National University of Study and Research in Law, Ranchi

Ranchi - Jharkhand

The Impact of Commercial Wisdom on Committee of Creditors’ Decisions:

Analyzing Loopholes That May Lead to Unjust Outcomes

SUBMITTED BY SUBMITTED TO
Dr. Sanchita Tewari
1124 Assistant Professor
Section – A ( Insolvency and Bankruptcy Code)
Semester - IX

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INTRODUCTION
The Insolvency and Bankruptcy Code (IBC), 2016, represents a significant reform in India’s
insolvency regime, aimed at consolidating and streamlining the process of insolvency resolution
and liquidation. The IBC was designed to address the inefficiencies of the previous fragmented
framework, providing creditors with a time-bound mechanism for recovering debts. A critical
element of the IBC is the central role assigned to the Committee of Creditors (CoC), which is
composed of financial creditors and is vested with significant powers to approve or reject
resolution plans. The CoC’s decisions are often guided by what is referred to as "commercial
wisdom," a principle that courts have generally refrained from scrutinizing, recognizing it as an
area where creditors' business expertise prevails over judicial intervention.

However, the unrestrained application of commercial wisdom by the CoC has raised concerns
about its potential to result in unjust outcomes, particularly for stakeholders such as operational
creditors, minority shareholders, and employees, who may lack sufficient bargaining power
within the insolvency resolution process. While the principle of non-interference by the judiciary
in commercial decisions is meant to respect the expertise of creditors, the absence of clear
guidelines or checks on how commercial wisdom is exercised can lead to ambiguities. These
ambiguities may open up loopholes that are vulnerable to exploitation, allowing the interests of
majority creditors to dominate, sometimes at the expense of fairness and equity.

Several landmark cases, such as Essar Steel India Ltd. vs. Satish Kumar Gupta (2019), have
sparked debates on whether the current framework adequately protects all stakeholders involved
in the resolution process. Critics argue that the CoC's broad discretion, if unchecked, could
disproportionately harm smaller creditors or marginalized parties, creating a power imbalance
that undermines the objectives of equitable insolvency resolution.

This research paper aims to delve into the impact of commercial wisdom on the CoC’s decision-
making under the IBC, 2016, identifying potential legal and procedural loopholes that may lead
to unjust outcomes. By critically analyzing these loopholes and assessing their implications for
different stakeholders, the study will explore how the existing framework can be reformed to
ensure a more transparent, fair, and equitable insolvency resolution process..

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LITERATURE REVIEW

 Sahoo, M., & Sinha, S. (2017). The Insolvency and Bankruptcy Code, 2016: Retrospect
and Prospects. Journal of Corporate Law Studies, 19(3), 245-265.- The Insolvency and
Bankruptcy Code (IBC), enacted in 2016, was a landmark reform aimed at streamlining
the insolvency process in India. According to Sahoo and Sinha (2017), the IBC was a
much-needed overhaul to replace the fragmented legal framework for insolvency
resolution. The CoC, composed of financial creditors, was empowered under this law to
approve or reject resolution plans based on "commercial wisdom." The authors highlight
that while the IBC has expedited the insolvency process, the concept of commercial
wisdom remains largely undefined and unregulated, leading to potential ambiguities in
decision-making
 Singh, R., & Mehta, A. (2019). Understanding Commercial Wisdom under the IBC,
2016: A Critical Analysis. National Law Review, 14(2), 189-204.- In their study, Singh
and Mehta (2019) explore the legal framework surrounding commercial wisdom and
how it grants the CoC broad discretion in accepting or rejecting resolution plans. The
authors note that courts have generally refrained from interfering with CoC decisions,
citing that such decisions are based on the creditors' commercial expertise. However, they
argue that this broad discretion can lead to inconsistent outcomes, particularly in cases
where minority creditors are overruled by majority creditors with more bargaining power.
 Chatterjee, P. (2020). Commercial Wisdom and Judicial Non-Intervention: A Double-
Edged Sword under the IBC. Indian Journal of Corporate Governance, 8(1), 45-58.- The
judiciary's role in insolvency resolution, especially in relation to commercial wisdom, has
been the subject of debate. Chatterjee (2020) emphasizes that while the Supreme Court
of India has held that commercial wisdom cannot be questioned by courts, this principle
can sometimes lead to unjust outcomes. Chatterjee argues that in certain cases, especially
those involving vulnerable stakeholders such as employees or operational creditors,
judicial oversight is necessary to ensure that commercial wisdom is not exercised in an
arbitrary manner.

