The Supreme Court on Friday said that the unsuccessful bidders cannot be allowed to raise objections on the commercial wisdom of the lenders in the Insolvency and Bankruptcy Code (IBC) matters. The court said that appeals by unsuccessful bidders under the guise of “procedural impropriety” leads to value erosion, and against the design of IBC.
“The appeals before us typify the growing strategic use of the judicial system by unsuccessful resolution applicants, who seek to reopen almost every commercial decision under the guise of procedural impropriety. Such an approach incentivises delay, rent-seeking, and strategic obstruction and is fundamentally inconsistent with the economic logic and statutory design of the IBC,” the judgment said.
Economic Logic of the IBC
The apex court noted that National Company Law Tribunal (NCLT), the company appellate tribunal nor even the SC is empowered to substitute its assessment in place of the commercial decisions arrived at by a requisite majority of the committee of creditors (CoC).
Asset Devaluation
Experts said that insolvency proceedings have become an arena for shadow boxing by contenders to grab prize assets at throwaway prices. “When they do not succeed, some among them resort to pillorying the CoC and the resolution professionals in court so as to upset and dislodge the successful bidder,” said Udayan Mukerji, senior partner at Bonum Lex.
The court also said that stakeholders with little to no economic interest in the insolvent company resort to litigation as a bargaining tool to delay implementation of the resolution plan or extract concessions, thereby converting the insolvency process into an adversarial contest. “Such conduct takes the process away from its objective of value maximisation,” the judgement said.
The issue pertains to the SKS Power Generation (Chhattisgarh) against whom corporate insolvency process was initiated in April 2022 by its lender Bank of Baroda. Sarda Energy and Minerals (SEML) and six other applicants submitted their plans to acquire SKS Power. This was followed by CoC approving SEML’s Rs 1,950-crore bid with full majority. Later, bidders like Torrent Power, Jindal Power and Vantage Point Asset Management filed appeals raising objections which was subsequently dismissed by the appellate tribunal on the grounds that the commercial wisdom of the CoC cannot be interfered with.