The Insolvency and Bankruptcy Code, 2016 (“IBC”) is a significant change in the Indian insolvency law because it unites many different fragmented provisions into a single comprehensive body of law, designed to protect creditors through a timely and efficient resolution process, as well as to maximise value for creditors and solve the problems of insolvent corporations. At the centre of this structure lies the Committee of Creditors (“CoC”). The CoC has decisive commercial authority to approve or reject resolution plans during the Corporate Insolvency Resolution Process (“CIRP”). The concept behind this mechanism was to ensure that commercial relationships between all stakeholders in the CIRP are handled through market-based decision-making. This new approach allows the financial creditors to control the process while limiting the scope for judicial interference.
Academic commentary suggests that the “commercial wisdom” doctrine, reflecting creditor primacy in insolvency resolution, has become firmly entrenched, primarily through a history of judicial pronouncements upholding that the courts’ role in reviewing decisions made by the CoC is to ensure they satisfy the requirements of form and are procedurally fair. Indeed, it is common for the courts to only concern themselves with whether the decisions were made within the limits outlined in Sections 30 and 31 of the Code and will not replace the decision of the CoC unless there has been a clear instance of illegality or a procedural deficiency.
This ongoing pattern of deference raises an important issue regarding the relationship between statutory adjudication and judicial oversight at the intersection between both: whether the restrained posture of the judiciary towards the IBC has led to the gradual erosion of judicial review, altering the role of the court in adjudicating insolvencies in India?
II. Institutional Design of Insolvency Adjudication under the IBC
The Insolvency and Bankruptcy Code (IBC) was enacted by the Parliament of India on 28 August 2016 and aims to provide for the orderly resolution of the insolvency of corporate entities through a unified statutory framework, rather than through multiple civil courts as per the previous legal regime. The code establishes the NCLT as the principal adjudicating authority in relation to the resolution and liquidation of corporate entities. The NCLAT is established as the appellate forum for the adjudications made by the NCLT. The jurisdiction of the NCLT under Section 60(1) of the IBC covers all applications made to it for the resolution or liquidation of corporate entities that are insolvent, and includes the initial application to the NCLT, supervision of the moratorium, the selection and appointment of resolution professionals, and the approval or rejection of the final resolution plans.
The statutory structure of the IBC clearly illustrates a purposeful intention by the legislature to consolidate all corporate insolvency matters into a single forum, which has the requisite expertise and authority to deal effectively with these types of issues, in order to eliminate the multiplicity and delays that characterised the old regime of corporate insolvency; and therefore, the NCLT’s jurisdiction extends to all matters relating to or arising from the resolution of corporate insolvency or liquidation.
Judicial interpretation has further clarified the limits of the NCLT’s jurisdiction, defined by statute. For instance, in the case of Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta And Others, the Supreme Court stated that the NCLT has jurisdiction to adjudicate on disputes that arise solely out of the Corporate Debtor’s insolvency or relate to the insolvency of the Corporate Debtor, but cautioned against using its powers to confer jurisdiction to other fora if there is no nexus with insolvency.
The NCLAT is established as the exclusive appellate body for orders passed by the adjudicating authorities under Section 61 of the Code, with its powers to review both questions of law and fact in order to determine whether the adjudicating authorities complied with statutory provisions and followed due process within the framework established by statute. The IBC envisions a two-tiered adjudicative structure, balancing the need for specialised statutory adjudication with controlled levels of judicial oversight, by only allowing limited amounts of intervention by traditional courts while preserving important legal safeguards to ensure procedural regularity and compliance with statutory requirements.
III. Commercial Wisdom of the Committee of Creditors and Judicial Deference
The doctrine of commercial wisdom has emerged as the most significant core principle of Indian insolvency jurisprudence, which vests decisive authority in the hands of the Committee of Creditors (“COC”) under the Insolvency and Bankruptcy Code, 2016 (“Code”). Although the Code does not define the term, the term is grounded in the Code through several sections as being the sole authority of the CoC to approve or reject resolution plans. Through repeated decisions of the Supreme Court, courts have consistently held that judicial review focuses on whether the CoC complied with applicable statutory provisions, rather than whether the CoC’s decision to approve or reject a resolution plan was commercially reasonable.
