Who Wins – Equitable Consideration or Commercial Wisdom of CoC?


This piece deals with the jurisprudence whether the Adjudicating Authority or the Appellate Authority has the authority to reject a resolution plan approved with requisite majority by the Committee of Creditors (CoC) which is lower than liquidation value in quantitative terms.

Resolution Plan should typically mirror the Insolvency and Bankruptcy Code, 2016 (Code) objectives in maximizing the value. The Code, the way it is derafted, puts all its faith in the Committee of Creditors (CoC) in protecting the commercial interest of stakeholders of the corporate debtor while they determine the feasibility and viability of the rival plans placed before them. Maximization of value probably weighs prominently on the minds of collective wisdom of the CoC while they carry the burden of expectations from other stakeholders. It is a tough job. It is about making a difficult choice keeping everyone’s faith intact while ensuring that maximum recoveries are made for their dues as well while the corporate debtor gets a chance to be rehabilitated.

The job of CoC is hard enough to select the suitable resolution plan amongst the available ones. The hardest part surfaces when a resolution plan lower than the liquidation value is received. No one would want to be in that position for taking a call either to approve or reject such a plan as it affects everyone and allegations are likely to fly thick and fast, if such a plan is approved.

Resolution Plan lower than Liquidation Value

One question that begs answers is whether the CoC can consider and approve a plan which is lower than the liquidation value? On the face of it, such an approval looks incongruous as it would seem as defeating the interest of stakeholders while upsetting the objectives of the Code. Practicalities apart, does the provisions of Code in any way bar the CoC to approve such a plan? The Apex Court had the occasion to examine this aspect in Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors[1] particularly whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not. In this case, NCLAT has directed that amount in resolution plan should match the liquidation value and this was challenged before Supreme Court. 

The Supreme Court noted that that “the object behind prescribing such valuation process is to assist the CoC to take decision on a resolution plan properly. Once, a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 thereof.” The Court further opined that the Appellate Authority has proceeded on equitable perception rather than commercial wisdom. The Court felt that “the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.” While recognizing the primacy of commercial wisdom of the CoC, the Apex Court rejected the idea of matching the value of the resolution plan to the liquidation value.

In another judgment[2] rendered on 28th February, 2020, the Apex Court has relied upon the Maharashtra Seamless judgment and set aside the judgment of NCLAT whereby the matter was remitted to NCLT after finding that Section 30(2) of the Insolvency and Bankruptcy Code together with the principle of maximization of assets of the corporate debtor, a resolution plan which is lesser than liquidation value cannot be accepted. The Supreme Court held that since this issue has been decided in Maharashtra Seamless judgment, the Appellate Tribunal cannot reject resolution plans approved by the CoC, which are lower than liquidation value. 


There is no provision in the Code that justifies a view that resolution plans should carry a value higher than liquidation value. A closer look of the provisions tells us that the Resolution Applicant is not aware of the liquidation value as determined by the Registered Valuers though they may have their own assessment of value. In fact, CoC members also do not know the liquidation value unless the resolution plans are placed before them. Liquidation value, at the most, works as a guidance for the CoC; it cannot be considered as a benchmark and resolution plans offering lower value than liquidation value ought not to be rejected on this ground alone. Of course, the resolution plan must pass the test of feasibility, viability and must be implementable besides satisfying the legal provisions. New lessons are being learnt everyday.

[1] Civil Appeal No. 4242 of 2019 decided on 22nd January, 2020.

[2] State Bank of India vs. Accord Life Spec Private Limited, Civil Appeal No. 9036 of 2019.

Retaining Books of Account Post Dissolution of a Corporate Debtor

Uncertainty remains as to how long the Liquidator should maintain the books of account of the corporate debtor under the Insolvency and Bankruptcy Code, 2016. Do they become bona vacantia? For clarity, it may be noted the Liquidation Regulations specify that the liquidator shall preserve specified registers and books of account for a period of eight years from the date of dissolution of the corporate debtor. These can be referred to as ‘books of the liquidator pertaining to liquidation’. The format of the registers and books of account has also been specified in the regulations. The regulations also mandate that the liquidator should complete the books of account of the corporate debtor if they are incomplete on the liquidation commencement date. The reference to books of account here is to ‘books of the corporate debtor prior to liquidator. In this sense, there are ‘books of the corporate debtor’ and books of the liquidator’.

The period of preservation of books of the liquidatorhas been provided in the regulations. But the Code and the regulations are silent on the period for which the books of the corporate debtorare to be preservedby the liquidator. Can they be destroyed upon order of dissolution?

