NCLT vis-a-vis Doctrine of Frustration
This post is authored by - Akshat Jaithlia and Rohan Gajendra Pratap Singh, Junior Editors at RGNUL Financial and Mercantile Law Review (RFMLR).
The Insolvency and Bankruptcy Code (IBC), 2016 was enacted with a view to streamlining the insolvency resolution process and making it economically viable for individuals as well as companies. However, resolution applicants and creditors have had to endure long delays even under the new framework, as the data from the Insolvency and Bankruptcy Board’s latest quarterly newsletter underscores. Out of the 2108 Corporate Insolvency Resolution Processes (hereinafter “CIRP”) filed and pending under the IBC as of 30th June 2020, 1094 have been going on for more than 270 days, while another 594 have been pending for more than 180 but fewer than 270 days.
One of the 1094 was the case of Wind World (India) Ltd., an insolvent wind power company first admitted to CIRP in February 2018, pursuant to which the Resolution Professional released an invitation for Expression of Interest (EOI) in May. The process document issued by the Process Advisors, KPMG India Pvt. Ltd., in June 2018 was amended a few times, the last revision being on 6th August. Suraksha Asset Reconstruction Company (ARC), along with other applicants, first submitted a Resolution Plan (hereinafter “RP”) on 20th August. The initial plan was revised after discussions with the Committee of Creditors for the Corporate Debtor (hereinafter “CoC”) and the final RP was subsequently submitted on 13thNovember of the same year. The RP was then promptly approved by the CoC with a majority of 69.87%, following which an application for approval of the RP was filed by the Resolution Professional before the Ahmedabad Bench of the National Company Law Tribunal (hereinafter “NCLT”). An amount of 75 crores was also rendered as Performance Bank Guarantee by the applicants.
It took less than two weeks from the time of submission of the final RP by the applicants to the filing before NCLT. However, after almost two years since, the CIRP was still pending, despite the fact that the IBC allows for a maximum time of 330 days for the completion of a CIRP. Faced with such excessive delay, the applicants filed another application before the NCLT, this time for withdrawal of the RP. The applicants argued that they are entitled to withdraw the RP in light of Section 12 of IBC which mandates that CIRP be completed within 330 days from the date of admission of the application, a duration which can only be extended in extraordinary circumstances. The period of 330 days had expired in January 2019 in this matter. The CoC and the Resolution Professional countered by contending that neither the IBC nor the process document provided for the withdrawal of an RP once approved by the CoC.
On 8th September 2020, the Ahmedabad Bench of NCLT allowed Suraksha ARC to withdraw the original application for approval of the RP without any charges and discharged the Resolution Applicants on the ground of frustration under Section 56 of the Indian Contract Act, 1872, holding that “In terms of provisions of Section 56, the word “impossible” does not mean only physical impossibility but it also connotes impracticability...In the background of the facts of the present case, in our opinion, due to inordinate delay in approval of such Resolution Plan, object of the Resolution Plan has frustrated.” It also observed that the process document made the RP valid in perpetuity by stating that it is not subject to any expiry once it is approved by the CoC. The concerned clause of the process document was held to be in dissonance with the provisions of Regulation 38(2) of CIRP Regulations, which stipulates that an RP must provide the term of the plan and its implementation schedule. The word “term” was interpreted to mean “period” in the given context, an interpretation which, coupled with the requirement for an implementation schedule, made it conclusive in the eyes of the tribunal that there should be a specified period of validity of an RP. It was noted that as per the provisions of the process document, the Resolution Applicant would be bound to the RP even if it is not approved after ten years. NCLT was of the view that that could not be the intention of the legislature in light of the objects and scheme of IBC, 2016.
The tribunal ordered the Resolution Professional to return Rs. 75 crores submitted as performance security by the Resolution Applicant. NCLT further directed the Resolution Professional to amend the terms of the process document, allowing them to seek and finalize from other RPs within 15 days. An additional period of 75 days was set to complete the CIRP. The Resolution Professional is supposed to file an application for the liquidation of the Corporate Debtor under Section 33 of the IBC if no RP is submitted, or in case the CoC fails to approve it within the prescribed period of 90 days.
While deciding the dispute, the NCLT has made a reference to the Doctrine of Frustration, which is an established principle under Section 56 of the Indian Contract Act, 1872, for allowing the applicant to withdraw its resolution plan. The doctrine of frustration comes within the umbrella of Law of Discharge of Contract which allows parties to not abide by the contractual obligations that have been entered into, due to subsequent impossibility or illegality. This principle has been reiterated several times by the Indian Courts, that if there is a fundamental change in the circumstances defeating the whole purpose of the contract, then it brings the contract to an end. The NCLT has also stated that the delay must not be “self-induced” which means that it must be outside the control of the party. In the present case, NCLT observed that there is a provision listed in the process document which elucidates that Resolution Applicant cannot unilaterally withdraw the RP from his side, but no circumstances have been prescribed in the process document whereby the RP can be withdrawn, even mutually. It further noted that in clause 1.7.4 of the process document it was stated that there is no expiry period of RP. Keeping in mind the contradictory nature of both the provisions, NCLT decided to apply Section 56 of the Indian Contract Act.
The NCLT has also analysed the Regulation 39(3) of CIRP Regulations which has evolved with amendments carried out within time to time. It was noted by the tribunal that before 25th July 2018, it was a mandatory requirement to quote reasons for acceptance or rejection of the Resolution Plan. In the main sub-regulation, the NCLT found that word “may” has been used which means that RP can either be accepted or rejected and there was no compulsory requirement to accepted the plan. Further, it was amended in the year 2019 and recording of reasons was substituted with “requirement to record its deliberations on the feasibility and viability of RP” to give it a wider scope.
The NCLT has also made a reference to the Essar Steel Case, under which the word “mandatorily” used in Section 12 of the IBC, was declared to be as unconstitutional by the Apex Court. The NCLT stated that despite the word being struck down, the provision still imposes an obligation to complete CIRP within 330 days of its initiation, excepting few exceptional circumstances.
Although this decision was taken after taking into consideration all factors affecting the parties to the dispute, it would have been more sagacious if the NCLT had ordered renegotiation of the resolution plan instead of a withdrawal. It remains to be seen whether the decision can be used by other applicants to escape the financial commitments by quoting “pandemic reasons and liquidity crunch in the market”. Therefore, it is imperative that the court take into consideration the interest of the Corporate Debtors and decide every case on its own merits. As aforementioned, there has been an excessive delay in CIRP which must be reduced to ensure effective as well as efficient justice system. Justice R M Lodha has also raised a similar concern and said that “it is high time that courts become sensitive to delays”. Strict adherence to the ceiling of 270 days is the need of the hour to preserve the essence of the Insolvency and Bankruptcy Code, 2016.