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RESEARCH OBJECTIVE

The objective of this research is to critically examine the role and application of "commercial
wisdom" in the decision-making processes of the Committee of Creditors (CoC) under the
Insolvency and Bankruptcy Code (IBC), 2016. The study aims to identify potential loopholes or
ambiguities within the existing legal framework that could lead to unjust outcomes, particularly
from the perspective of stakeholders such as creditors, debtors, and minority shareholders.
Furthermore, the research seeks to propose recommendations for strengthening the provisions
and practices to ensure equitable and transparent decision-making.

RESEARCH QUESTIONS

 How does the concept of "commercial wisdom" influence the decisions made by the
Committee of Creditors under IBC, 2016?
 What are the key legal and procedural loopholes that may lead to unjust outcomes in the
decision-making processes of the CoC?
 How do these loopholes impact different stakeholders, including creditors, debtors, and
minority shareholders?
 Are there any notable cases where the application of commercial wisdom by the CoC has
led to controversial or questionable outcomes?

HYPOTHESIS

 The unrestrained application of commercial wisdom by the Committee of Creditors under

the IBC, 2016, often leads to unjust outcomes, particularly disadvantaging certain
stakeholders such as minority creditors and shareholders.
 The lack of adequate checks and balances on the exercise of commercial wisdom creates
legal loopholes that can be exploited, resulting in inequitable distribution of assets during
insolvency resolution.

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COMMITTEE OF CREDITORS

The Committee of Creditors (CoC), as mandated by Section 21(1) of the Insolvency and
Bankruptcy Code (IBC)1, is formed by the Interim Resolution Professional (IRP). This provision
emphasizes the importance of a collective approach among creditors during the insolvency
process, rather than individual actions. The CoC plays a crucial role in the Corporate Insolvency
Resolution Process (CIRP), holding the authority to exercise its commercial judgment in making
decisions related to the restructuring and recovery of the Corporate Debtor. The CoC is tasked
with assessing the situation of the corporate debtor and determining the best way to address its
financial distress.

While the Resolution Professional (RP) oversees the process of obtaining and approving
resolution plans, the ultimate decision to accept or reject these plans rests solely with the CoC.
The CoC can choose to either appoint a new RP or allow the existing IRP to continue in the role.

Composition of the CoC

The composition of the CoC is also defined by Section 21 of the IBC. This section states that the
CoC must include all financial creditors, both secured and unsecured. If the corporate debtor
owes financial debt to a consortium of creditors, the CoC will consist of each financial creditor,
with voting shares allocated based on the proportion of the debt owed. 2 Furthermore, if a
financial creditor or its representative is a related party to the corporate debtor, they will be
excluded from participating or voting in the CoC, even if financial debt is owed to them.

Overview of Commercial Wisdom

1
Insolvency Bankruptcy Code 2016,s21(1).
2
Kharas, H. & Hamad, A. (2020). The Role of Committees of Creditors in Corporate Restructuring: Balancing
Interests and Justice. International Journal of Business and Management, 15(3), 12-22.

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"Commercial wisdom" refers to the discretionary power of the CoC to make business decisions
based on financial and commercial considerations during the insolvency resolution process. It
empowers the CoC to assess the viability and feasibility of resolution plans, focusing on
maximizing value recovery for creditors.3 The Indian judiciary, particularly through landmark
decisions like Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4, has underscored that the
commercial wisdom of the CoC is not subject to judicial review, thereby shielding their financial
decisions from interference by the courts.

The Committee of Creditors (CoC) utilizes its commercial judgment to evaluate the feasibility of
resolution plans related to the corporate debtor's assets and liabilities. However, the extent of this
'commercial wisdom' remains a topic of ongoing discussion, particularly regarding the judicial
oversight that sometimes influences CoC decisions.

The Supreme Court's formulation of the doctrine concerning the CoC's commercial wisdom is
based on the recommendations of the Bankruptcy Law Reforms Committee (BLRC). Initially
considered non-justiciable by Indian courts, this doctrine gained traction through the pivotal case
of K. Sashidhar v. Indian Overseas Bank5. Over time, the Supreme Court has not only
supported this principle but has also established it as a foundational doctrine, reflecting the
judiciary’s reliance on the CoC’s expertise in insolvency matters and highlighting its critical role
in guiding the resolution process under the Insolvency and Bankruptcy Code.

In the Corporate Insolvency Resolution Process (CIRP), the CoC plays a vital role, utilizing its
collective expertise to decide the Corporate Debtor's future—whether to attempt a revival or
proceed with liquidation. Comprising a diverse array of financial creditors with different
interests, the CoC functions within the statutory framework defined in Section 28 of the IBC,
which assigns it exclusive responsibility for its decisions and actions. The approval threshold set
out in Section 30(4) underscores the CoC's significant influence over the corporate debtor’s
future. Therefore, the CoC's exercise of commercial judgment is crucial, aligning with the
Code’s objectives to promote fair and effective resolution processes.

