In many insolvency cases where the decision of the committee of creditors (CoC) may have raised eyebrows, the courts have refused to interfere. For example, in the famous case of Siva Industries and Holdings, the Supreme Court upheld the CoC decision even though it meant the lenders would have to take a ‘haircut’ of 93.5 per cent on ₹4,863 crore.

In the Jaypee Kensington case, the apex court observed: “The legislature has not endowed the adjudicating authority (National Company Law Tribunal) with the jurisdiction or authority to analyse or evaluate the commercial decision of CoC, much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors.”

This underscores the point that “corporate insolvency resolution, with approval of the plan of resolution, is ultimately in the exclusive domain of the committee of creditors”. Yet, despite these injunctions, the CoC’s decisions cannot, in the name of ‘commercial wisdom’, go against the law.

In a recent case, MK Rajagopalan vs Dr Periasamy Palani Gounder, Supreme Court judges Justice Dinesh Maheswari and Justice Vikram Nath drove home the point that “the principles underlying the decisions of this Court respecting the commercial wisdom of CoC cannot be over-expanded to brush aside a significant shortcoming in the decision-making of CoC when it had not duly taken note of the operation of any provision of law for the time being in force.”

The National Company Law Appellate Tribunal (NCLAT) had set aside an earlier order of the NCLT allowing the resolution plan of MK Rajagopalan, the founder of the MGM Hospitals group. NCLAT found two shortcomings in the plan. One, it had not passed through the CoC. Two, Rajagopalan had made a cash-rich trust, Sri Balaji Vidyapeeth, a co-applicant in the resolution plan. The trust was a non-profit entity and ineligible as resolution applicant.

Upholding NCLAT’s decision, the Supreme Court said: It is not in dispute that the trust “Sri Balaji Vidyapeeth”, of which the appellant-resolution applicant is the managing trustee, was one of the disqualified resolution applicants on the ground that the said entity was a charitable trust. It has been argued that even if the trust may be disqualified, the appellant cannot be disqualified because his financial capability was independent of the trust money. In our view, this part of the matter cannot be examined by a broad and generalised reference to the separate status of the two entities, i.e., the trust on one hand and the resolution applicant as an individual on the other.”

As for bypassing the CoC, the SC said: “the commercial wisdom of CoC would come into existence and operation only when all the relevant information is available before it and is duly deliberated upon by all its members”.

The SC has clearly defined the scope and application of the principle of ‘commercial wisdom’.