THE COMMERCIAL WISDOM DOCTRINE UNDER THE INSOLVENCY AND BANKRUPTCY CODE: JUDICIAL DEFERENCE OR ABDICATION OF REVIEW?

ABSTRACT

The Insolvency and Bankruptcy Code, 2016 (IBC), has established new insolvency frameworks in India by granting creditors control over debtors and prioritizing time-bound resolution, which necessitates the completion of resolution within specific time periods. The commercial wisdom doctrine, under which the Committee of Creditors (CoC) is given primary authority regarding the approval and rejection of a resolution plan, is accorded primacy. The Supreme Court has established through K. Sashidhar v Indian Overseas Bank and Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta, that CoC commercial decisions remain mostly outside the legal system except for minor judicial examination, which exists under sections 30(2) and 31 of the IBC.

This article critically examines whether such deference strengthens insolvency efficiency or results in an abdication of the judiciary’s constitutional role. It argues that although limiting court review helps make the process faster and more certain, giving the Committee of Creditors (CoC) almost complete protection from review can harm fairness, equality, and transparency, this is particularly for operational creditors and minority stakeholders.

Judicial Deference exists because financial creditors have the necessary expertise and financial interest to judge whether a resolution plan is viable and feasible. However, the business judgment rule, which shields commercial decisions from close judicial review, can create serious concerns. It raises doubts about whether giving creditors such independence has reduced the court’s ability to address complaints about unfair treatment of stakeholders or violations of public interest.

The article examines whether this doctrine genuinely supports the objectives of the Insolvency and Bankruptcy Code (IBC) or whether it allows courts to avoid proper constitutional and statutory scrutiny. It analyzes both judicial reasoning and its practical impact to understand how the goal of speedy insolvency resolution balances with fairness, transparency, and accountability in the corporate insolvency process.

INTRODUCTION

When a company is unable to repay its debts, the law must determine whether it should be revived or liquidated. The Insolvency and Bankruptcy Code 2016 (IBC) in India establishes this procedure to handle rising non-performing assets and ongoing problems with debt collection. The IBC established a unified system for handling insolvency, which had previously operated through different laws that required multiple years for resolution because they would not begin until all debt obligations were fulfilled. To fix these problems, the IBC introduced a strict time-bound insolvency resolution process and transferred control of the debtor company from the existing management to financial creditors, acting collectively through the Committee of Creditors (CoC).  The statutory design focuses on speed and finality by setting a 180-day resolution period, which can be extended up to a maximum of 330 days. This was meant to fix the delays and inefficiencies that existed in the earlier laws, like the Sick Industrial Companies (Special Provisions) Act, 1985.

The Supreme Court established the commercial wisdom doctrine, which operates under this system. The CoC decision-making process, which determines whether to approve or reject resolution plans, receives protection from this doctrine because it restricts judges from intervening in their choices. The Court established in K. Sashidhar v. Indian Overseas Bank, the court clarified that adjudicating authorities cannot substitute their own commercial assessment for that of the CoC. The position received full support from the Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta because the court only examined whether the law had been followed.

The deference system creates benefits through its ability to deliver results that people can trust while producing economic advantages. Has the judiciary’s respect for creditor autonomy evolved into an abdication of meaningful review? The paper shows that limited judicial intervention supports IBC objectives while extensive commercial wisdom interpretation creates danger by protecting essential financial choices from required legal examination.

STATUTORY FRAMEWORK OF THE IBC: WHERE DOES COMMERCIAL WISDOM FIT?

The Insolvency and Bankruptcy Code 2016 establishes a legal framework that designates the Committee of Creditors as the main entity responsible for managing corporate insolvency resolution procedures. The CoC consists primarily of financial creditors according to Section 21, which gives them authority to make important financial decisions. Its commercial authority is further reinforced through section 28, where prior approval of the CoC is mandated for specified actions of the resolution professional, and section 30, which entrusts the CoC with evaluating and approving plans by a prescribed voting threshold. Once approved, the plan is submitted to the adjudicating authority under section 31 for confirmation. Notably, judicial scrutiny at this stage is confined to the limited grounds enumerated in section 30(2), which relate to statutory compliance rather than commercial merits.

Importantly, the Code does not clearly provide guidelines for courts to review the business decisions of the CoC. The Bankruptcy Law Reforms Committee Report shows that this structure was intentionally designed to reduce judicial interference and ensure faster resolution. Over time, judicial interpretation of “commercial wisdom” has created a strong shield around CoC decisions, preventing courts from examining their merits even though this protection is not explicitly detailed in the statute.

