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of <h1>Committee of Creditors must follow due process and natural justice in insolvency proceedings under Section 21</h1> Delhi HC examined the CIRP of SU-KAM where no eligible resolution plan emerged. The court emphasized that Committee of Creditors (CoC) is the pivotal body ... Insolvency process of the company called ‘SU-KAM’ which was initiated by the Adjudicating Authority - various disputes arose in the CIRP of the Corporate Debtor - no eligible resolution plan could be evolved - HELD THAT:- It is crystal clear that the sacrosanct intention behind this Code is to revive the Corporate Debtor from the shackles of the debt trap by protecting the Corporate Debtor from its own management and from a corporate death by liquidation. The CoC is the pivotal body under the Code which is responsible for making decisions on various aspects i.e., whether a resolution plan should be adopted or not, whether the resolution plan should be adopted in the same form as presented to it or in a modified form and whether the attempt for the revival of the Corporate Debtor is made or not. The final decision on a resolution plan is taken by the CoC and for approval, a resolution plan is required to be voted in favour by not less than 66% of the voting share of the financial creditors, as per Section 30(4) of the Code. It is also relevant to point out that though the Resolution Professional is obligated to run the business of the Corporate Debtor as a going concern during the CIRP but as per Section 28(3) of the Code, he cannot take certain decisions relating to the management of the Corporate Debtor without prior approval of the CoC by a vote of at least 66% of the voting share. It is crystallized that the entire CIRP is aimed at bringing the Corporate Debtor back on its feet and it is acknowledged that the appropriate disposition of a defaulting Corporate Debtor and the choice of solution, to keep the Corporate Debtor as a going concern or to liquidate it, is to be made by the financial creditors, who could assess the viability and may take decisions in terms of the existing liabilities. It is undoubtedly clear that in this saga of the entire CIRP procedure, the protagonist is the CoC and the ‘commercial wisdom’ of the CoC acts like the ‘North Star’ for the resolution process and its participants. The ‘commercial wisdom’ of the CoC is the guiding light to every decision-making of the CoC in pursuance of the financial distress faced by the Corporate Debtor. The underlying idea behind this concept is to acknowledge the business acumen of the CoC as well as its keenness to arrive at a mutually satisfactory resolution since their own interests are entangled with the resolution process - this court shall now examine the need for a code of conduct for the efficient functioning of the CoC in the entire CIRP in light of the legislative mandate and bonafide objectives of the Code. Code of Conduct for the CoC - HELD THAT:- It is reiterated that CoC, while discharging the crucial decisions under the Code, shall be bound by a certain code of conduct for the effective delivery of its duty as per the legislative intent of the IBC. The CoC, which effectively comes into the picture during the CIRP of the Corporate Debtor, cannot act dehors the bonafide objectives which the Code strives to achieve - A key element envisaged in the code of conduct for the CoC is adherence to the due process in decision-making. The concept of procedural due process involves various elements and one of the most fundamental ones is the Wednesbury principles of reasonableness. The aim of administration proceedings is to rescue and rehabilitate insolvent but potentially viable companies. An Administrator is a person or persons appointed under Schedule B1 of the Insolvency Act, 1986 to manage the company’s affairs, business and property. On appointment, an Administrator becomes an officer of the court. The Administrator must generally perform his/her functions in the interests of the creditors as a whole. The Administrator is duty bound to follow the Statements of Insolvency Practice (SIP) which is a set of guidance notes issued to insolvency practitioners with a view to maintain standards by setting out required practice and harmonising practitioners’ approach to particular aspects of insolvency. The purpose of SIPs is to outline basic principles and essential procedures with which insolvency practitioners are required to comply. The Adjudicating Authority has the authority to regulate the conduct of the CoC through powers of judicial review as formulated aforesaid to ensure that it is functioning as per the role and responsibilities delineated under the Code. The Adjudicating Authority maintains a supervisory role over the entire CIRP and is empowered under Section 60 of the Code to take action in any