Committee of Creditors must follow due process and natural justice in insolvency proceedings under Section 21

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 responsible for revival decisions, requiring 66% voting approval for resolution plans. HC held that CoC must follow a code of conduct including adherence to due process, reasonableness principles, and natural justice while maintaining commercial wisdom. The court noted absence of formal CoC guidelines despite IBBI's 2021 discussion paper. HC directed IBBI to frame comprehensive code of conduct/guidelines for effective CoC functioning within three months, ensuring procedural safeguards without diluting commercial wisdom or legislative intent. Petition allowed in part.

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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 CoC
Petitioner'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, 1993
Court'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 2016
Court'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 Proceedings
Court'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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