The requirement of maintenance and preservation of books of account of a company is provided in the Companies Act, 2013 in following terms:

Books of Account are to be maintained for period of not less than eight financial years immediately preceding a financial year together with the vouchers relevant to any entry in such books of account. Where an investigation has been ordered in respect of the company, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit (s. 128).

The company shall maintain and preserve at its registered office copies of all documents and information as originally filed for incorporation till its dissolution (s.7).

Interestingly, the Companies Act, 2013 deals with the disposal of books of account upon dissolution as under (s. 347):

  • The books and papers of a company to be dissolvedand those of the Company Liquidator to be disposed of in the manner as directed by the Tribunal.
  • After the expiry of five years from the dissolution of the company, no responsibility shall devolve on the company, the Company Liquidator, or any person to whom the custody of the books and papers has been entrusted, by reason of any book or paper not being forthcoming to any person claiming to be interested therein.
  • The Central Government may, by rules, prevent for such period the destruction of the books and papers of a company which has been wound up and of its Company Liquidator.

Under the Company (Court) Rules, 1959 [Applicable to winding-up governed by provisions of the Companies Act, 1956], the High Court, in its discretion, can pass orders directing disposal of the books and papers of the company and of the Liquidator.

Section 356 of the CA 2013 provides that the dissolution can be declared as void by the Tribunal upon an application being made within two years from the date of dissolution.

Similar provisions find no place in the Code or in the Regulations. The period for preservation for books of liquidator is provided in the Regulations but not for books of the corporate debtor. Section 347 of the Companies Act, 2013 cannot be applied for liquidation under the Code regardless of the fact that the same Tribunal has the authority to deal with winding-up under the Companies Act, 2013 as well as liquidation under the Code. In any case, corporate debtor under the Code is a broader term and also includes limited liability partnership and there is no question of extending the applicability of provisions of the Companies Act, 2013 to a LLP. Winding-up process under the Companies Act, 2013 and liquidation process under the Code are two distinct processes under two different statutes.

Typically, the regulations should be amended to provide for the period of preservation of books of the corporate debtor. Until, this is done, the onus lies on the Tribunal using its power under section 60(5) of the Code to direct the period and the manner of preservation or disposal of the books of account of the corporate debtor upon the order of dissolution.

There may be case of pending investigation and litigation against the corporate debtor. Should the books and records be maintained till the end of investigation or litigation? The answer lies in the question itself. No corporate debtor should, ordinarily, be dissolved if any investigation, litigation or case is pending against it. Dissolving such a corporate debtor would be a huge lapse giving rise to a legal crisis.

@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.




NCLT Knocks Out 137 Days from CIRP

NCLT Principal Bench in a recent order of NIIL Infrastructure Private Limited  directed exclusion of 137 days from CIRP period. The Bench was of the opinion that section 12(2) for extension of time as alternative prayer need not be invoked in the case. In this case, Resolution Professional (RP) was appointed by the Bench after a gap of 114 days after the tenure of Interim Resolution Professional (IRP) ended. Though the IRP organised few meetings of the committee of creditors (CoC) but no decision could be arrived at on the appointment of RP. It was only after the intervention of the Bench that CoC resolved to appoint RP. Earlier also 23 days were lost when inadvertently different IRP was appointed than the one proposed by the financial creditor. The Bench, thus, excluded 137 days from the CIRP period relying upon Quinn Logistics India Pvt Ltd judgement of the NCLAT. This order paves way for exclusion of time as an alternative to extension of time where there is delay in appointment of RP.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Fundamental Change in Insolvency Commencement Date – Ambivalent Thinking

The Insolvency and Bankruptcy Second Amendment Bill, 2018 provides for a fundamental change in the insolvency commencement date (ICD) of Corporate Insolvency Resolution Process (CIRP). Presently ICD commences on the date when the order is passed by NCLT admitting the application for CIRP under section 7, 9 or 10. ICD is a significant date in the Code and many things turn on it such as the countdown for period of CIRP begins from ICD and the moratorium takes effect from ICD amongst others. In some cases, while passing the order of admission, the Bench does not simultaneously appoint an Interim Resolution Professional. This was a source of confusion as the appointment of the IRP at a later date than admission used to allow the IRP or RP lesser time than envisaged under the Code. The Second Amendment Bill, in order to correct this situation, has proposed to commence the ICD from the date of appointment of the IRP by NCLT by adding a proviso in section 5(12).