JUDICIAL CONSTRUCTION OF COMMERCIAL WISDOM DOCTRINE

Foundational Validation

The constitutionality of the Insolvency and Bankruptcy Code, 2016 (IBC) was established through the Supreme Court decision in Swiss Ribbons Pvt. Ltd v. Union of India. The code established a system where creditors held power to control assets according to the legislative choice, which aimed to achieve both economic efficiency and asset recovery during times of financial distress. It was observed that financial creditors, owing to their exposure and expertise, were better positioned to evaluate the feasibility and viability of resolution plans. Judicial Deference to their commercial assessment was therefore considered consistent with legislative intent. The Court relied upon the Bankruptcy Law Reforms Committee BLRC Report, which recommended that judicial intervention should be reduced and insolvency resolution processes should be conducted with maximum efficiency. Deference was needed in this system because it served as a basic requirement for a time-bound system that operated to protect value from being lost.

Expansion and Strengthening

The Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta expanded the doctrinal foundations because it restricted the scope of judicial review powers to certain limits. The court held that the adjudicating authority could not interfere with the commercial decisions of the Committee of Creditors (CoC), except to ensure compliance with section 30(2) of the code. It was found by the court that judicial powers could only be extended to examine the distribution, proportionality, and feasibility. By confining scrutiny to procedural and statutory parameters, the Court strengthened the insulation of creditor decisions from merits review. The emphasis on finality and certainty reflected broader economic considerations, including improved recovery rates and enhanced credit discipline reported by the Insolvency and Bankruptcy Board of India. Through this reasoning, deference began to acquire structural rigidity that approached non-reviewability.

Subsequent Reinforcement

Later decisions reinforced this position, particularly in K. Sashidhar v. Indian Overseas Bank and Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., where the Court made it clear that the decisions of the CoC are generally not open to judicial interference. Judicial review was restricted to two types of cases, which included procedural irregularities and statutory violations, but courts were not allowed to assess commercial evaluations. The doctrine developed through time from its original state of principled deference to achieve complete protection, which lacked any legal basis. Article 14 of the Constitution creates a structural conflict between legislative efficiency objectives and constitutional rights, which protect against arbitrary actions. The initial approach of restricted review for economic recovery purposes has now become a form of judicial self-limitation that protects commercial wisdom from accountability through its established deference standard.

THE DEMOCRATIC AND CONDITIONAL CRITIQUE

Equality Concerns

The creditor-in-control, which the Insolvency and Bankruptcy Code, 2016, establishes, prevents operational creditors from joining the Committee of Creditors, which section 21 establishes, until they meet specific legal requirements. The court upheld this classification in Swiss Ribbons Pvt. Ltd. v. Union of India, but used financial expertise as the basis to exclude people from the group who lacked representation. Empirical data published by the Insolvency and Bankruptcy Board of India indicates that operational creditors frequently receive significantly lower realizations in approved resolution plans. The court recognized distribution differences in the case of Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC India Ltd., where the balancing of stakeholder’s interests was examined. The institutional design which operates through economic rationale has been attacked for creating permanent structural discrimination within the system that governs insolvency cases.

Article 14 and Non-Arbitrariness

The doctrine of commercial wisdom has restricted judicial examination to statutory compliance, which creates doubts about its ability to meet Article 14’s requirement against arbitrary decision-making. In Maneka Gandhi V Union of India, arbitrariness was equated with inequality, which creates a requirement for substantive fairness within constitutional review. If CoC decisions are completely shielded from merits review, it raises the question of whether this level of protection can withstand constitutional scrutiny. Absolute judicial restraint, therefore, exists as a contradictory approach to the basic structure commitment, which requires the establishment of the rule of law.

Procedural vs Substantive Justice

The courts have the power to assess only whether parties followed procedures that they need to show for their case. The court established this distinction through its ruling, which declared that commercial viability belongs exclusively to the CoC. The framework that protects only formal compliance will fail to protect economically vulnerable stakeholders whose essential rights need to be protected.

HAS DEFERENCE BECOME ABDICATION?

The question of whether judicial deference to the Committee of Creditors (CoC) has evolved into abdication requires careful analysis. Evidence shows that courts are increasingly avoiding responsibility by focusing only on procedural compliance under Section 30(2) of the Insolvency and Bankruptcy Code, 2016, and not examining whether resolution plans are substantively fair. This restraint, while initially intended as a functional deference to facilitate speed and efficiency, has in practice created a situation in which the judiciary is effectively relinquishing its responsibility, leaving major financial decisions unchecked. In this context, “abdication” is understood as the failure to exercise judicial authority that is necessary to ensure justice and equity, rather than mere cautious deference.

The doctrine of commercial wisdom has been repeatedly interpreted as a shield against scrutiny, which protects CoC decisions from being assessed based on their actual value. In the case of ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, adjudicators must verify that parties follow legal requirements, but they cannot question business decisions. The power of financial creditors to make decisions has increased beyond normal limits or is over-concentrated because operational creditors and small unsecured creditors who hold minority positions cannot effectively participate in decisions or obtain restitution.