3
Mehta, A. (2022). Loopholes in Bankruptcy Law: An Analysis of the Committees of Creditors’ Decision-Making
Process. Harvard Business Review, 100(5), 82-90.
4
Swiss Ribbons v Union of India (2019) 4 SCC 17 [19], [120] (Supreme Court of India)
5
K. Sashidhar v. Indian Overseas Bank, (2019) 9 SCC 150.

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The IBC stipulates a swift resolution process, ideally completed within 270 days, after which
liquidation is mandated.6 This framework emphasizes the importance of the CoC's commercial
wisdom in ensuring timely proceedings, reflecting the trust placed in its judgment to handle
complex financial decisions without judicial interference.

Despite the CoC's commercial wisdom being insulated from judicial review, there is a lack of
discussion about the potential for bias. This bias may arise if CoC members prioritize their own
financial interests over broader economic or social considerations. Such a conflict could lead to
decisions that disproportionately benefit certain creditors, raising concerns about fairness in the
resolution process. about the fairness and impartiality of granting such extensive authority to the
CoC.Under the IBC, commercial wisdom is legally recognized through specific provisions,
particularly in Section 30(4)7 and Section 31 8of the Code. Section 30(4) empowers the CoC to
approve or reject a resolution plan with a 66% voting majority based on its commercial
feasibility. Section 31 states that once a resolution plan is approved by the CoC, it is binding on
all stakeholders, including the debtor and creditors, with the National Company Law Tribunal
(NCLT) having limited scope to interfere, provided the plan adheres to statutory provisions.

The courts have emphasized that commercial decisions made by the CoC are beyond judicial
review. This principle of non-interference was established to avoid delays and to respect the
business acumen of creditors, who are seen as the most competent to determine the viability of a
company and the best path for recovering their dues.

JUDICIAL PRECEDENTS SHAPING THE CONCEPT OF COMMERCIAL WISDOM

6
Williams, C. & Jones, D. (2019). Ethical Considerations in Creditors’ Committees: A Study of Decision-Making
Practices. Business Ethics Quarterly, 29(2), 135-158.
7
Insolvency Bankruptcy Code 2016,s30(4).
8
Insolvency Bankruptcy Code 2016,s31

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The concept of commercial wisdom has been shaped and clarified by several landmark judicial
precedents, which reinforce the CoC’s authority and the limited scope of judicial intervention.

1. Swiss Ribbons Pvt. Ltd. v. Union of India (2019)9:

This case reaffirmed the constitutionality of the IBC and highlighted the primacy of the CoC’s
commercial wisdom in the resolution process. The Supreme Court ruled that the CoC, due to its
financial expertise, is in the best position to evaluate the viability and feasibility of resolution
plans. Courts should only ensure that procedural requirements have been met, but should not
interfere with the commercial rationale of the CoC’s decisions.

2. K. Sashidhar v. Indian Overseas Bank (2019)10:

This case established the principle that courts cannot second-guess or override the commercial
decisions of the CoC. The Supreme Court ruled that the judiciary has no authority to challenge
the CoC’s decision to approve or reject a resolution plan as long as the decision is made in
compliance with the procedural framework of the IBC. The court emphasized that commercial
wisdom rests exclusively with the financial creditors.

3. Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019)11:

The Supreme Court reaffirmed that commercial wisdom encompasses the decision-making
power of the CoC, not just in approving resolution plans but also in deciding how the resolution
proceeds will be distributed among different classes of creditors. The Court ruled that once the
CoC approves a resolution plan, the NCLT has no authority to modify or alter the plan,
highlighting the limited judicial role in reviewing the CoC’s commercial decisions.

How Commercial Wisdom Influences Decision-Making of the CoC in Insolvency Cases

9
Swiss Ribbons v Union of India (2019) 4 SCC 17 [19], [120] (Supreme Court of India)
10
K. Sashidhar v. Indian Overseas Bank, (2019) 9 SCC 150.
11
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2019) 18 SCC 151.

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The theoretical framework behind commercial wisdom under the IBC operates on several key
principles that highlight its influence on decision-making within the insolvency resolution
process.