In the case of K. Sashidhar v. Indian Overseas Bank, the Supreme Court made it clear that the legislature “has not bestowed on the adjudicating authority any jurisdiction or authority to review or assess the commercial decision of the CoC,” and that such matters are outside the adjudicating authority’s jurisdiction to review. This approach is consistent with the express policy of the legislature to give priority to financial creditors over the judicial review of the CoC’s commercial decisions by restricting the basis for review to statutory noncompliance.
Later on, in the case of “Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta,” the Supreme Court announced that the Commercial Wisdom of CoC should have “Paramount” standing in accordance with compliance with the requirement under Section 30(2) of the Code. The Supreme Court further went on to clarify that it is the Tribunal’s responsibility to ensure compliance with the procedural and substantive requirements of the IBC under section 30(2), not to question the economic/financial judgment of the CoC.
In this context, Legal commentators have indicated that the Doctrine of Deference gives much authority to the Commercial Judgement of Financial Creditors, which means that one cannot seek further Judicial Review of the COC’s judgments with respect to Financial Creditors’ Commercial Judgement beyond Statutory grounds, as this would negate the IBC’s emphasis on Time-Bound Resolution and Certainty. Lower Tribunals have applied this Principle and therefore confirmed that the Adjudicating Authority does not have Jurisdiction to entertain an Interference in Commercial Wisdom unless the Plan does not comply with Section 30(2). Therefore, the Commercial Wisdom Doctrine reflects the Jurisprudential Constraints that have evolved, which put Creditor Autonomy and Economic Expertise above and before Substantive Judicial Reassessment and is consistent with the IBC’s Legislative Intent.
IV. Judicial Review in Corporate Insolvency Resolution: Scope, Limits, and Exclusions
The Insolvency and Bankruptcy Code, 2016 (IBC) restricts the scope of judicial oversight of corporate insolvency to simply ensuring compliance, due diligence and fairness as required in Sections 30 and 31, while not allowing for consideration of the commercial viability of a Committee of Creditors’ (CoC) approval of resolution proposals. The purpose of this limited scope of review by the adjudication authority, i.e. the National Company Law Tribunal (NCLT), and its appellate court, the National Company Law Appellate Tribunal, is to restrict adjudicating authorities to examining only whether the required legal conditions for a resolution proposal have been satisfied.
As prescribed in Section 30(2), the adjudication authority must ensure that a resolution proposal satisfies specific statutory criteria such as a satisfactory resolution to claims, compliance with the law, and a plan for the implementation of the resolution. Additionally, the NCLT is permitted to authorise a resolution proposal under Section 31 only if that proposal is in compliance with these provisions. This limits any meaningful review by judicial bodies as they relate to whether or not the resolution proposal is commercially feasible.
The Supreme Court has clarified this threshold many times now. In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, the Court stated that “an Adjudicating Authority only has a limited judicial review, which cannot in any way exceed or replace the commercial decisions made by a majority of the Committee of Creditors.” In that decision, the Court also reiterates that once a resolution plan has been approved by the CoC based on its compliance with the requirements set forth under Section 30(2), neither the NCLT nor the NCLAT has the authority to reconsider the merits of the underlying business judgment.
This principle has been supported by subsequent decisions where the Supreme Court described the scheme of the Act as being “clear”; that is, that tribunals do not have jurisdiction to look beyond the narrow confines of the grounds set out in Sections 30 and 61 to re-evaluate the commercial wisdom of the CoC. In the judicial commentaries, it has also been stated that where statutory standards have been satisfied, an objection to an inadequate resolution plan may only be addressed using the statutory appeal process and cannot be addressed by way of merits review.
