Commercial Wisdom of the CoC: Sashidhar and Essar Steel

Whether a resolution plan is good enough is a business question: how much the business is worth, how realistic the bidder's projections are, and whether a bird in the hand is better than liquidation. The Supreme Court has repeatedly held that these questions belong to the committee of creditors, not to the NCLT or the courts. This deference, called the commercial wisdom of the committee, is one of the defining principles of the Code. This note explains its basis, its leading cases and its limits.

1. Meaning and Basis

• Meaning. The collective business judgment of the financial creditors on the viability and feasibility of a resolution plan, the amount offered, the choice between bidders and the distribution of proceeds, taken by the required majority.
• Why the committee. Financial creditors bear the risk of the outcome, are able to assess viability, and, as the Bankruptcy Law Reforms Committee intended, should decide the fate of the business; tribunals lack the expertise and information to second-guess them.
• Statutory basis. The plan is approved by at least 66 per cent of the committee (section 30(4)) and then by the NCLT, which checks only whether it meets section 30(2) (section 31(1)); appeals to the NCLAT lie only on the limited grounds in section 61(3)

Figure 1: What the NCLT can and cannot review

2. K. Sashidhar v Indian Overseas Bank, 2019

• Facts. Resolution plans for two companies failed to get the then required 75 per cent approval because some creditors dissented; the issue was whether the NCLT could examine the dissenting creditors' reasons.
• Holding. Decided on 5 February 2019, the Supreme Court held that the commercial wisdom of the financial creditors, expressed by their vote, is non-justiciable; the Code does not require dissenting creditors to give reasons, and neither the NCLT nor the NCLAT can review the merits of their decision.
• Result. Since the plan did not get the required majority, the corporate debtors went into liquidation.

3. Essar Steel, 2019

• Facts. ArcelorMittal's plan for Essar Steel offered secured financial creditors far more than operational and unsecured creditors; the NCLAT redistributed the proceeds to treat all creditors equally.
• Holding. Decided on 15 November 2019, the Supreme Court set aside the NCLAT's order: distribution is a matter for the committee's commercial wisdom, and the tribunals cannot substitute their own view of fairness.
• Limits on the committee. The committee must take into account the need to keep the corporate debtor a going concern, to maximise the value of its assets, and the interests of all stakeholders, including operational creditors; it may treat secured and unsecured creditors differently, and must treat creditors within the same class fairly.
• Scope of review. The NCLT's review is confined to whether the plan meets section 30(2) and whether the committee has considered these factors; it may send a plan back to the committee, but cannot itself modify it.
• 2019 amendment. Section 30(4) was amended to state that the committee may take into account the order of priority among creditors under section 53(1), including the priority and value of security interests, in approving a plan, which the Court upheld.

4. Later Cases

Figure 2: Leading cases on commercial wisdom

• Maharashtra Seamless v Padmanabhan Venkatesh, 2020. The NCLAT could not require the successful resolution applicant to raise its offer to the liquidation value; there is no rule that a plan must at least equal liquidation value, and the committee may accept a lower offer if it judges resolution better than liquidation.
• Kalparaj Dharamshi v Kotak Investment Advisors, 2021. The NCLAT erred in overturning the committee's choice of one resolution plan over another on its own assessment; the choice was the committee's commercial decision.
• Pratap Technocrats v Monitoring Committee of Reliance Infratel, 2021. Decided on 10 August 2021, the Court held that the NCLT and NCLAT have no residual equity jurisdiction to interfere with a plan approved by the committee merely because the distribution seems unfair to some creditors, if the plan meets the statutory requirements.
• Jaypee Kensington, 2021. Where the NCLT finds a plan deficient in some respect of the statutory requirements, the proper course is to send it back to the committee for reconsideration rather than to modify it.

5. Review by the NCLT

Figure 3: How the NCLT examines a plan

• Section 30(2). The plan must provide for payment of process costs in priority, a minimum for operational and dissenting financial creditors, management of the debtor's affairs after approval, implementation and supervision, and must not contravene any law; it must also meet the regulations (Topic 40)
• Section 61(3). An appeal against approval lies only on the grounds that the plan contravenes the law, that there was material irregularity by the resolution professional, that debts owed to operational creditors were not provided for as required, that process costs were not provided for in priority, or that the plan does not comply with other specified criteria.
• 2026 Amendment. The NCLT may give the committee notice to rectify defects in a plan before rejecting it, and must decide on approval within thirty days (Topic 42)

6. Criticism and Safeguards

Deference has been criticised where plans have involved very large haircuts, sometimes with promoters or related bidders appearing to benefit. The safeguards lie in the statutory minimums for operational and dissenting creditors, the bar on ineligible bidders under section 29A, the duty of the committee to consider all stakeholders, the independent valuation of assets, and, after 2026, the IBBI's power to specify standards of conduct for committees of creditors. Courts have also intervened where the process, rather than the commercial outcome, was flawed, such as where a plan was approved in breach of the regulations.

7. Frequently Asked Questions

Can the NCLT reject a plan because the haircut is too large?

No. The size of the haircut and the adequacy of the offer are matters of the committee's commercial wisdom. The NCLT may reject or send back a plan only if it fails the requirements of section 30(2) or the committee has not considered the factors identified in Essar Steel (2019).

Must creditors who vote against a plan explain their reasons?

No. In K. Sashidhar (2019), the Supreme Court held that the Code does not require dissenting creditors to give reasons, and their decision is not open to review.

Can the committee give secured creditors more than unsecured creditors?

Yes. Essar Steel (2019) and the 2019 amendment to section 30(4) allow the committee to take into account the priority and value of security interests, provided the statutory minimums for operational and dissenting creditors are met.

8. Related Topics

• Topic 40: Section 30. Contents of a resolution plan.
• Topic 41: Treatment of Operational and Dissenting Creditors. The statutory minimums.
• Topic 42: Section 31. Approval and the clean slate.