1. What is Haircut and Why Rationale Must Be Documented?

Haircut = % of debt waived off by creditors under resolution.

Example: Claim Rs. 1000 Cr, Resolution Plan pays Rs. 50 Cr = 95% haircut.

Under IBC, haircut is allowed. Supreme Court in K. Sashidhar Vs Indian Overseas Bank (2019) 12 SCC 150, Essar Steel Vs Satish Kumar Gupta (2020) 8 SCC 531, Kalpraj Dharamshi Vs Kotak Investment Advisors (2021) 10 SCC 401 held:

Commercial wisdom of CoC is non-justiciable. NCLT cannot sit in appeal over wisdom of haircut.

BUT - Wisdom must be discernible. That wisdom must be documented.

Regulatory framework requiring documentation:

• Regulation 39(3) CIRP Regulations: CoC must record deliberations and commercial considerations
• IBBI Circular dated 10.08.2022: Resolution Professional must prepare evaluation matrix and record reasons for approval/rejection
• Sec 26 & 28 of IBC: All commercial decisions requiring 66% vote must be recorded with rationale
• Sec 30(2)(b) Explanation 1: Distribution must be fair and equitable - requires reasoning why operational creditors get 0% while financial get 5%

Failure = Minutes only say "CoC approved plan with 95.85% haircut with 90% majority". No valuation comparison, no liquidation value discussion, no feasibility study, no PUFE transaction analysis.

That is failure to document rationale.

2. Consequences of Non-Documentation

a) Plan set aside as arbitrary / malicious under Sec 65

b) NCLT bound to record cogent reasons under Sec 31(2) - if CoC gives no reasons, NCLT cannot give reasons

Supreme Court in Ramkrishna Forgings Ltd case 2023 - 94.25% haircut case:

NCLT while exercising power under Sec 31(2) while rejecting a resolution plan must record cogent reasons. If CoC has not documented rationale, NCLT cannot mechanically approve. Non-recording of any reason for taking commercial decision will be of no value.

c) Personal Guarantor Plans: Currently RP records only voting tally without adequately documenting haircut rationale - Stayed by special NCLT bench in Subhash Chandra / Essel Group personal guarantor case 2024 - allegation that entities acted under influence to support exceptionally large haircut. Special bench stayed single bench order precisely because rationale not documented.

3. Leading Case Laws

1. Balajee Ingot India Pvt. Ltd. - NCLT Kolkata Bench, (2025) ibclaw.in 1638 NCLT - 99% HAIRCUT REJECTED - MOST IMPORTANT

Facts: Plan gave NIL to operational creditors, negligible to statutory dues, 99% haircut. RP neither pursued receivables nor appointed forensic auditor for PUFE. Valuation questionable.
Held:

• Plan non-compliant with Sec 30(2)(b)
• 99% haircut without PUFE investigation and rationale = malicious CIRP under Sec 65
• CIRP recalled, insolvency admission recalled, action under Sec 65 ordered against RP and CoC members
• Observation: Absence of documentation of haircut rationale amounts to collusion

This judgment is now cited for "Commercial Wisdom under Judicial Check".

2. Videocon Industries - 95.85% Haircut Controversy

NCLT Mumbai approved Videocon plan with 95.85% haircut (Rs. 46,000 Cr claim, Rs. 2,962 Cr paid). NCLAT stayed and remanded because CoC minutes did not show why 95.85% haircut better than liquidation value, no comparison of twin valuation reports, no reason for 90% haircut to dissenting creditors. IRCCL commentary: "Does Commercial Wisdom Justify Huge Haircuts?" - Courts clarified wisdom cannot violate objective of Code.

3. Vallal RCK Vs M/s Siva Industries & Holdings Ltd. (2022) - Supreme Court - 93.25% haircut for promoter under Sec 12A

NCLT Chennai questioned lenders to explain rationale behind OTS with 93.25% haircut to promoter himself. Supreme Court set aside NCLT's direction but observed CoC must document why settlement with promoter at deep discount in interest of creditors versus liquidation. Failure to document = abuse of Sec 12A.

4. K. Sashidhar Vs Indian Overseas Bank (2019) - Paragraph on Non-recording of reasons

Supreme Court held:

"Non-recording of any reason for taking such commercial decision will be of no consequence if commercial wisdom is otherwise discernible from record. But if record is bereft of any deliberation, Court can intervene."

Meaning - you can have huge haircut, but file must show deliberation: liquidation value Rs. X, fair value Rs. Y, forensic audit done, feasibility considered, viability checked.

5. Kalpraj Dharamshi Vs Kotak Investment Advisors Ltd. (2021) 10 SCC 401

Supreme Court upheld primacy of CoC but emphasized legislature purposely did not provide NCLT/NCLAT jurisdiction to examine business decision ONLY when decision is documented as per Sec 30 and 61. If no documentation under Sec 30(2), judicial review opens.

6. Synergies-Dooray Automotive - First 94% haircut case approved by NCLT Hyderabad (2017)

Promoter allowed to buy own firm at 94% haircut. Later led to introduction of Sec 29A. Cited as example of what happens when rationale not documented - promoters misuse.

4. What Must Be Documented - Checklist for RP/CoC

To avoid Sec 65 / rejection, CoC minutes must contain:

1. Valuation Comparison: Fair Value and Liquidation Value from 2 valuers, and why haircut accepted despite higher LV/FV
2. Feasibility & Viability Study: Cash flow projections of Resolution Applicant
3. PUFE Transactions: Regulation 35A report - if Preferential, Undervalued, Fraudulent, Extortionate transactions not investigated, reason why
4. Distribution Rationale: Why Sec 30(2)(b) compliance, why operational creditors get less - with liquidation waterfall
5. Dissenting Financial Creditor Treatment: Why Sec 30(2)(b) second proviso compliance
6. Commercial Negotiation: Number of rounds, improved offers, Swiss challenge if any
7. Voting Rationale: Not just 66% - why each FC voted yes/no

IBBI has proposed amendment - RP must file CoC Commercial Wisdom Memo along with Form H.

If you are RP or CoC member - failure to document rationale exposes you to:

• Plan set aside by NCLAT
• Cost imposed by Supreme Court (as in Assam Tea Employees Provident Fund case - Rs. 5 lakh fee without reasons)
• IBBI disciplinary action for RP under Sec 220
• Personal liability under Sec 66 - fraudulent transaction if haircut favours related party