question relating to the insolvency proceedings. As per the mandate of the IBC, the IBBI is entrusted with the responsibility of framing guidelines with respect to the insolvency professionals, insolvency professional agencies and information utilities and other institutions, in furtherance of the purposes of this Code. Section 196(1)(u) of the IBC also gives the mandate to the IBBI to perform any other function as may be prescribed - the respondent-IBBI has submitted that the IBBI notified a Discussion Paper on 27.08.2021 on various issues involving CIRP, including the code of conduct for the CoC. Comments were invited on that Discussion Paper and the IBBI is still in the process of framing guidelines. However, till date, there exists no code of conduct or guidelines framed by the IBBI for the effective functioning of the CoC. Considering the significant role which the CoC plays in the entire CIRP and the sanctity of the ‘commercial wisdom’ of the CoC which is protected by the legislative mandate from unnecessary interference, there is 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 Code. The need for a code of conduct assumes greater importance in light of the fact that once a decision is taken by the CoC, the aggrieved party is deprived of the legal remedies, except to a limited extent. Therefore, what attains significance is that the decision-making process should itself be infused with sufficient safeguards of reasonableness, fair-play, proportionality and adherence to the principles of natural justice. The IBBI is directed to frame/finalise a code of conduct/guidelines in accordance with its stand set out in the instant case, principles mentioned hereinabove and as per other relevant considerations, within a reasonable period of time, preferably, within three months from the date of the passing of this 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 - Petition allowed in part. Issues Involved:1. Framework or guidelines for the effective monitoring and functioning of the Committee of Creditors (CoC).2. Quashing of proceedings initiated under Section 19 of the RDDBFI Act, 1993.3. Barring initiation of any proceedings under the RDDBFI Act, 1993 or IBC 2016.4. Expunging the petitioner's name from recovery proceedings.Summary:Issue 1: Framework or Guidelines for CoCPetitioner's Argument:- The petitioner argued that the CoC's decisions drastically reduced the value of the company from Rs. 300 crores to about Rs. 10 crores.- The CoC rejected proposals to raise interim finance to keep the company as a going concern, which led to a significant devaluation.- The petitioner was not allowed to bring investors to settle the company's outstanding dues.- The petitioner requested the court to direct the IBBI, RBI, and IBA to develop a framework or guidelines to ensure effective monitoring of the CoC and provide recourse for stakeholders in cases of negligence.Respondents' Argument:- The respondents contended that the petitioner had no case under Article 226 of the Constitution as he had already availed alternate remedies before the NCLT.- The CoC's decisions are based on commercial wisdom, which is not subject to judicial scrutiny.- The petitioner was responsible for the devaluation due to numerous suits filed during the CIRP.Court's Analysis and Conclusion:- The court acknowledged the significant role of the CoC in the CIRP and the sanctity of its commercial wisdom.- It noted that the CoC must adhere to principles of reasonableness, proportionality, and natural justice in its decision-making process.- The court directed the IBBI to frame/finalize a code of conduct/guidelines for the CoC within three months to ensure effective functioning without diluting the CoC's commercial wisdom.Issue 2: Quashing of Proceedings under Section 19 of the RDDBFI Act, 1993Court's Decision:- The court declined to grant this relief as no orders had yet been passed by the DRT, leaving the petitioner to seek remedy through appeal to the DRAT if adverse orders were issued.Issue 3: Barring Initiation of Proceedings under the RDDBFI Act, 1993 or IBC 2016Court's Decision:- The court refused to bar the initiation of any proceedings under the RDDBFI Act, 1993 or IBC 2016 against the petitioner, citing the availability of alternate remedies.Issue 4: Expunging Petitioner's Name from Recovery ProceedingsCourt's Decision:- The court did not grant the relief to expunge the petitioner's name from the recovery proceedings initiated by the respondents.Conclusion:The court partly allowed the petition concerning the development of a code of conduct for the CoC, directing the IBBI to frame appropriate guidelines within three months. The other reliefs sought by the petitioner were declined, emphasizing the availability of alternate remedies and the sanctity of the CoC's commercial wisdom.
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