Delhi High Court: Purushaindra Kumar Kaurav, J.*, opined that the Committee of Creditors (‘CoC’) was entrusted with fiduciary duties and the functions entrusted to CoC were wide in nature, and to effectively deliver the duties entrusted upon it, a code of conduct was of pertinent value. The Court opined that one of the foremost functions of law was to circumscribe power with the responsibility, and the CoC, being entrusted with the fiduciary duty to bring back the Corporate Debtor from the vicious cycle of debt trap, must be saddled with the responsibility of ensuring that the decisions took by it in the exercise of its commercial wisdom should be in tune with the bonafide objectives of the Code.
Thus, the Court opined that there was an urgent need for an effective code of conduct for the functioning of the CoC, and accordingly, directed the Insolvency and Bankruptcy Board of India (‘IBBI’) to frame/finalise a code of conduct/guidelines, in accordance with its stand set out in the instant case, and as per other relevant considerations, within a reasonable period of time, preferably, within three months from the date of the passing of the present 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 Insolvency and Bankruptcy Code, 2016. (‘IBC’).
Background
The petitioner was the ex-Director of Su-Kam Power Systems Limited (‘Company’). The Company already went into the Corporate Insolvency Resolution Process (‘CIRP’) in 2018 and Interim Resolution Professional (‘IRP’) had already been appointed. In the present petition, with respect to prayers relating to the proceedings initiated against the petitioner in respect of the personal guarantees issued by him, it was noted that since, no orders were passed by the Debt Recovery Tribunal by that time, therefore, the petitioner was open to file an appeal to the Debt Recovery Appellate Tribunal in case, adverse orders were passed against the petitioner.
Further, with respect to prayer, that a direction might be issued to IBBI, Reserve Bank of India and Indian Bank Association, to work in tandem and develop a set of guidelines to ensure effective monitoring and functioning of the CoC, the Court was of the prima facie opinion that the said prayer was in the realm of a policy and therefore, the respondents were directed to place on record the mechanism for dealing with grievances, if any, regarding the functioning of the CoC and the IRP. Thus, the present case required adjudication only in the context of this prayer.
The petitioner submitted that the company was valued at Rs. 300 crores and CoC diminished the company’s value to an extent that Respondents 1-12 only received a meagre amount of Rs. 10 Crores from the company’s sale. Respondent 12 proposed before the CoC that interim finance to be raised to keep the company as a going concern, however, the said proposal was not accepted by the CoC, without any reason. The petitioners stated that the denial of an opportunity to the company to operate as a going concern had drastically reduced the company’s fair value and even the petitioner was not allowed to bring investors to settle the outstanding dues owned by the company.
The petitioner stated that the present matter was a startling case and a glaring example of misuse of power/non-exercise of power by the CoC, causing immense prejudice to the petitioner. Therefore, appropriate mechanisms should be made for raising grievances against the conduct of the CoC for the effective implementation of the IBC. The petitioner also submitted that after there were grey areas which ought to be filled up and should not be left to the discretion of the CoC, merely because the CoC happened to be the best judge to take commercial decision with respect to the Corporate Debtor.
Analysis, Law, and Decision
The Court referred to Section 63 of the IBC and opined that the Adjudicating Authority had the sole authority to decide any question of law or facts arising out of pending insolvency proceedings, including any alleged mismanagement of assets done by the CoC. The Adjudicating Authority was the main adjudicating body which ensured that the resolution process was carried out in a time-bound manner following the principles of fairness, reasonableness and transparency. The Court relied on Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2020) 8 SCC 531 and opined that the Adjudicating Authority had the authority to regulate the conduct of the CoC through powers of judicial review to ensure that it was functioning as per the role and responsibilities delineated under the IBC.
The Court opined that the CoC was entrusted with fiduciary duties and the functions entrusted to CoC were wide in nature, and to effectively deliver the duties entrusted upon it, a code of conduct was of pertinent value. The Court opined that one of the foremost functions of law was to circumscribe power with the responsibility, and the CoC, being entrusted with the fiduciary duty to bring back the Corporate Debtor from the vicious cycle of debt trap, must be saddled with the responsibility of ensuring that the decisions took by it in the exercise of its commercial wisdom should be in tune with the bonafide objectives of the IBC.
The Court opined that the code of conduct was not intended to question the justness of the decision, as the wisdom of the CoC was to be upheld. A code of conduct should be subservient to the Code and not more than it. However, the process of decision-making must reflect fairness, reasonableness and objectivity, irrespective of the outcome. Therefore, the code of conduct should be effectively based on the principles of integrity, objectivity, professional competence, due care and confidentiality. Further, the code of conduct must also reflect the fundamental features of the Wednesbury principles of fairness and proportionality, to give true meaning to the legislative intent of the IBC. Moreover, it should also reflect the principles of natural justice to be followed by the CoC while taking any measure with respect to any stakeholder during the subsistence of the entire CIRP.
The Court referred to Section 196 of the Code and opined that the provision duly indicated that the IBBI was entrusted with a wide set of powers and functions to regulate the exercise of the insolvency resolution. The IBBI, under the provisions of the IBC, was marked with the responsibility to further the speedy resolution and to provide an effective grievance redressal mechanism. The Court also pointed out that IBBI notified a Discussion Paper on 27-08-2021 on various issues involving CIRP, including the code of conduct for the CoC. However, till date, there existed no code of conduct or guidelines framed by the IBBI for the effective functioning of the CoC.
The Court opined that considering the significant role which the CoC played in the entire CIRP and the sanctity of the commercial wisdom of the CoC which was protected by the legislative mandate from unnecessary interference, there was a compelling need for the code of conduct/guidelines for the effective working of the CoC in order to fulfil the bonafide objectives of the IBC. The need for a code of conduct assumed greater importance because once a decision was taken by the CoC, the aggrieved party was deprived of the legal remedies, except to a limited extent. Therefore, the decision-making process should itself be infused with sufficient safeguards of reasonableness, fair-play, proportionality and adherence to the principles of natural justice.
Thus, the Court opined that there was an urgent need for an effective code of conduct for the functioning of the CoC and accordingly, the Court directed the IBBI to frame/finalise a code of conduct/guidelines, in accordance with its stand set out in the instant case, and as per other relevant considerations, within a reasonable period of time, preferably, within three months from the date of the passing of the present 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.
[Kunwer Sachdev v. IDBI Bank, 2024 SCC OnLine Del 908, decided on 12-02-2024]
*Judgment authored by- Justice Purushaindra Kumar Kaurav
Advocates who appeared in this case :
For the Petitioner: Sudhir Nandrajog, Siddharth Yadav Sr. Advocates with Apoorv Agarwal, Prachi Darji, Divya Verma and Kanishka Lunia, Advocates.;
For the Respondents: Siddhartha Barua and Praful Jindal, Advocates; Ateev Mathur, Advocate; V. K Gupta and Kaushiki Kashyap, Advocates; Yajur Sharma, Advocate.