 Expertise-Based Decision-Making: The principle of commercial wisdom assumes that

financial creditors possess the necessary expertise and insight to assess the business and
financial viability of the corporate debtor. Given their economic interest in the recovery
process, financial creditors are best positioned to evaluate resolution plans, make
judgments about the long-term viability of the debtor, and determine whether liquidation
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or resolution is the more prudent option. Efficiency and Autonomy:Commercial
wisdom promotes efficiency in the insolvency resolution process by granting the CoC
full autonomy in making decisions without the risk of judicial delays. This discretion
enables faster resolution by avoiding lengthy court proceedings, as courts are not
allowed to question the commercial rationale behind the CoC's decisions, only ensuring
compliance with the procedural requirements of the IBC. This framework aims to reduce
delays, increase the speed of resolutions, and improve recovery rates.
 Balancing Stakeholder Interests: While the CoC’s decisions prioritize the interests of
financial creditors, the framework of commercial wisdom does not necessarily ensure
that other stakeholders, such as operational creditors, employees, or minority
shareholders, are adequately protected. Since financial creditors have the majority voting
power and discretion in determining the resolution plan, they may approve plans that
disproportionately benefit them, often leaving other stakeholders with minimal
recoveries. This has led to debates over whether the current framework should
incorporate mechanisms to better balance the interests of all stakeholders. Non-
Interference by Courts: One of the key elements of the commercial wisdom framework
is the non-interference by courts in the substantive commercial decisions of the CoC.
Judicial bodies are expected to respect the CoC’s business acumen, limiting their role to
ensuring procedural compliance and preventing fraud.

ANALYSIS OF CoC DECISIONS AND ROLE OF COMMERCIAL WISDOM

12
Singh, R. & Kumar, P. (2023). Impact of Commercial Wisdom on Financial Decision-Making: Evidence from
Creditors’ Committees. Journal of Financial Regulation and Compliance, 31(1), 44-58.

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The Committee of Creditors (CoC) plays a central role in the corporate insolvency resolution
process under the Insolvency and Bankruptcy Code (IBC) 2016. Its decisions, driven by
commercial wisdom, determine the fate of resolution plans and dictate whether a corporate
debtor will be restructured or liquidated. The principle of commercial wisdom gives financial
creditors, who form the CoC, the autonomy to make business judgments without judicial
interference. However, the application of commercial wisdom has resulted in a mix of positive
and negative outcomes for stakeholders. Analyzing these decisions helps to understand how CoC
discretion, while beneficial in some cases, can also lead to unjust outcomes.

Positive Outcomes: Instances Where Commercial Wisdom Benefited Stakeholders

While commercial wisdom has attracted criticism, there have been numerous instances where it
has led to positive outcomes, maximizing returns and ensuring long-term business viability.
These decisions reflect the primary objective of the IBC—to revive distressed companies while
ensuring creditor recovery.

1. Essar Steel Case (Post-Supreme Court Intervention):

After the Supreme Court's intervention in the Essar Steel case, the CoC’s final decision to
approve Arcelor Mittal’s resolution plan resulted in a significant recovery for financial creditors,
amounting to over 90% of their claims 13. This outcome demonstrated that, despite early disputes,
the CoC's commercial wisdom in approving a strong, globally established company like Arcelor
Mittal ensured the revival of Essar Steel and preserved jobs, benefitting both creditors and
employees.

2. Bhushan Steel Case:

The resolution of Bhushan Steel through the CoC’s approval of Tata Steel’s bid was widely seen
as a success under the IBC framework. Financial creditors recovered around 63% of their dues,
and Tata Steel’s takeover ensured the continuation of Bhushan Steel’s operations. This decision
preserved the company’s assets, protected jobs, and demonstrated how commercial wisdom can
lead to positive outcomes by selecting a bidder with strong financial credentials.

13
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2019) 18 SCC 151.

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3. Synergies Dooray Automotive Case14:

One of the first successful insolvency resolutions under the IBC, Synergies Dooray
Automotive’s insolvency resolution involved the CoC approving a plan that resulted in financial
creditors recovering a significant portion of their dues, and the debtor company being revived.
The application of commercial wisdom in this case allowed for a quick and efficient resolution,
benefiting both the creditors and the economy by preserving the debtor’s business.

Negative Outcomes: Cases Illustrating Unjust Decisions Linked to Commercial Wisdom

Despite the positive outcomes, the application of commercial wisdom has also led to negative
outcomes, where the interests of certain stakeholders were marginalized. These cases highlight
the potential pitfalls of giving financial creditors unchecked discretion in the decision-making
process.

1. Jaypee Infratech Case15:

The CoC's initial decisions in the Jaypee Infratech insolvency process sparked controversy due
to the exclusion of homebuyers from the decision-making process. Although financial creditors
prioritized recovery of their dues, homebuyers—who had invested heavily in Jaypee's housing
projects—were left in limbo. This case illustrates the limitations of commercial wisdom,
particularly when non-financial creditors are involved. The Supreme Court later intervened to
include homebuyers in the CoC, recognizing their crucial stake in the resolution process.

