Life of a Resolution Plan – Formulation to Implementation
Owais Khan
LL.B- Government Law College, Mumbai
Resolution Plan (RP) constitutes a very imperative document for a Corporate Debtor (CD) under the Insolvency and Bankruptcy Code (Code). In simple terms, RP has the effect of bringing the CD out of the jaws of Death (liquidation within the context of the Code) and ensure that it continues its activity after a temporary period of hiatus (within the context of moratorium) under the Corporate Insolvency Resolution Process (CIRP).
Sec. 5(26) of Code defines Resolution Plan as “a plan proposed by the Resolution Applicant for the Insolvency Resolution of the Corporate Debtor as a going concern.” Thus, the RP gives a new life to the CD, ensuring smooth and efficient functioning of the CD post CIRP. In fact, the success of a CIRP is concomitant with the successful and effective RP.
Admission of the Corporate Debtor for Corporate Insolvency Resolution Process:
The RP emerges in the CIRP at a much later period. However, the genesis of the RP takes place as soon as the application of CIRP of the CD is admitted by the Adjudicating Authority (AA). As per Sec. 13 of the Code, a public announcement for the Submission of Claims of Debt shall be made by the Interim Resolution Professional post admission.
On the basis of the Claims submitted, the Interim Resolution Professional collates and prepares a list of Claims. This list of Claims lays the foundation of the Committee of Creditors (CoC), which is to play a major role vis-à-vis the RP in the later part of CIRP. The CoC is constituted by the Interim Resolution Professional and shall comprise only of Financial Creditors. Sec. 5(7) defines Financial Creditors as any person to whom Financial Debt is owed and includes a person to whom such debt is legally assigned or transferred to. Sec. 5(8) defines Financial Debt as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Acc. to Sec. 25, if the CD has no Financial Creditors, then the functions of the CoC shall be performed by 30 persons as may be determined by the Insolvency and Bankruptcy Board of India (IBBI).
The CoC shall then hold its first meeting within a period of seven days of its constitution. In its first meeting, it is the volition of the CoC to appoint the existing Interim Resolution Professional as the Resolution Professional or appoint a new Resolution Professional by replacing the Interim Resolution Professional. The code envisages the Resolution Professional and the CoC to work in conformity with each other for the ultimate success of CIRP.
The Resolution Professional – the Player behind the Curtains:
There can be no successful RP without the efforts undertaken by the Resolution Professional behind the curtains. The Resolution Professional lays down the fertile ground for the successful burgeoning of the RP. Apart from the various duties conferred upon the Resolution Professional under Sec. 25 and the other provisions, there are four obligations in relation to the Resolution Plan.
Firstly, the Resolution Professional is required to prepare an Information Memorandum (IM) and invite the prospective Resolution Applicant (RA) to submit the RP. The IM shall consist of all the relevant information of the CD in physical and electronic form which shall enable the RA to formulate the RP for the CD. Sec. 5(25) defines Resolution Applicant as a person who individually or jointly with other persons, submits a resolution plan to the resolution professional pursuant to invitation made. The RA shall undertake to comply with the provisions relating to confidentiality and insider trading, to protect the Intellectual property of the CD and not to share the relevant information of the CD with any other third party.
Sec. 29 defines Relevant Information as the Information required by the Resolution Applicant to make the Resolution Plan for the Corporate Debtor which shall include the financial position of the Corporate Debtor, all information related to disputes by or against the Corporate Debtor and any other matter pertaining to Corporate Debtor as may be specified. It has been held in Deccan Value Investors v. Dinkar Venkatasubramaniam (2024) ibclaw.in 98 SC that the RA cannot subsequently withdraw the RP after approval by CoC on the ground that there are ambiguities or lack of specific data or details. Any defect in the data shall act as a caveat to the RA, who shall then decide to submit or not to submit the RP for the CD.
Secondly, to Examine the RP submitted by the RA. As per Sec. 30, the Resolution Professional, has to examine that each RP received by him:
- Provides for payment of the Insolvency Resolution Process costs in a manner specified by the IBBI.
- Provides for the payment of Debts of Operational Creditors in such manner as specified by the IBBI.
- Provides for the management of the affairs of the CD after approval of the RP.
- Provides for the implementation and supervision of the RP.
- Does not contravene any of the provisions of the law for the time being in force.
- Conforms to such other requirements as may be specified by the IBBI.
As per Sec. 29A of the Code, there are certain categories of persons who shall not be eligible to submit the RP. However, it has been adjudicated in Rajputana Properties Pvt. Ltd. vs. Ultratech Cement Ltd. (2018) ibclaw.in 24 SC that the Resolution Professional is not empowered to decide on the ineligibility of persons under Sec. 29A and the CoC shall decide on the eligibility. Similarly, it has been held in ArcelorMittal India vs. Sathish Kumar Gupta (2018) ibclaw.in 31 SC that the Resolution Professional is not empowered to decide on the validity of the RP, but must provide his prima facie opinion regarding the RP to the CoC.
Any approval of the shareholders required under the provisions of the Companies Act, 2013 for the implementation of the RP, shall deemed to have been given and same shall not be a contravention of any law or act.
Thirdly, the Resolution Professional, after receiving the RP from the RA, and ensuring its compliance with Sec.30 shall submit the RP for the consideration of the CoC. Finally, the RP approved by the CoC, is then submitted to the AA for the Final approval by the Resolution professional.
