Committee Of Creditors Cannot Overreach Its Commercial Wisdom, Says Supreme Court

The principles that underlie the Committee of Creditors' commercial wisdom cannot be overextended to brush aside a significant shortcoming in its decision-making when it fails to properly consider the application of a law, the Supreme Court has held.

In its judgement, the top court upheld the National Company Law Appellate Tribunal order, which set aside the approval given to MK Rajagopalan, managing director of MGM Healthcare, for a Rs 423 crore resolution plan for Appu Hotels Ltd.

A bench of Justices Dinesh Maheshwari and Vikram Nath said that the resolution plan couldn’t be approved for two major reasons.

One, since the resolution applicant was ineligible; and two, since the revised resolution plan wasn't placed before the CoC before it was submitted to the insolvency court.

On the first, the court noted that since Rajagopalan was the managing trustee of a charitable organisation, he was ineligible to run a profit-making entity.

It was highlighted that the status of the trust and Rajagopalan could not be detached from each other. That's because the CoC received two resolution plans for Appu Hotels: one in Rajagopalan's individual capacity and the second as managing director of the trust. What couldn't be done directly was sought to be done indirectly by Rajagopalan, the apex court said.

If Rajagopalan had applied in his individual capacity without relying on his status in the trust, the observation of the court probably would have been different, Shailesh Poria, partner at ELP, said.

On the second aspect, the court noted that the plan was approved by 87.39% of the CoC by vote, subject to certain modifications to the rights of the dissenting financial creditors.

The plan was modified accordingly, but the final revised plan was not presented to the CoC for its consideration and was submitted directly to the adjudicating authority.

The court stated that the commercial wisdom of the CoC would come into existence and operation only when all relevant information is available before it and is duly deliberated upon by all its members.

Commercial wisdom can only be exercised when all the information is readily available in the COC. The top court has actually set the path straight with regard to this aspect, Anoop Rawat, partner at Shardul Amarchand Mangaldas, told BQ Prime. "You cannot have a modification to the final resolution plan without the same being approved by the CoC."

Each and every aspect of the plan has to be tested on the yardstick of its feasibility and viability. Even an improvement to the plan has to be tested, Rawat said.