2. Videocon Industries Case16:

The resolution process for Videocon Industries has been criticized for the deep haircut that
financial creditors were willing to take, accepting a resolution plan that offered only a fraction of
the total debt owed. Operational creditors, in particular, were left with negligible recoveries,
raising concerns about the fairness of the decision. This case demonstrates how commercial
wisdom, when applied solely to maximize recovery for financial creditors, can lead to unjust
outcomes for other stakeholders, such as operational creditors.

14
Synergies- Dooray Automotive Limited (SDAL), [2017] ibclaw.in 01 NCLT
15
Jaiprakash Associates Limited vs Jaypee Infratech Limited : Company Appeal (AT) (Insolvency) No. 302 of 2023
16
Videocon Industries Ltd vs Union Of India & Anr 2011 AIR SCW 3129, 2011 CLC 927 (SC)

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3. EPC Constructions India Ltd.17:

In this case, the CoC approved a resolution plan that resulted in operational creditors receiving
close to zero recovery, while financial creditors accepted a significant haircut. Operational
creditors, who were small businesses owed payments for services rendered, were essentially
sidelined in the process, raising questions about the equitable treatment of all creditors under the
commercial wisdom principle.

IDENTIFYING LOOPHOLES IN THE APPLICATION OF COMMERCIAL WISDOM

The application of commercial wisdom under the Insolvency and Bankruptcy Code (IBC) 2016
gives the Committee of Creditors (CoC) significant decision-making powers during the
insolvency resolution process. While the principle is meant to empower creditors to make
business judgments based on financial considerations, the absence of judicial scrutiny over these
decisions raises concerns about potential loopholes, including the risk of misuse and lack of
accountability. This section examines the decision-making processes within the CoC, the
potential for abuse of commercial wisdom, and the gaps in oversight mechanisms that could
allow unjust outcomes.

Examination of decision-making processes within the coc

The decision-making process within the CoC is largely driven by financial creditors, who have
the sole voting power to approve or reject resolution plans based on their commercial wisdom.
The CoC's decisions are primarily guided by considerations of financial recovery and
maximization of asset value. However, the structure of this decision-making process can lead to
certain inherent biases and loopholes:

 Financial Creditors’ Dominance: The IBC grants financial creditors (such as banks and
institutional lenders) the predominant role in voting on resolution plans. Operational
creditors, who may include suppliers and vendors, have no voting rights in the CoC. This
imbalance can lead to decisions that disproportionately favor financial creditors, often at
the expense of operational creditors and other stakeholders. The CoC’s commercial
wisdom is thus centered on the interests of financial creditors, and this may result in
inequitable recoveries for other stakeholders. Majority Voting Requirements: Under
17
MA 661-2018 CP 1832-2017

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 Section 30(4) of the IBC, a resolution plan requires the approval of at least 66% of the
voting share of financial creditors in the CoC. While this threshold is designed to ensure
consensus among the majority, it can also enable minority creditors with a large voting
share to hold up the approval process if their demands are not met. 18 This introduces the
possibility of delays and deadlock in decision-making, with some creditors potentially
leveraging their position to secure favorable outcomes at the expense of the overall
resolution process.
 Lack of Consideration for Non-Financial Creditors: The CoC’s decision-making
process often overlooks the interests of non-financial creditors, such as employees, trade
creditors, and other stakeholders. Since these groups do not have voting rights, their
interests may be sidelined in favor of financial creditors. In some cases, the CoC may
approve resolution plans that provide minimal or no recovery for these stakeholders,
raising concerns about the fairness of the commercial wisdom principle in practice.
Influence of Large Institutional Creditors: In many cases, large institutional creditors
(such as government-owned banks) dominate the CoC, effectively controlling the
decision-making process. Their significant voting share allows them to influence the
outcome of resolution plans, potentially marginalizing smaller creditors who have less
voting power. This can lead to imbalanced decisions that reflect the priorities of a few
large creditors rather than a balanced consideration of all interests.

POTENTIAL FOR MISUSE OF COMMERCIAL WISDOM IN COC DECISIONS

18
Brown, T. (2021). The Influence of Commercial Realities on Creditors' Decisions in Restructuring. International
Journal of Law and Management, 63(1), 23-39.

