RESOLUTION PLAN: AN INESCAPABLE OBLIGATION
This post, the selected entry of the RFMLR-IBBI Blog Series Competition, 2021, is authored by Sakshi Garg, LL.B. student at Campus Law Centre, University of Delhi.
A resolution plan can be considered as the boat provided by someone else which helps the distressed companies float through the hurricane of insolvency. However, this boat sometimes turns out to be a rope that ties the helper’s hands binding him into obligations he didn’t initially intend to undertake. This article would try to throw some light upon the inability of the applicant to withdraw the resolution plan, by discussing the recent judicial decisions, along with impact of such inability while also discussing some solutions.
2. The Issue: The inability to withdraw the Resolution Plan
After a Resolution Plan (“RP”) is approved by the Committee of Creditors (“CoC”), the same has to be approved by the National Company Law Tribunal (“NCLT”) as per Section 31 of the Insolvency and Bankruptcy Code, 2016 (“the Code”). After this approval, the RP becomes binding on all the parties. However, pending the approval of NCLT, the business environment may change, forcing the Resolution Applicant (“RA”) to re-think the RP and he may even consider opting out of it. In the recent time of the pandemic, due to low functioning of courts and tribunals, such pendency has increased by leaps and bounds, forcing the RAs to file for withdrawal applications for the plans which they can no longer execute in the changed circumstances under Section 60(5) of the Code which provides the tribunals with certain additional powers. This issue, before knocking on the doors of the Supreme Court, went before the NCLT and NCLAT on a number of occasions where the tribunals failed to put forward a stable judicial position. In some cases like Panama Petrochem Ltd. vs Aryavart Chemicals Private Ltd, while considering the concerns of RAs, the tribunal allowed the withdrawal of the plan, while in cases like Kundan Care Products Limited vs Amit Gupta, the NCLAT refused to grant such withdrawal stating the absence of explicit provisions and focusing on commercial wisdom of the creditors who approved the plan in the first place.
3. The Supreme Court’s Verdict and its Analysis
The Supreme Court, recently in the rather contentious matter of Ebix Singapore Private Limited vs Committee of Creditors of Educomp Solutions Limited & Anr (“Ebix case”), finally held that once an RP has been approved by the CoC, it shall neither be withdrawn nor be modified pending the approval of Adjudicating Authority (“AA”) on application by the RA. This judgment though had cleared the air around the matter which had not seen a constant legal position for quite some time now, raises further questions on the increased burden on the RA.
By following the principle of casus omissus and considering the UNCITRAL guide, the Court rightly observed that the Code didn’t explicitly contain any provision regarding the withdrawal of the RP on the application of RA pending AA’s approval and in absence of clear statues, the Court could not allow such an activity but the Court failed to consider the obligations it would create on the RAs who despite no fault of theirs would be forced to execute an action they no longer consider to be pragmatic or favourable.
The Court firmly upheld the sanctity of the Code and the time limitations given for the completion of the Corporate Insolvency Resolution Process (“CIRP”) while identifying the purpose of the Code which is avoiding the insolvency and providing maximum value to the creditors but disregarded the concerns of the party who is undertaking the entire process for the same goals. The Court observed that permission of such withdrawal may cause unpredictability in the process and hamper adherence to the timelines, which the author argues is quite far-fetched. Even if we consider that the RA should be forced to fulfil its obligation, the process is still not completed in time. So, transferring the entire burden of timely completion on the RA, that too at his expense, would be unfair.
The Court also examined the nature of the resolution plans which was one of the contentions raised by both the parties in the Ebix case. What came to be questioned was if an RP is of a contractual nature. To answer this conundrum, the Court referred to the similar issues raised across different jurisdictions like the US, UK, Singapore, and Australia. While interpreting the Code widely, analysing the BLRC Report and considering the precedent established in SK Gupta Vs KP Jain, the Court discerned the RP to be a result of a statutory process as mentioned in the Code and thus differentiated it from any sort of contract, thereby excluding it from the ambit of the Indian Contract Act, 1872 (“the Act”) and subsequently from the force majeure clause of Section 56 of the Act which could have aided an RA in seeking relief. This blocks other reliefs which could be demanded by the RA under the Act such as damages while still recognizing RP to have a binding effect on the concerned parties especially RA post-CoC-approval but pending AA’s Approval.
