Madras High Court: Adjudicating Authority Must Review COC's Decisions With Revisional Jurisdiction

Madras High Court: Adjudicating Authority Must Review COC's Decisions With Revisional Jurisdiction

Madras High Court emphasized that while the adjudicating authority is not empowered to replace the commercial judgment of the Committee of Creditors (CoC), it should utilize its jurisdiction, akin to revisional jurisdiction, to review the propriety of the CoC's decisions.

National Sewing Thread Co. Ltd. (Petitioner), a public limited company registered under the MSME Act, 2006, entered the Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) due to its failure to repay the loan acquired from the Indian Overseas Bank.

Starting in June 2019, the petitioner also defaulted on paying electricity charges owed to the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO). On January 19, 2022, TANGEDCO issued a demand notice claiming Rs. 32 lakh as unpaid electricity charges.

The petitioner argued that since the CoC exercised its commercial judgment to approve the Resolution Plan, which subsequently received approval from the NCLT, all outstanding claims or liabilities not covered by the Plan should be considered extinguished.

In response, the petitioner filed a writ of certiorari and mandamus to invalidate the demand notice issued by TANGEDCO and requested directives for TANGEDCO to restore the electricity connection.

The Madras High Court dismissed the writ petition and emphasized that while the adjudicating authority cannot override the commercial judgment of the Committee of Creditors (CoC), it must exercise a form of revisional jurisdiction to review the correctness of the CoC's decisions.

Highlighting the limited role of the adjudicating authority under the Insolvency and Bankruptcy Code (IBC), the High Court noted its responsibility to ensure that the resolution plan approved by the CoC complies with Section 30(2) of the IBC. It referenced previous judgments, such as State Tax Officer v. Rainbow Papers Ltd. and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, which emphasize that the Authority should not substitute its own notions of fairness and equity for the CoC's commercial judgment.

Citing the precedent set by M.K. Rajagopalan v. Dr. Periasamy Palani Gounder & Anr, known as the "Rajagopalan effect," the High Court clarified that the CoC's commercial wisdom prevails only when based on complete disclosure of information. This ruling redefines the adjudicating authority's role, affirming its duty to ensure the accuracy and correctness of the CoC's actions, in line with its constitutional mandate as a neutral tribunal.

The Court outlined circumstances where the adjudicating authority may reject a resolution plan approved by the CoC, including instances of incomplete or inadequate information, a lack of transparency, a failure to ensure minimum payments to operational creditors, and a lack of fair and equitable treatment to operational creditors.

In conclusion, while the adjudicating authority cannot substitute the CoC's commercial judgment, it retains the power to refuse approval if there is a breach of Explanation I to Section 30(2) of the IBC. Therefore, the petitioner is obligated to settle its unpaid dues to TANGEDCO.