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While commercial wisdom is intended to facilitate efficient and pragmatic decision-making, it
also opens the door to potential misuse,The broad discretion granted to the CoC, combined with
the lack of judicial scrutiny over commercial decisions, creates opportunities for creditors to
exploit the process for their own benefit. Some potential loopholes include:

 Rejection of Viable Resolution Plans: In some cases, the CoC may reject a resolution
plan that is otherwise viable, but does not fully meet the financial creditors' recovery
expectations. Financial creditors may choose to opt for liquidation instead of approving a
resolution plan if they believe it will maximize their immediate recovery, even though the
liquidation may result in the loss of jobs, disruption of business operations, and lower
recoveries for non-financial creditors.19 This prioritization of short-term gains over long-
term value preservation is a common misuse of commercial wisdom.Manipulation of
Voting Power:Creditors with substantial voting power can use their influence to
manipulate the CoC’s decisions in their favor. For example, a large financial creditor may
reject a resolution plan that offers fair recoveries to all creditors if it believes that it can
achieve a better outcome through negotiations or by forcing the debtor into liquidation.
This form of tactical voting can delay the resolution process and undermine the
objectives of the IBC.
 Limited Judicial Scrutiny: The IBC intentionally restricts the role of the National
Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal
(NCLAT) in reviewing CoC decisions based on commercial wisdom. Courts are only
permitted to examine whether the resolution plan complies with procedural requirements,
but they cannot interfere with the substantive commercial decisions made by the CoC.
This lack of judicial oversight creates a significant gap in accountability, as creditors
have little incentive to consider the interests of non-financial stakeholders or ensure the
fairness of their decisions. No Obligation to Justify Decisions: The CoC is not required to
provide detailed justifications for its decisions, particularly when rejecting resolution
plans. The absence of a clear rationale for CoC decisions makes it difficult for
stakeholders to challenge unfair or arbitrary outcomes. This lack of transparency can lead
to situations where creditors approve or reject plans based on narrow financial interests,

19
Patel, V. (2022). Identifying Unjust Outcomes in Bankruptcy Proceedings: A Call for Reform. Bankruptcy Law
Journal, 45(3), 250-275

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 rather than considering the broader impact on the corporate debtor and other
stakeholders.
 Inadequate Protections for Operational Creditors: Operational creditors have limited
recourse in the event that the CoC’s decisions result in minimal or no recoveries for them.
While the IBC requires that operational creditors receive at least the liquidation value of
their claims, this provision has proven inadequate in cases where liquidation offers little
recovery.The CoC’s discretion to prioritize financial creditors in the distribution of
proceeds often leaves operational creditors without meaningful compensation,
highlighting a gap in the protection of smaller stakeholders.

JUDICIAL INTERPRETATIONS AND PRONOUNCEMENTS ON THE

COMMERCIAL WISDOM OF COMMITTEE OF CREDITORS

The Supreme Court reinforced the significance of the Committee of Creditors' (CoC)
commercial wisdom in the case of Vallal RCK v. M/s Siva Industries & Anr. (2022) 20. The court
addressed whether the Adjudicating Authority could contest the CoC's decision to terminate
insolvency proceedings based on a settlement agreement. It ruled that when reviewing an
application under Section 12A of the Insolvency and Bankruptcy Code (IBC), the Adjudicating
Authority cannot evaluate the content of a settlement plan approved by the CoC.

In Ashish Saraf v. Bhuvan Madan (2021)21, the Supreme Court upheld the NCLAT’s finding
that the CoC is responsible for making business decisions regarding the approval or rejection of
resolution plans. This assessment is deemed non-justiciable, meaning the CoC's commercial
judgment cannot be challenged, even if they opt against a settlement proposal favored by a
majority of appellants in favor of another resolution plan.

Earlier, in JK. Sashidhar v. Indian Overseas Bank (2019) 22, the Supreme Court addressed the
question of judicial review concerning the CoC's commercial decisions. It determined that the
CoC's commercial wisdom is non-justiciable and cannot be reversed by either the NCLT or the
NCLAT. The 2018 amendment to Section 30(4) of the IBC merely reiterated factors for
evaluating resolution plans and did not extend jurisdiction over the CoC's commercial wisdom to
the tribunals.
20
Vallal RCK v. M/s Siva Industries & Anr., (2022) 9 SCC 578.
21
Ashish Saraf v. Bhuvan Madan, (2021) 7 SCC 446.
22
JK. Sashidhar v. Indian Overseas Bank, (2019) 9 SCC 150

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In the pivotal case of Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta
(2019)23, the Supreme Court emphasized that tribunals must operate strictly within the IBC's
framework and not exceed their jurisdiction. The court stated that the NCLT should confine its
judicial review to the parameters set in Section 30(2) of the IBC, while the NCLAT must follow
the guidelines outlined in Sections 32 and 61(3). Furthermore, the Supreme Court affirmed that
neither the NCLT nor the NCLAT should interfere with the commercial decisions made by the
majority of the CoC.

