The Editorial Column is authored by Shereen Moza and Shashwat Sharma, Associate Editor and Junior Editor respectively at RGNUL Financial and Mercantile Law Review.
A resolution plan is a proposal aimed at providing possible resolutions to the problems of a corporate debtor’s (“CD”) insolvency and their subsequent incapacity to repay their debts. The Insolvency and Bankruptcy Code, 2016 (“IBC”) explains a resolution plan submitted by the interested resolution applicant to the committee of creditors (“CoC”) for the Corporate Insolvency Resolution Process (“CIRP”). One of the questions that revolved around the resolution plans was whether the resolution applicant could be allowed to withdraw the resolution plan once approved by the CoC while approval from the adjudicating authority (“AA”) was pending. The conflicting positions in this matter were put to rest by the Supreme Court in the case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Private Limited (“Ebix Singapore Case”). The Supreme Court settled the position that once the resolution plan is approved by the CoC, then withdrawing or modifying it becomes not permissible in law. This article seeks to analyze the facets revolving around the withdrawal of a resolution plan and lay the perspective from the point of view of a resolution applicant. Lastly, the authors put forward a way to provide a constructive provision of law that allows such modification or withdrawal in specific circumstances.
2. THE CASE CONCERNING THE WITHDRAWAL OF THE RESOLUTION PLAN
In the Ebix Singapore Case, the CD had filed an application for the initiation of voluntary CIRP under Section 10 of the IBC, 2016. In furtherance to the CIRP so filed, the resolution plan submitted by Ebix Singapore was approved by the CoC and was pending approval of the National Company Law Tribunal (“NCLT”). Before approval, Section 31 of the Code stipulates that the AA must be satisfied that the Resolution Plan satisfies the standards specified in Section 30(2). Nonetheless, pending the approval of the Resolution Plan by the AA, several members of the CoC submitted a request to the AA for the initiation of an investigation into the financial issues of the CD. The NCLT denied their applications and directed the Resolution Professional to convene a CoC meeting to consider the matter. In the interim, the Ministry of Corporate Affairs instructed the Serious Fraud Investigation Office (“SFIO”) to investigate the CD’s operations. The breadth of investigations and major changes in the CD’s facts and circumstances prompted the resolution applicant to file an appeal with the NCLT for the modification or withdrawal of the Resolution Plan. The same was granted by the AA, but on appeal by the CoC to the National Company Law Appellate Tribunal (“NCLAT”), the order of the NCLT was reversed. Indignant, the resolution applicant chose to file an appeal with the Supreme Court, contesting the NCLAT’s decision.
3. COC APPROVED RESOLUTION PLAN: FATE DECIDED BY THE SUPREME COURT
The IBC, 2016 does not contain any provision explicitly allowing withdrawal of the resolution plan without considering approval of the same. Thus, the Supreme Court, not acting on its judicial overreach, resisted making any such negotiation as this would lead to another round of litigation totally unregulated by the law. Whereas, the Supreme Court in another case, Kundan Care Product allowed a modification in the resolution plan as requested by both the resolution applicant and CoC invoking article 142 of the Indian Constitution. The Supreme Court in the case of Seroco Lightning Industries Private Limited decided against the resolution applicant in the case for withdrawing the resolution plan whereby material changes had occurred before the execution could take place. The court held that the resolution applicant being the former employee of the company would have been aware of such changes. Thus, allowing such an appeal would adversely impact the insolvency framework and would defy its purposes. The Supreme Court held that it would be a judicial overreach to insert a provision that was not envisaged in the insolvency framework to prevent delays of any kind to promote timely resolution of the corporate debtor. Thus, the stance was clarified and it was noted that any modification would be justified only in the case of mutual consensus between CoC and RP.
4. POWER OF ADJUDICATING AUTHORITY UNDER SECTION 60(5)(C)
The IBC, 2016 empowers the NCLT to entertain matters arising out of the question of law or facts in relation to CIRP against CD as the matter may be. The Indian insolvency framework faces the problem of delayed resolution caused by pending approvals by the CoC of already approved resolution plans. Moreover, the resolution plan becomes binding only after being approved by the AA thus it lacks implementation even when parties are ready to execute the resolution plan. This particular delay attracts specific attention because of material changes taking place after approval by the CoC, in certain cases CD meddles with the assets making it hard for the resolution applicant to successfully execute the plan. Further, the depreciation of assets leads to adverse effects on the resolution applicant that renders the intent of IBC unfruitful. These delays were seen being stretched to longer periods during the times of the COVID-19 pandemic, thus taking a toll on the resolution applicants. The IBC was meant to provide solutions to such problems, but the legislature has overlooked such material changes that can take place during the CIRP of a CD. As a result, NCLT should be empowered under section 60(5)(c) to investigate and adjudicate any facts that may arise. This would not just provide relief to the RAs but also promote a willingness among them to resolve the CD as a going concern.
As the final stance has been delivered by Supreme Court in the appeal of the Ebix Singapore Case, an unwilling resolution applicant has been held to be obligated to execute the plan. Such a resolution plan executed on changed material facts would lead to an unsuccessful resolution by the RA. The NCLAT in the case of Yavar Dhala v. JM Financial Asset Reconstruction Company Ltd. held that if there is a failure by the resolution applicant to successfully implement the provisions of the resolution plan, liquidation would follow. Taking into consideration all the stances, it clarifies that material changes would lead to such defaults in the implementation of the resolution plan, finally pushing the corporate debtor to liquidation and hence defying the purpose of resolving a corporate debtor as a going concern. The legislature needs to address the concern of resolution applicants in such circumstances and provide a legislative framework that can allow modification or revaluation of the resolution plan to prevent CDs from going into liquidation. Although the adjudicating authority has the authority to address question facts under section 60(5)(c), this has not been the case in this case. Thus, both judicial and legislative measures are required to enhance the insolvency framework that results in the timely resolution of CD as a going concern.