The Delhi High Court recently decided the case of Kunwer Sachdev v. IDBI Bank.

The case involved a petition filed by an ex-director of a company seeking an order or direction for the Insolvency and Bankruptcy Board of India (IBBI), the RBI, and the Indian Banks Association to collaborate and develop a framework to ensure effective monitoring and functioning of the Committee of Creditors (CoC). This framework would allow other stakeholders in the Corporate Insolvency Resolution Process (CIRP) to take recourse against the CoC in cases of negligence.

A CoC is constituted when a company undergoes the Corporate Insolvency Resolution Process (CIRP). The CoC becomes vital to the decision-making process of the company, with decisions expected to be made in the interest of all stakeholders. Once the CoC approves a resolution plan, it becomes binding on all stakeholders. Courts have on many occasions declined to interfere in matters already addressed by the CoC, holding that the “commercial wisdom of the CoC is non-justiciable.”

In this interesting case, the company was valued at over Rs. 274 crores as per the balance sheet produced by the petitioner. However, the CoC’s valuation was much lower, resulting in financial institutions receiving a mere Rs. 10 crores from its sale. It was contested that the CoC rejected a prospective interim financial plan (IFP) presented by the Resolution Professional (RP) without proper consideration or commercial wisdom, thereby substantially diminishing the company’s value. It was further contested that the CoC thwarted the petitioner’s attempts to bring in investors to settle outstanding dues.

Leaving aside the specifics of the case, the decision of the Delhi High Court can be assessed in three parts: analysing the legislative intent behind the Insolvency and Bankruptcy Code (IBC), outlining the scheme of the Code highlighting different key stakeholders involved in the process and their scope of authority, and most importantly, discussing the code of conduct for the CoC. This was much needed!

While discussing the legislative intent and the aim of the Code, the Court relied upon the observations in the Bankruptcy Law Reforms Committee (BLRC) report dated 04.11.2015. The core aim of IBC is to speed up the process of CIRP. Delays in the process may trigger a decrease in the value of the company’s assets due to economic depreciation.

It is well-known that the CoC has maximum control and power during the resolution process and is the pivotal decision-making body. The Honourable Supreme Court in Essar Steels clarified that there is limited scope of judicial intervention into the commercial wisdom of the CoC. Therefore, it is imperative for the CoC to have members with the maturity to assess both the financial feasibility of a plan and the scope of restructuring and putting the company back on its feet. Further, in Kalpraj Dharamshi, the Honourable Apex Court gave further powers to the CoC even with procedures and timelines not strictly within the laid-down regulations. Thus, with such wide powers, it is important that the CoC comprises members with both business acumen and fairness in arriving at decisions in the interest of all stakeholders.

The Delhi High Court relied upon the recommendations of the Insolvency Law Committee report dated 20th February 2020 and the subsequent report dated 20th May 2022. Both reports emphasised the need to develop guidance to aid CoC members in functioning efficiently and adhering to the objectives of the Code. The 2022 report proposed balancing the wide powers of the CoC by stating that guidelines for the standard of conduct of the CoC were the “need of the hour” and that they must reflect best practices, procedural fairness, and efficiency. The Honourable Court spoke about the principle of proportionality, the doctrine of necessity, and the twin facets of proportionality: rational nexus and intelligible differentia.

The Honourable Court further stated that since the CoC is entrusted with wide fiduciary duties and obligations towards the stakeholders of the distressed company, it is of utmost importance to formulate a code of conduct to legitimize their decisions, especially in grey areas. The Court felt that an elaborate, determinative, and efficient code of conduct would facilitate the effective and responsible functioning of the CoC.

The proposed code of conduct should be based on principles of integrity, objectivity, professional competence, due care, and confidentiality. Apart from the significant role of the CoC in the process, the unreachable boundaries of “commercial wisdom” persuaded the Honourable Court to highlight the necessity of a code of conduct, especially given the multiple litigations arising from conflicts between the CoC and promoters.

Let’s hope that a comprehensive “code of conduct” will not only make the CoC more accountable but also expand the legal recourse available to other stakeholders who currently have little say in the resolution process.