K. Sashidhar v. Indian Overseas Bank (2019)

The Code hands the most important decision in the whole process — whether a business lives or is broken up — to a body of creditors voting by percentage, and then tells the Tribunal to check a list. Every student wants to know what happens when the creditors get it wrong. K. Sashidhar is the answer: nothing, because the Code does not treat commercial judgment as a thing that can be wrong in law. This is the foundation of the doctrine usually called the commercial wisdom of the committee of creditors, and no answer on plan approval, dissent or liquidation is complete without it.

Resolution plans placed before the committee of creditors failed to secure the required majority because certain financial creditors voted against them, and liquidation followed. Those affected challenged the outcome, asking the Tribunal to examine whether the dissenting creditors had good reason to vote as they did. The question was whether the Adjudicating Authority had jurisdiction to conduct that enquiry at all.

• The discretion is the committee's. The word may in s. 30(4) is ascribable to the discretion of the committee of creditors to approve the resolution plan or not to approve it.
• The Adjudicating Authority has no supervisory jurisdiction over that discretion. The legislature has not endowed the Adjudicating Authority with the jurisdiction or authority to analyse or evaluate the commercial decision of the committee of creditors, much less to enquire into the justness of the rejection of a resolution plan by the dissenting financial creditors. The discretion of the Adjudicating Authority is circumscribed by s. 31 to scrutiny of the resolution plan as approved by the requisite percentage of voting share of financial creditors.
• Nor has the Board. The Board cannot, under s. 196, directly or indirectly regulate the manner of exercise of commercial wisdom by financial creditors during voting on a resolution plan.

Start from the statutory text. Section 30(4) says the committee may approve; s. 31 says the Adjudicating Authority shall approve a plan as approved by the committee if it is satisfied that the plan meets the requirements of s. 30(2). Read together, the Tribunal's function is engaged only by an approved plan, and is then confined to the statutory checklist. There is no provision at all that engages the Tribunal where the committee has refused approval, and a jurisdiction that the statute does not confer cannot be assumed.

The reason the statute is drawn that way is institutional. Whether a business can be saved, at what price, and on what terms, is a forecast about commerce, not a finding about rights. Creditors who stand to lose their own money are the parties with both the information and the incentive to make that forecast. A tribunal reviewing it would be substituting a judgment it is not equipped to make, and would do so with the benefit of hindsight.

The holding on s. 196 closes the obvious back door. If the Adjudicating Authority may not review commercial wisdom, a regulator may not achieve the same result by prescribing how creditors must vote. The Board regulates the process and the professionals; it does not direct the commercial outcome.

1. State the two limbs together: the discretion under s. 30(4) belongs to the committee, and the jurisdiction under s. 31 is confined to a plan as approved.
2. Use it to answer any question about a dissenting creditor who says the plan was unfair, or about a rejected applicant who says his plan was better. Neither has a remedy grounded in the merits of the commercial decision.
3. Mark the boundary carefully. Commercial wisdom is immune; legality is not. A plan must still satisfy s. 30(2), and an appeal under s. 61(3) lies on the closed statutory grounds. Commercial wisdom is not a licence to approve an unlawful or discriminatory plan.
4. What it does not decide. It does not decide that distribution among creditors is a matter of commercial wisdom; later decisions have dealt separately with equitable treatment and with the position of dissenting financial creditors. Nor does it decide what happens once a plan has been approved by the committee but not yet by the Tribunal.

Section 30(4) has since been amended to require the committee of creditors, when approving a plan, to record reasons for its approval. Section 30(2) has been restructured, with the entitlement of financial creditors who do not vote in favour of the plan moved into a separate clause and pegged to the lower of the amount payable on a liquidation under s. 53 or the amount that would have been paid if the plan's distribution followed the s. 53 order of priority, with an Explanation declaring such a distribution to be fair and equitable. Section 196 has also been amended: the Board now regulates service providers, and may specify standards of conduct for the committee of creditors and its members, including timelines within which the committee is to take decisions. The requirement to record reasons and the power to specify standards of conduct qualify the practical reach of this decision without displacing its central proposition, so say both.