Commercial wisdom of CoC is not subject to adjudicating authority purview: SC

In a landmark ruling, the Supreme Court of India clarified that commercial wisdom of the committee of creditors is not subject to the adjudicating authority or the appellate authority’s purview under the Insolvency and Bankruptcy Code.

“The NCLAT judgment which substitutes its wisdom for the commercial wisdom of the Committee of Creditors and which also directs the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, must therefore be set aside,” a large Bench of the Court ruled.

The Court further clarified that full freedom and discretion has been given to the Committee of Creditors to classify creditors and to pay secured creditors amounts which can be based upon the value of their security, which they would otherwise be able to realize outside the process of the Code, thereby stymying the corporate resolution process itself.

The Court also stated that the Committee of Creditors does not act in any fiduciary capacity to any group of creditors. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors.

The Supreme Court also held that the time of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings, was not mandatory.

The Court said “If it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days.“

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