Committee of Creditors – The Penultimate Approvers:
On receipt of the RP from the Resolution Professional, the CoC then considers the RP on detailed and elaborate grounds. As laid down in the Tata Steel ltd vs. Liberty House Group Pvt. Ltd. (2019) ibclaw.in 246 NCLAT. The RA has no vested or fundamental right to have his RP considered or approved by the CoC. Under Sec. 30 for an RP to be approved by the CoC, it must be voted by 66% of the voting share of Financial Creditors after considering its feasibility and viability, the manner of distribution proposed which may take into account the priority of creditors as laid down in Sec. 53, including the priority and value of the Security interest of a secured creditor and other such requirements as specified by the board.
The RA may attend the meeting of CoC in which the RP submitted by her shall be considered. However, the RA does not have any right to vote, unless the RA is also a Financial Creditor. Further it has been held in Vijay Kumar Jain vs. Standard Chartered Bank (2019) ibclaw.in 24 SC that the Suspended Directors or Promoters shall also have the right to receive the copies of the RP. If at all, the RA is ineligible to submit a RP owing to his account or the account of the CD which he handles being classified as a Non- Performing Asset, the RA shall be allowed to pay the outstanding overdue within a period of 30 days.
Once a RP is approved by the CoC, it has been held in CoC of Essar Steel India Ltd. vs. Sathish Kumar Gupta (2019) ibclaw.in 07 SC, that the Successful RA cannot be subsequently faced with an undecided claim. Similarly, it has been held in RPS Infrastructure vs. Mukul Kumar (2023) ibclaw.in 102 SC, that Admission of Claims after the approval of RP by CoC is inadmissible.
The RP post approval by the CoC, cannot be subsequently withdrawn by the RA as held in Ebix Singapore Pvt. Ltd. vs. CoC of Educomp Solutions Ltd (2021) ibclaw.in 153 SC. On the same grounds, even the CoC, cannot reject the RP after initially approving the same.
The Adjudicating Authority – The Ultimate Approvers:
After the RP being approved by the CoC, the approved RP is submitted by the Resolution Professional before the AA. The AA on being satisfied that RP has provisions for its effective implementation, approve the RP. The RP on being approved by the AA, shall be binding on the CoC, The CD and its employees and also the Central Govt., State Govt. or the local Authority. It has been stated in Madhya Gujarat Vij Co. Ltd. vs. Kalpataru Alloys Pvt. Ltd. (2019) ibclaw.in 210 SC that the approved RP shall also be binding on the surety of the CD and other stakeholders. It has been held in CoC of Essar Steel India Ltd Case, that the Code recognizes faith in the commercial wisdom of CoC, and thus the scope of judicial review to interfere with such wisdom is limited.
As soon as the RP is approved by the AA, the moratorium imposed u/s.14 of the Code upon the CD shall cease to have effect. Also, the Resolution Professional, shall then submit all the records relating to the conduct of the CIRP and the RP to the IBBI. Similarly, the Resolution Professional is required to obtain the necessary approval relating to RP under any law for the time being in force within a period of One year from the date of approval of the RP by the AA.
If the RP contains a provision of Combination, u/s.5 of the Competition Act, 2002 then the Resolution Professional shall obtain the approval of the Competition Commission of India (CCI) prior to the approval of the RP by the CoC. However, it has been clarified in Arcelormittal India Pvt. Ltd. vs. Abhijit Guhathakurta (2019) ibclaw.in 450 NCLAT that the approval of CCI can be obtained even after the approval of RP by the CoC, but before being approved by the AA.
Any party aggrieved with the approval of the RP by the AA, shall make an appeal on grounds laid down in S.61 of the Code. It has been held in Quantum Ltd. vs. Indus Finance Corp. ltd. Company Appeal (AT) (Insolvency) No. 35 of 2018 that the AA shall make every effort to promote and uphold the RP, if the same confines to the provisions of the Code, rather than directly approving Liquidation.
Pardoning of Prior Offences by virtue of the Approved Resolution Plan:
When a RP approved by the AA, results in the change in the management or control of the CD, then the CD and its property shall cease to be liable for any offence offense committed by it prior to the commencement of CIRP as per Sec. 32A of the Code. However, the “Designated Parties” (in case of a Limited Liability Partnership) and the “Officers in Default” (in case of Company) shall continue to be liable for the offense. Thus, it can be construed that the principle of Corporate Veil does not apply post approval of RP by AA.
In Manish Kumar vs. Union of India (2021) ibclaw.in 16 SC, Sec. 32A was held to be constitutionally valid as it strives to provide a clean slate to the new management, who has no role for the prior offences committed. Similarly, in Shiv Charan vs. Enforcement Directorate (2024) ibclaw.in 154 HC, it was held that the property of the CD attached by the Enforcement Directorate, shall be released when a RP for the CD has been approved by the AA, as the property ceases to have any liability for the offence committed.
Similarly, any prosecution instituted during the CIRP against the CD shall stand discharged with the approval of RP by the AA.
Thus, a successful RP, serves two-fold purposes. One, providing a new life to the CD and Two, Absolving the previous liability of the CD, to ensure that the RA proposes a RP without any fear and at the same time, ensure that the new management functions without any complexity. The RP is surely of great importance for the CD, when it enters a CIRP proceedings, as a failure to get a Successful RP, unfortunately leads to the liquidation of the CD.
