When there’s no wisdom, how come “Commercial Wisdom”?

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An interesting case where the Adjudicating Authority made critical comments on the so-called Commercial Wisdom of the Committee of Creditors. It emphasised that the CoC has not at all applied its mind and that there was no element of wisdom displayed, leave alone the 'commercial wisdom'...


The Committee of Creditors has not at all applied its mind and there was no element of wisdom displayed, leave alone the ‘commercial wisdom’. This is not something I said, it is something I recited. So, who would have criticised the actions of the CoC? Any guesses…? No…? Let me give you one more clue. After making such mocking observation, it rejected the decision of the CoC to liquidate the Corporate Debtor and approved the resolution plan which was originally rejected by the CoC. Now, am sure you would have guessed who it is. But let me take you through the whole story before you decide whether such an observation is absurd or reasonable.


One of the financial creditors of Ushdev International Limited (“Corporate Debtor”) initiated CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) against the Corporate Debtor, which was admitted by the Mumbai Bench of the NCLT (“NCLT” or “Adjudicating Authority”). Upon issuance of the Expression of Interest only one applicant, i.e., M/s. Taguda Pte. Ltd., Singapore (“Resolution Applicant” or “Taguda”) had qualified to submit the resolution plan.


After various negotiations with CoC, the resolution applicant modified its resolution plan as per the suitability of the CoC. The CoC sought some time to consider the resolution plan and at its meeting held on February 2, 2019, the Resolution Plan submitted by Taguda was rejected and the CoC voted to liquidate the Corporate Debtor.


Let us dig deeper into the facts of this case.


Well, the average liquidation value as per the valuation reports of the registered valuers is approximately INR 67Cr. whereas the upfront payment offered by the resolution applicant Taguda is INR 200Cr. within 90 days. Even when the upfront payment itself is much higher than the liquidation value why did the CoC reject the plan? The only thread which can lead us to find an answer to this is the “receivables”.


As per the books of the Corporate Debtor, the receivables stand at INR 75 Cr. While as per the assessment made by SBI from an undisclosed recovery agency, the recoverable amount from the debtor is around INR 400 to 500 Cr. An interesting fact is that the registered valuer stated in its report that most of the debtors of the Corporate Debtor are under liquidation proceedings or NPAs themselves and that most of the receivables are outstanding for more than three years and stating this reason it has assigned “Nil” value to majority of the sundry debts due to the Corporate Debtor.


Thus, on one side we have an argument that the Resolution Plan shall be approved since liquidation won’t fetch much to the CoC as the debtors are themselves in stress and that it would gravely prejudice the livelihood of the employees of the Corporate Debtor. On the other hand, the SBI argues that the CoC need not justify its decision taken in commercial wisdom as the same is given a paramount status without any judicial intervention and hence order for liquidation shall be passed.


Given this, the Resolution Professional filed an application under section 33 of the IBC seeking an order for liquidation of the Corporate Debtor.


Now, let me narrate how the NCLT had handled this issue.


The NCLT analysed the status of receivables and observed that, the SBI had completely ignored the facts and figures reflected in the Audited Accounts of the Corporate Debtor while contending that the recovery from receivables is approximately INR 400Cr., and that such decision is totally devoid of a common sense and normal intelligence thus no sane person shall approve such obnoxious decision. I can equate this with a teacher commenting on her student’s answer sheet. Well, let’s see how else did this teacher pin point the mistakes of this notorious student.


The NCLT had at the very threshold stated that the decision of the CoC to reject the resolution plan is bad in law and thus deserves to be overturned. It further observed that the commercial wisdom exercised by the CoC is not sound enough to protect the interest of the corporate debtor as well as the stakeholders, and that in such a scenario the Adjudicating Authority shall not hold itself back from applying a judicious mind to determine the correctness of the commercial decision taken by CoC.


The NCLT also opined that in this case the two important preconditions of commercial wisdom, i.e., (i) existence of prudence and (ii) existence of commercial data are missing and absence of common wisdom makes such decision of the CoC to liquidate the corporate debtor, a bad decision not sustainable in the eyes of law.


Further, relying on the findings in the Mafatlal judgement, the NCLT lead to a conclusion that if the process which is prescribed by law is not followed for approving a resolution plan as in this case, then the Adjudicating Authority has the authority to pierce the veil and is expected to judiciously x-ray the plan. The NCLT went on to observe that in the present case, the procedure established by law is that the ‘commercial wisdom’ is to be exercised by the CoC, and if the same is not done, then the Adjudicating Authority within its jurisdiction can neglect such an illogical, unreasoned , unfounded, and unsound decision of the CoC. Such strong adjectives clearly depict that the teacher is deeply worried about the student.


The Adjudicating Authority also observed that under supervisory jurisdiction the job of the Adjudicating Authority is not merely a stamping authority to approve each and every decision of the CoC, but to test such decision on three parameters i.e. feasibility, viability, and effective implementation. After due examination of the plan, the Adjudicating Authority approved the same and had set aside the decision made by the CoC to liquidate the Corporate Debtor.


“A resolution plan which is otherwise fit to be approved but on some flimsy ground rejected is nothing but contravention of provision of law” observed the NCLT.

The Hon’ble Judicial Member, in the order, stated that “My reason and conscience do not allow me to let this company go into liquidation when such a better beneficial offer is already on the table”.


Accordingly, the NCLT approved the resolution plan by its order dated November 7, 2019.


However, the SBI preferred an appeal against this order before the NCLAT on the ground that it is in disregard of the decision rendered by the Hon’ble Supreme Court in the case of K. Sashidhar vs. Indian Overseas Bank & Ors. The Hon’ble NCLAT vide its order dated November 29, 2019 has stayed the order of the Adjudicating Authority and directed the Resolution Professional to manage the affairs of the Company and continue to discharge his functions as before.


As on today, the matter is still pending before the NCLAT and the interim orders are still in force. Let us wait and see how the NCLAT deals with this case.

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