siva Industries case. Delayed resolution is denied resolution. If the CoC is supreme, it, too, should be above suspicion. If a code of conduct can help, why not?

Insolvency and Bankruptcy Board of India [“IBBI”] on 27th August 2021 released a discussion paper. One of the main issues highlighted by the IBBI was the Code of Conduct for CoC. IBBI observed that CoC performs a statutory role and it discharges public functions as well. It was further noted by IBBI that the impact of CoC’s decision has to be borne by all stakeholders, operational creditors, and other creditors as well. Thus, CoC must apply the highest standard, a duty of care, follow due process, be fair to all stakeholders, and also act transparently in the discharge of its responsibilities. While other stakeholders i.e., RP, Valuers, and Information Utilities are regulated entities, the CoC functions in an unregulated environment. Therefore, IBBI has asked for public comments regarding the Code of Conduct for CoC which will regulate the powers of CoC. It is high time that the powers given to CoC are regulated. Thus, IBBI’s initiative is a welcome step in achieving the objectives of IBC.

Disha and Anurag are fourth year law students at the National Law University, Jodhpur.