SC calls out gaps in IBC, calls for more oversight of creditors' committee

The recent Jet Airways' liquidation case prompted the apex court to highlight how tribunal members often lack the domain knowledge required in high-stakes insolvency matters

The Supreme Court in its recent order on Jet Airways’ liquidation called the case an “eye opener” that has brought to light the deficiencies in the Insolvency and Bankruptcy Code (IBC). The top court laid into the role all stakeholders including creditors, applicants and adjudicating authority in the insolvency process, it has particularly suggested the need for better enforcement of code of conduct for the Committee of Creditors (CoC). 

Five years since its approval, the Jet Airways resolution plan had not been implemented with the successful applicant the Jalan Kalrock Group and the CoC led by State Bank of India at loggerheads over several aspects of the Plan, distribution of dues etc. 

While the Jet’s case has often been termed as a complex one by IBC experts, the SC in its order said that “the duty to implement the plan does not fall on the Successful Resolution Applicant alone; lenders and creditors are equally obligated to support the process by offering constructive and continuous cooperation.” 

Reserve Bank of India’s deputy governor M Rajeshwar Rao said last week the insolvency regulator should enforce a code of conduct for the CoC, as their performance in insolvency proceedings has been “lacking in several aspects”.

  A CoC in IBC consists of financial creditors in insolvency cases and can also include operational creditors with limited participation and voting rights. 

Rao said that there were several instances of subpar performance by the CoC, such as prioritizing individual creditors’ interests over collective interests, disputes over resolution plans due to concerns about undervaluation or viability, disagreements on distributing proceeds even after a plan’s approval, poor attendance at CoC meetings, and inadequate engagement, coordination, and information-sharing among members. 

“Balancing the interests of all stakeholders has always been a challenge in the IBC. Despite the same, the sanctity afforded to the COC must not be done away and this could be an area where specific attention should be invested to avoid replacing the commercial wisdom of the COC with judicial intervention,” Sukrit Kapoor, Partner, King Stubb & Kasiva, Advocates and Attorneys said. 

On its part the Insolvency and Bankruptcy Board of India (IBBI) in August this year brought self regulating guidelines that require the CoC to maintain integrity, confidentiality, objectivity during decision making process and disclose any conflict of interest. 

“The IBC process relies heavily on commercial wisdom of the CoC, and it is subject to a very limited judicial review… IBBI has limited power to oversee the function of CoC. The recommendation suggests putting a bridle on the CoC functioning by placing it under a regulatory supervision,” said Shiju PV, Senior Partner, IndiaLaw LLP. 

In the case of Jet Airways, experts said that the successful resolution applicants have sought relaxation,subsidy or put condition precedents which causes delays and results in deterioration in the value of the assets. 

“This approach needs to be shed as it is assumed that when a Resolution Applicant presents a Resolution Plan it has done proper due diligence and is making a conscious decision. Similarly, it is also expected from the CoC members that they should not hold unnecessary approvals or the representative attending the meetings should be competent enough to take the decisions,” Daizy Chawla, Managing Partner, S&A Law Offices said. 

The SC suggested that the Central Government or the IBBI explore the possibilities of better enforcement of the standards and practices enumerated in the guidelines through an independent mechanism under the auspices of an oversight committee instead of making them self-regulatory. “This will enable the guidelines to achieve some level of practical and operational relevance and also prevent any significant lapse in decision making on the part of the CoC,” it added. 

"Stricter enforcement can prevent CoC from cherry-picking plans that only serve their interests, ensuring a balance with operational creditors and employees’ rights, aligning with principles under Section 53. This ensures decisions are not only compliant but equitable," said Sonam Chandwani, managing partner, KS Legal & Associates. 

An interesting suggestion by the SC is that the resolution plan itself should  record the next steps to be taken by the respective parties for commencement of implementation of the approved Resolution Plan. 

Experts said that this may be a constructive approach but it will have practical  challenges. “The successful implementation of the resolution plan often depends on external factors beyond the control of the resolution applicant. Any delays arising from these factors could expose the successful resolution applicant to further prolonged litigation, undermining the intended efficiency and certainty of the resolution process,” said Piyush Agrawal, Partner, AQUILAW. 

The plan, the court said, must demonstrate that it addresses the cause of default, is feasible and viable, has provisions for its effective implementation, has provisions for approvals required and the timelines for the same and, that the resolution applicant has the capability to implement the resolution plan. 

However, SC’s suggestion that the resolution applicants should not be frugal or narrowly profit-driven, limited to viewing the transaction through a purely commercial lens may be difficult to implement. The court said that the applicant  must recognize that rescuing a distressed company is a responsibility of significant social and economic value, demanding a holistic and responsible strategy. 

“Every resolution plan is designed on a return of investment strategy and that is how the distressed assets market functions with CIRPs being no different,” Kapoor said. 

The SC has also delved into the shortage of members in the Tribunals and inadequate infrastructure to support their functioning. It even highlighted how the Tribunal Members often lack the domain knowledge required to appreciate the nuanced complexities involved in high-stake insolvency matters in order to properly adjudicate such matters.   

The IBC which has undergone six amendments already is due for another set of changes with the IBC amendment bill in the works. The Ministry of Corporate Affairs is expected to bring an out-of-court settlement process under the Code, along with several other new provisions such as group-insolvency norms, extension of the compact pre-pack resolution mechanism to larger firms among others.