The jurisprudence of the Tribunal Practice reflects the limitations of Judicial Review. The National Company Law Appellate Tribunal (“NCLAT”), in accordance with Section 30(2), only allows for challenges to CoC members for non-compliance with Statutes, which are based on Commercial Wisdom, while supporting approved plans with no sign of Infirmity, and refusing NCLAT to interfere with CoC members where the Complaint of a Claimant does not involve non-compliance with Statutes.
The stronghold of the area of Jurisprudence established by the same decisions reinforces the limited scope for Judicial Review where there are clear statutory Violations. For example, the decision in Bhushan Power and Steel Limited (the “Supreme Court”) invalidated a Resolution Plan as it did not comply with adopted Procedures and Statutes and emphasised that “Commercial Convenience” cannot, and does not, substitute for Statutory Obligations; therefore, this Decision allows for Judicial Review of Statutory Evidence where there is a clear Violation of Statutes.
Therefore, Judicial Review under the Corporate Insolvency Resolution Process is in place to ensure statutory compliance and procedural fairness, and it does not extend towards substituting the commercial discretion of the Committee of Creditors with judicial judgment. Less restrictive methods maintain creditor independence, support legal certainty and enhance the wide-ranging aim of IBC to provide timely resolution to debtors through the introduction of remedial measures only in instances of unambiguous breaches of statute or procedure.
V. Judicial Deference, Fairness, and the Future of Insolvency Adjudication
The judicial deference given to the commercial decisions of the Committee of Creditors (CoC) has drastically affected the way bankruptcy cases are handled under the Insolvency and Bankruptcy Code, 2016 (IBC). The minimal adjudicatory interference for these commercial decisions has led to progress towards achieving some of the important goals of the Code, including the timely resolution of insolvency cases and increased efficiency and transparency; however, it has also led to questions regarding whether the Code protects the rights of non-financial or lower-level stakeholders or the sustainability of the insolvency system’s legitimacy over the long term.
The doctrine of judicial deference to the CoC was based on the assumption that the financial creditors have the best ability to assess the optimal course of action for a company that is undergoing bankruptcy because they have the expertise and exposure to financial markets. Therefore, the limited level of judicial intervention was found by the courts to be necessary to avoid unnecessary delays in the bankruptcy process and the substitution of the court’s opinion for the commercial judgment of the CoC. If judicial deference to the CoC is allowed to become standard practice, rather than being on an individualised basis, it may exclude or overlook the interests of non-financial creditors, like operational creditors, and employees, as well as dissident minority shareholders, whose interests are often not represented during the decision-making process of the CoC. Accordingly, the CoC may follow the statutory requirements, yet the outcomes may still have materially disproportionate or exclusionary outcomes.
When looking at the insolvency process through the lens of Natural Justice, this issue becomes apparent. The insolvency process will have an irreversible impact on creditors through the elimination of creditor claims and redistribution of rights. Creating an environment in which a creditor’s decision will not have meaningful review may result in the dilution of principles of fairness, transparency, and reasoned decision-making. Although courts have demonstrated that the equality of creditors does not require that the same treatment be given to each creditor, the lack of safeguards against arbitrary creditor decisions may give rise to prioritising speed over equity.
The expansion of judicial intervention into the commercial merit of creditors’ decisions would create longer timelines and uncertainty regarding when the process will return to normalcy, thus eroding the principles of speed and predictability established by IBC. As such, the goal should be to create a balance between respecting creditors’ decisions and providing oversight of creditor decisions. The creation of a model of judicial review that balances the respect for creditor autonomy with the enhancement of procedural accountability may create the basis for a sustainable solution. By directing judicial review to issues of process, rather than on the outcome of the creditor’s decision, and placing greater emphasis on transparency and adherence to law, the review of a creditor’s decision can enhance the fairness of the process while also not disrupting the efficiency of the IBC. Therefore, it is possible to maintain legitimacy within an insolvency regime through a combination of quick results and continued confidence that creditor-driven results are both legally compliant, procedurally fair, and just.
Author: Anubhuti Singh
Juris Centre 