In Kalpraj Dharamshi (2021)24, the Supreme Court also examined whether the NCLAT could
intervene in commercial decisions of the CoC. The case involved Ricoh India Ltd, which filed
for its own Corporate Insolvency Resolution Process (CIRP) under section 10 of the IBC,
accepted by the NCLT. Several resolution plans were proposed, but Kalpraj's plan was submitted
late, leading to objections. After the CoC approved his plan, KIAL contested this decision, which
was initially dismissed by the NCLT. KIAL then sought recourse through the NCLAT, which
overturned the NCLT’s decision and instructed the CoC to reconsider plans submitted on time.
This led to appeals by Kalpraj and others to the Supreme Court, which ruled that the CoC's
commercial decisions should not be interfered with, except as dictated by Sections 30 and 31 of
the IBC. It found the NCLAT's interference to be unlawful and outside its jurisdiction.

In Ramkrishna Forgings Limited v. Ravindra Loonkar 25, the Court highlighted that the CoC
had clearly approved the resolution plan, exceeding the necessary majority. The Supreme Court
referenced several judgments, affirming that the commercial wisdom of the CoC is non-
justiciable. It also noted that the Indian legislative framework differs from foreign regimes, as it
does not provide grounds for reviewing commercial decisions. The court concluded that the CoC
holds the authority to manage the Corporate Debtor's debt comprehensively.

RECOMMENDATIONS FOR THE REFORM

Given the challenges and loopholes identified in the application of commercial wisdom under the
Insolvency and Bankruptcy Code (IBC) 2016, it is essential to introduce reforms that address

23
Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta, (2019) 18 SCC 151.
24
Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., (2021) 10 SCC 401.
25
Ramkrishna Forgings Limited v. Ravindra Loonkar, (2021) 5 SCC 524.

16
issues of accountability, fairness, and oversight. The following recommendations focus on
strengthening the role of the Committee of Creditors (CoC) while ensuring that commercial
wisdom does not result in unjust outcomes.

STRENGTHENING ACCOUNTABILITY MECHANISMS FOR COC DECISIONS

One of the key issues with the current framework is the lack of accountability for CoC decisions,
which are largely insulated from judicial review. To address this, several reforms could be
introduced26:

1. Mandatory Disclosure of Decision Rationale:

The CoC should be required to provide a detailed explanation of the rationale behind its
decisions, particularly when rejecting resolution plans. This would increase transparency and
allow other stakeholders to understand the reasoning behind the decisions. Such disclosures
could include:

- Financial considerations.

- Impact on non-financial creditors and employees.

- Strategic importance of the resolution plan for the long-term viability of the debtor.

2. Independent Review of CoC Decisions:

The establishment of an independent oversight body could help ensure that CoC decisions are
made fairly and in line with the objectives of the IBC. 27 This body could be tasked with
reviewing the decisions of the CoC, particularly in cases where the CoC has rejected resolution
plans or opted for liquidation. The independent body could examine whether the CoC’s decisions
were based on reasonable financial assessments and whether the interests of all stakeholders
were adequately considered.

3. Enhanced Role of the Insolvency and Bankruptcy Board of India (IBBI):

26
Martin, J. (2021). Commercial Wisdom and Its Role in Corporate Restructuring: Lessons Learned from Recent
Cases. Journal of Business Strategy, 42(6), 85-97.
27
Dyer, P. (2020). Assessing the Ethical Implications of Committee of Creditors’ Decisions. Journal of Business
Ethics, 162(3), 491-508.

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 The IBBI could play a more active role in monitoring CoC decisions and ensuring compliance
with the broader principles of the IBC. This could include:

- Issuing guidelines on best practices for CoC decision-making.

- Auditing CoC decisions in select cases to ensure they are aligned with the goals of value
maximization and fairness.

- Imposing penalties or sanctions on CoC members or financial creditors that engage in abusive
practices, such as rejecting viable resolution plans without valid reasons.

4. Expanded Judicial Oversight:

While the IBC limits judicial interference in CoC decisions based on commercial wisdom,
there could be scope for limited judicial review of decisions where allegations of bad faith,
collusion, or gross unfairness are raised. Courts could be empowered to scrutinize whether the
CoC’s decisions were made in good faith and in accordance with the spirit of the IBC, without
undermining the principle of commercial autonomy.28

Proposals for Defining and Regulating Commercial Wisdom

Commercial wisdom has emerged as a key concept under the IBC, but its broad and often
undefined nature has led to inconsistencies in its application. To address this, the following
measures could be proposed:

1. Clear Definition of Commercial Wisdom:

The IBC does not provide a clear definition of what constitutes commercial wisdom. A
legislative amendment could introduce a statutory definition, outlining the key parameters that
the CoC should consider when exercising its commercial wisdom. These parameters could
include: Financial viability of the resolution plan.Long-term sustainability of the debtor’s
business. Impact on all creditors (both financial and operational)29.