The proposed amendment looks reasonable on paper and is probably  based on experience out of the cases under the Code so far. The Code, we all know, owes its genesis to the Vishwanathan Committee Report (Bankruptcy Law Reforms Committee Report). The Report has an incomparable sense of clarity of thought and as per the Report, the ICD plays an important role in the CIRP. 

The Report recommended commencement of moratorium from Insolvency Commencement Date. The date of passing of order of admission by the Adjudicating Authority was considered as a significant date and the moratorium also commenced from this date. Moratorium has a rational relation to CIRP in the sense that this marks the beginning of calm period. Calm period provides for no coercive action against the assets of the corporate debtor and also bars transfer or alienation of property of the corporate debtor. 

With the proposal to shift the Insolvency Commencement Date to the date of appointment of IRP by NCLT, there may be gap of few days in the date of order admitting the application and date of appointment of IRP. For this gap, no moratorium will be in effect and this may prove to be counter productive. Section 14(2) provides that supply of essential goods or services to the corporate debtor shall not be terminated or suspended or interrupted during moratorium period. During the gap between the order admitting the application for CIRP and date of appointment of IRP, this provision will not have any effect and the essential services may get disrupted which may affect the functionality and working of the corporate debtors as the news of CIRP spreads like wild fire. This does not behold good for the stakeholders of the corporate debtor. Penal sections such as section 71 will effectively lose their sting.

The solution lies in amending several provisions of the existing Code to retain the effect of the provisions of the Code. This is the beginning of more changes.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.


To Empanel or Not To Empanel – Confusion Confounds!

The Insolvency professionals are in a dilemma. The banks and financial institutions are creating a panel of their own to select insolvency professionals to be appointed as Interim Resolution Professional and Resolution Professionals. The lenders are doing this based on their own criteria and parameters. The persons selected to be on their panel are the registered insolvency professionals.

Mussadi Lal’s case set the tone when the Principal Bench headed by the President of NCLT rejected the decision of the committee of creditors to appoint a Resolution Professional in place of the Interim Resolution Professional because the insolvency professional was on the panel of one of the financial creditors. The Bench held that such a insolvency professional cannot be regarded as independent umpire to conduct corporate insolvency resolution process. The mere fact of empanelment of the insolvency professional became the cause of rejection.

The New Delhi Bench, in a recent order in Uttam Strips Limited, has, however, held that shortlisting of the names of eligible Resolution Professionals (sic) and maintenance of the list by Banks does not per se give rise to the fact that Resolution Professional would lean in favour of the financial creditor. The Bench held that his work is open to scrutiny and subject to final decision of the CoC.

The Bench took judicial note of the fact that banks normally propose the appointment of a Resolution Professional of their own choice and a person different from the one who had initially acted as the IRP. The Bank had shortlisted names of empaneled and eligible Resolution Professionals  for recommending the names in various corporate insolvency resolution processes. The Bench also noted that the person recommended had not rendered any professional services to the Bank in the past in any professional capacity. The Bank had shortlisted the names of 125 professionals for their appointment as Resolution Professional. This was done so that no time is lost in assessing their eligibility or seeking their consent. The fact that the bank had previously scrutinised the credentials of a professional is no ground to impute partiality.  The Bench held that there is nothing wrong in any bank maintaining their list of resolution professionals whom they feel are competent or experienced to handle the resolution process.

Understanding Counter View

This order by New Delhi Bench is in stark contrast to the earlier order of the Principal Bench. The interest of empanelled IPs may conflict if they have rendered any services to the Bank or financial creditor empanelling them. There may be a counter argument that the IP appointed as IRP or RP may have to tow the line of the Bank or else may not stand any chance of being recommended again for appointment in another case. The neutrality gets affected to this extent. But this argument may not hold good as the IP is bound by the ethical norms under the Code and Regulations. Independence is a state of mind and IP is independent if he acts independently.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.





# Key Issues under IBC – Should IRP/RP consider interest while verifying and admitting the claims of creditors?

As regards financial creditors, the IRP/RP should take into account the interest claimed as per the terms of the loan agreement including penal interest, if any upto the insolvency commencement date.

For operational creditors, ordinarily the interest is not considered unless it is claimed by the operational creditor or other creditor and it is stated in purchase or work order. In other words, claim will be admitted to the extent there was agreement between the parties to charge and pay interest. If there is no agreement, merely the fact that it is mentioned in the invoice does not entitle the operational creditor to that interest. Interest has to be taken into account excluding the credit period as per the agreement or customary practice of the trade or usage having the force of law.

To conclude, no thumb rule can be established for providing and calculating the interest in claims by operational and other creditors; it depends on the facts and circumstances of each case.

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.