TOWARDS A CALIBRATED MODEL OF REVIEW

The Judicial Review system needs to be realigned under the Insolvency and Bankruptcy Code, 2016, because the commercial wisdom doctrine currently operates without control. The recognition of substantive review needs to be established as a formal method to assess arbitrary actions. The economic decisions should not be subject to doubt, but the evaluation needs to determine if the resolution plan exhibits obvious discrimination, bad faith, or extreme irrationality. The system of calibrated scrutiny will provide results that align with the non-arbitrariness doctrine established by Article 14, as per Shayara Bano v. Union of India.

Further, a mandatory reasoning requirement for CoC decisions should be introduced. The approval or rejection of plans is frequently recorded without giving detailed justification, which limits transparency. The Insolvency Law Committee has previously accepted the need for greater procedural clarity to strengthen stakeholder confidence. The requirement for a written and reasoned explanation would not weaken the creditor control; instead, it would allow proper scrutiny for allegations that involve statutory violence or arbitrariness.

Enhanced protections for minority and operational creditors should also be considered. Empirical studies in insolvency law show that there are persistent distributional inequalities that create unfair advantages to secured creditors while harming unsecured parties. Creating clear statutory guidelines would help define the specific aspects of proceedings that courts can review, especially in cases where essential rights to fair treatment have been violated.

Such reforms do not mean that there will be complete judicial interference in commercial decisions. Instead, they would reintroduce balanced oversight, ensuring that the goal of efficiency does not override constitutional accountability. Without careful correction, the current approach may further establish creditor control while disregarding the essentials of the rule of law system.

CONCLUSION

This article examines how the judicial deference to the Committee of Creditors under the Insolvency and Bankruptcy Code, 2016, has shifted from its original principle to functional abdication. It has been argued that while creditor-in-control, the way courts have interpreted the commercial wisdom doctrine has gradually shielded financial creditors’ decisions from meaningful review. What started as a way to avoid delays and protect economic value, over time, it reduced the scope of review to such an extent that courts rarely examine whether the outcome is substantively fair.

Efficiency in insolvency proceedings is extremely important. Delays reduce asset value, discourage investment, and weaken credit markets. The Code establishes deadlines for operations and restricts judicial involvement to address an actual problem that leads to systemic operational halts. However, efficiency cannot be treated as an absolute end. When judicial oversight is limited to simply checking procedural compliance, issues such as arbitrariness, unfair distribution, and the exclusion of minority stakeholders often go unaddressed. The present system allows financial creditors to make all important decisions, which results in major power imbalances that courts cannot correct.

The practical impact of this approach is serious. If commercial wisdom is treated as almost absolute, accountability in insolvency proceedings may weaken stakeholder’s confidence. Principled oversight must remain available to all complex economic decisions that apply to constitutional democracies. Insolvency law cannot function as only an economic mechanism; it must also be grounded in fairness, accountability, and judicial responsibility.

REFERENCE(S):

1. Bankruptcy law reforms committee, ministry of finance, govt of India, report of the bankruptcy law reforms committee: volume 1 – rationale and design (2015).
2. Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, §§7, 12, 30 (India).
3. Sick Industrial Companies (Special Provisions) Act, 1985, No. 1 of 1986 (repealed).
4. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150.
5. Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta, (2020) 8 SCC 531.
6. Insolvency and Bankruptcy Code, 2016, No.31 of 2016, § 21 (India).
7. Insolvency and Bankruptcy Code, 2016, No.31 of 2016, § §28, 30(4).
8. Insolvency and Bankruptcy Code, 2016, No.31 of 2016, §§ 30(2), 31.
9. Swiss Ribbons Pvt. Ltd v. Union of India, (2019) 4 SCC 17.
10. Insolvency and Bankruptcy Board of India, IBC Annual Newsletter.
11. Kalpraj Dharamshi v. Kotak Investment Advisors Ltd. (2021) SCC OnLine SC 204.
12. Jaypee Kensington Boulevard Apartments Welfare Association v NBCC India Ltd, (2022) 1 SCC 401.
13. Maneka Gandhi V Union of India, (1978) 1 SCC 166.
14. Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh, (2020) 11 SCC 467.
15. ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1
16. Shayara Bano v. Union of India, (2017) 9 SCC 1
17. S. Sahoo, ‘Commercial Wisdom and Judicial Abdication under the IBC’ 11 NLS Bus. (2021).
18. Umakanth Varottil, ‘Corporate Insolvency Resolution in India: Distributional Concerns’ 12 NUJS (2019).