CoC’s Commercial Wisdom: Legal Perspective in IBC

Background: The NCLAT Ruling and Its Implications

The NCLAT had directed that secured financial creditors and trade creditors be paid on a pari passu basis, regardless of the ranking of their security interests. This created confusion in the classification of creditors and raised concerns for investors and the secondary debt market in India.

Such a ruling contradicted the principles of credit risk assessment, possibly leading to reduced recoveries for creditors and impacting the overall efficiency of the IBC.

Supreme Court’s Position on CoC’s Commercial Wisdom

The Supreme Court has now reasserted that the CoC’s decisions — including the manner of distribution of funds — fall under its commercial domain, and not the judiciary’s. It held that:

• The CoC is to evaluate the feasibility and viability of each resolution plan.

• The CoC can suggest modifications, including changes in payments to different classes of creditors.

• The CoC is not bound to act in fiduciary capacity to any single class of creditors.

• The final decision is based on the CoC’s commercial wisdom, which is binding on all stakeholders once approved by the requisite majority.

Scope of Judicial Review Under IBC

The Supreme Court clarified the limited scope of judicial review by NCLT and NCLAT in CoC decisions:

• Courts cannot intervene in the merits of a commercial decision taken by the CoC.

• However, the IBC mandates that resolution plans must:

  • Keep the corporate debtor as a going concern

  • Maximize asset value

  • Protect the interests of all stakeholders, including operational creditors

If these parameters are not met, the NCLT can return the plan for reconsideration — but cannot amend the commercial proposal itself.

Practical Implications for Resolution Plans

• CoC must now provide detailed commercial justifications, especially when operational creditors are offered payments beyond liquidation value.

• The court’s observation discourages multiple litigations from dissenting creditors.

• Delegated CoC sub-committees must still seek ratification from the full CoC.

Upholding Bankruptcy Principles

The Supreme Court highlighted that IBC should not give creditors greater rights than they hold under general law unless it serves a bankruptcy-specific purpose.

Importantly, the judgment reiterates the “fresh slate doctrine”, assuring acquirers that past liabilities of the corporate debtor will not carry over post-resolution — enhancing buyer confidence and encouraging participation in the resolution process.

Conclusion

This landmark judgment strengthens the creditor-driven framework of the IBC. By reinforcing the supremacy of the CoC’s commercial wisdom, the Supreme Court has ensured that judicial forums respect business decisions made by the majority creditors — provided they align with the objectives of the IBC.

India’s insolvency regime, with its modern restructuring principles, continues to evolve, with this ruling being a key milestone in shaping creditor rights and commercial certainty in insolvency resolutions.

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