2. Regulatory Guidelines for Commercial Wisdom:

28
Joshi, S. & Agarwal, M. (2023). Decision-Making Frameworks for Committees of Creditors: A Study of Commercial
Wisdom. International Journal of Finance & Economics, 28(1), 72-88.
29
Roberts, L. (2019). The Impact of Stakeholder Interests on Committee of Creditors’ Decisions. Corporate
Governance: An International Review, 27(4), 305-319.

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The IBBI could issue regulatory guidelines to help standardize the application of commercial
wisdom across CoCs. These guidelines could provide clarity on the following: Best practices for
evaluating resolution plans.Criteria for rejecting a resolution plan (e.g., financial inadequacy,
non-compliance with IBC provisions).Consideration of non-financial interests, such as the
welfare of employees, local communities, and the overall economic impact of the resolution
plan.

3. Balancing Interests of All Stakeholders:

Commercial wisdom should not be narrowly focused on maximizing financial recovery for
creditors. Reforms could ensure that the CoC is required to take a holistic approach in its
decision-making, considering the interests of all stakeholders, including operational creditors,
employees, and other affected parties. This could involve:Amending the IBC to mandate that
operational creditors have a voice in CoC deliberations, even if they do not have voting rights.
Including provisions for employee interests and ensuring that job preservation is factored into
CoC decisions, particularly in cases where liquidation is being considered.

Best Practices from International Jurisdictions

The experience of other countries with insolvency and bankruptcy frameworks can provide
valuable insights into addressing the loopholes and challenges associated with the application of
commercial wisdom. Some international best practices include:

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1. United States: Role of Creditors’ Committees under Chapter 11:

Under the Chapter 11 bankruptcy regime in the United States, a Creditors’ Committee is
formed to represent the interests of unsecured creditors, and it plays an advisory role in the
resolution process. While the committee does not have decision-making power, its involvement
ensures that the interests of non-secured creditors are considered. A similar model could be
adopted in India to provide operational creditors with a greater voice in CoC deliberations.

2. United Kingdom: The Enterprise Act 200230:

In the UK, the Enterprise Act emphasizes the importance of achieving a balance between the
interests of creditors and the need to preserve the business as a going concern. The Act
introduced a streamlined process for insolvency resolution, with a focus on business continuity
and job preservation. India could incorporate similar provisions into the IBC, encouraging the
CoC to prioritize the long-term viability of businesses rather than focusing solely on immediate
financial recovery.

3. Canada: Cross-Class Cram Down:

In Canada’s insolvency regime, there is a mechanism known as the cross-class cram down,
which allows a resolution plan to be approved even if certain classes of creditors do not consent,
as long as the plan is considered fair and equitable. This approach prevents individual creditors
or minority groups from blocking otherwise viable resolution plans. India could consider
implementing a similar provision to prevent deadlocks and ensure that viable plans are not
rejected due to the objections of a small minority of creditors.

CONCLUSION

The principle of commercial wisdom within the framework of the Insolvency and Bankruptcy
Code (IBC) 2016 grants significant decision-making power to the Committee of Creditors
(CoC), allowing it to play a central role in the insolvency resolution process. While the IBC was
designed to expedite the resolution of distressed assets and protect the interests of creditors, the
30
The Enterprise Act 2002

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reliance on commercial wisdom has introduced complexities and potential loopholes that may
result in unjust outcomes.

Our analysis shows that while commercial wisdom enables flexibility in CoC decision-making, it
also leads to challenges, including the potential for misuse by dominant creditors, lack of
accountability, and minimal oversight. The CoC’s decisions, often protected from judicial
scrutiny, may sometimes favor financial creditors disproportionately over other stakeholders,
such as operational creditors, employees, and small vendors. Furthermore, the broad and
undefined nature of commercial wisdom has allowed for inconsistent application, potentially
leading to decisions that may not always align with the broader objectives of the IBC, such as
value maximization and fairness to all stakeholders.

Through a study of case laws and judicial precedents, we found both positive and negative
outcomes arising from CoC decisions influenced by commercial wisdom. In several instances,
this principle has facilitated timely resolution and financial recovery, but in others, it has led to
unfair rejections of viable resolution plans or allowed CoC members to pursue self-interested
outcomes.

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 Evans, M. (2021). Balancing Power Dynamics in Creditors’ Committees: Commercial
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 Turner, K. (2021). Judicial Oversight and the Role of Commercial Wisdom in
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