While prioritizing the Code and the interest of CoC (following the superintendence of CoC established in Committee of Creditors of Essar Steel Ltd. vs. Satish Kumar Gupta), the Court also rejected the concerns of the RA who depending upon the Form H (Compliance Certificate) of IBBI (Insolvency Resolution Process for Corporate Persons), 2016 (“the CIRP Regulations”), requested the insertion of contingencies in the RP to allow them to withdraw the plan under specified situations.
Even on the issue of withdrawal due to delay in AA’s approval, the Court observed that the acts of the courts should not jeopardize the CIRP process and the interests of CoC while failing to take into consideration the jeopardy caused to the RA by such decision. The Court also rejected the ground of misinformation and ongoing investigations raised by the applicant in this case citing the defence of Section 32A of the Code which protects RA from previous acts of the Corporate Debtor and claimed duty of due diligence on part of the applicant while ignoring the potential misgivings on the side of the respondent, the inability of the Resolution professional to communicate the developments and established precedents such as Committee of Creditors of Metalyst Forging Ltd. vs Deccan Value Investors LP, wherein the withdrawal of resolution plan was allowed on account of improper information.
4. Expected Ramifications
The decision of the Apex Court places resolution plans at a platform from where there is no going back, thus, putting a lot of burden on the RA who can’t renege on RP even when the circumstances change drastically against it while the tribunal is not able to approve the plan in time. This unfavourable and irreversible status of the RP would certainly discourage the applicants who wished to undertake CIRP while decreasing the commercial feasibility of the process for RA which could further cause impediments in the process. As a result, the number of applicants interested in undertaking the process would decrease substantially, reducing the prospective revival partners of the Corporate Debtors to an even lower number.
Further, the judgment forces the RA to execute a plan which may not be feasible in the changed circumstances which might be created while the approval application is pending with the AA for an extraordinary amount of time. Failing the execution of such an obligation would also be against the RA as he may be held for contempt of court and may even infringe Regulation 36B of the CIRP Regulations which makes it compulsory for the RA to abide by the RP after CoC-approval. Additionally, if the withdrawal of the plan which can no longer be executed successfully is denied, it would firstly disable CoC from considering the other viable options available, and secondly, in case the approved plan fails to transpire, it would lead to insolvency following Section 33 of the Code, defeating the entire purpose of the CIRP.
The Court’s view of strict adherence to the timelines establishes a strong precedent for future litigations but these timelines are often stretched as per the comfort and the interest of the creditors, while completely ignoring the concerns of the RA who wishes to divert the corporate debtor from the path of insolvency and provides a scale which may not be entirely equitable to all, creating an imbalance between CoC and the RA. Even if, as per the Court’s observation, RP is not considered a contract, the basic principles of commerce must apply wherein in any transaction, no person should be allowed to gain unilaterally at the expense of the other innocent party. In the Ebix case, the Court considered it to be the responsibility of RA to find the relevant information, however, the same rule then must be applicable to the creditors as well. Even in absence of clear instructions on the role and rights of both the parties, CoC still stand at a higher ground with prior knowledge of the company and assurance of cash compensation, exclusive right to withdrawal would only add to the powers of CoC, leaving the RA at the whims of CoC.
5. Possible Solutions
It is hoped that the legislature, while balancing the rights of CoC and the given time framework, would try to bring some attractiveness in the process for the RA which could be in form of certain specified conditions wherein such withdrawal may be permitted, like non-availability of complete information, misrepresentation by Corporate Debtor, unreasonably delayed approval, and drastic change in circumstances. Following the lead of the newly inserted Section 12A of the Code, withdrawal of RP on application by RA pending the approval must be granted even if it requires the support of majority creditors. Stipulation of clear time limits for approval of RP by AA and issuance of guidelines for adherence to the same could also be considered to uphold the time framework for completion. Even the Apex Court in the Ebix case supported this view by urging the tribunals to approve the plans within a limited time frame so that the 330-day deadline could be adhered to, while recognizing that unreasonable delay may cause commercial distress to all parties.
The Apex Court has fairly interpreted the provisions while considering the established principles and has rightly emphasized the intent, objective, and sanctity of the Code which doesn’t permit such withdrawal while shifting the burden on the legislature to alleviate the concerns of the RA. Even though the Code doesn’t provide for withdrawal, it can’t be accepted without exceptions or some kind of relief for RA as the impact thereof could be immense. Therefore, it would be in the interest of all the parties involved, to provide some rights to the RA regarding the withdrawal of RP which could also help in balancing the scale and attracting more participants. The decision of the same now lays on the legislature’s shoulders, leaving us with the current judicial position as given by the Supreme Court treating the RP as inviolable.