Navigating Procedural Complexities Concerning Resolution Plans in Insolvency Law: Recent Precedents and Implications
Shivansh Kaushik
4th Year, B.A. L.L.B. (Hons.), NLU Odisha
Chetana Goud
4th Year, B.A. L.L.B. (Hons.), NLU Shimla
Abstract
The Insolvency and Bankruptcy Code, 2016 introduced a progressive shift from debtor-in-possession model to a creditor-in-control approach. A vital component of the Indian Insolvency process is the Resolution Plan. This essay delves into the complexities surrounding the various procedural aspects of Resolution Plans under the Corporate Insolvency Resolution Process by examining recent judicial precedents and their implications.
Firstly, the essay explores the grey area of validity of modifications or power of withdrawal of Resolution Plans within the interim period between COC approval and AA approval of a Resolution Plan. It also discusses the ambiguity surrounding modifications of COC approved plans and the need for inclusion of a statutory provision for such modification. Secondly, it examines the recent precedents safeguarding the rights of Successful Resolution Applicants (SRA) against interventions by suspended managements and the misuse of Section 12A by defaulting promoters. Lastly, it addresses the issue of substitution of SRAs post COC approval of its Resolution Plan.
Thus, through an analysis of statutory provisions and judicial precedents, the essay underscores the evolving landscape of insolvency resolution with a spotlight on Resolution Plans and aims to document the changes in an objective manner alongside providing suggestions to solve the existing ambiguity.
The Newborn Statute: IBC 2016
The Insolvency and Bankruptcy Code, 2016 (IBC), a landmark legislation in India’s economic landscape ushered a transformative era in India’s Insolvency Law marking a paradigm shift in India’s approach to corporate insolvency and its resolution. Post enactment of the IBC, a myriad procedural issues and lacunae have been and are being consistently rectified with appropriate judicial intervention and regular amendments to the statute.
A vital component of the Indian insolvency process is the Resolution Plan. It is a comprehensive plan proposed by a Resolution Applicant for the resolution of insolvency of a Corporate Debtor[1] usually outlining strategies for debt restructuring, asset sale, and other measures to revive the Corporate Debtor’s financial health or for asset maximisation of the insolvent entity.
Due to its nascent nature, the application of IBC has revealed a myriad of procedural complexities hindering the main objective of the Code i.e., time-bound insolvency resolution. In light of this, this essay attempts an explorative analysis of recent judicial pronouncements on various procedural issues surrounding Resolution Plans such as the withdrawal or modification of Committee of Creditors (COC) approved Plans, safeguarding of SRAs rights amidst competing proposals and the issue of substitution of SRAs post approval of a Plan. These developments have been examined with a view to illustrate the role of judicial precedents in addressing procedural complexities and to document the continuous developments with the insolvency regime.
Restriction on the withdrawal or modification of a COC approved Resolution Plan: A double-edged sword?
The Insolvency and Bankruptcy Code, 2016 (IBC) represents a significant departure from the traditional debtor-centric approach by granting creditors with greater control. The recent ruling of the Apex Court in Deccan Value Investors L.P. & Anr. Versus Dinkar Venkatasubramanian & Anr. [2] relying upon its ratio in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Anr. [3], further strengthens the ‘creditor-in-control’ model that IBC has adopted.
The COC plays a vital role in resolving the debtor’s insolvency, most importantly via the approval or rejection of Resolution Plans presented to it by interested Applicants.
Upon the approval of a Resolution Plan by the COC under section 30 (3) and (4), the Plan is to be submitted for the approval of the Adjudicating Authority (AA) under s. 31, which becomes binding upon approval.
However, a contentious issue arises during the period between the COC’s approval and the approval by the AA i.e., whether a Resolution Plan endorsed by the COC can be withdrawn by the Successful Resolution Applicant (SRA) before its approval by the AA. The Apex Court delivered a ruling in the negative on this issue in the Ebix Singapore Pvt Ltd. case in 2021.
The background preceding the judgment consists of an Appeal filed against the order of NCLAT by the SRA, Ebix Singapore Pvt. Ltd., which dismissed its Third Withdrawal Appeal. Ebix, hitherto, had filed multiple Withdrawal Applications requesting withdrawal of its Resolution Plan due to delays in the approval process, failure to meet statutory timelines and concerns over Educomp’s alleged mismanagement of its internal affairs.
Resolution Plan not an ordinary contract
The SC analysing the nature of the Resolution Plan held that it is not an ordinary contract but a creation of law, i.e., the IBC. The Appellant, Ebix Singapore had contended that the Resolution Plan was an offer qualified by time whose acceptance is not open for an indefinite period. It also argued that such an offer would become a binding contract only upon the approval of the Plan by the AA, as according to them the Resolution Plans approved by the COC being contingent contracts would become enforceable only upon the said approval.
The Court rejected these contentions and clarified that the enforceability of a Resolution Plan is not contingent upon the agreement of the parties involved, but rather on its compliance with the procedures specified by the IBC. The entire process of the supposed contract formation takes place within the framework outlined by the IBC as all the involved parties act according to the rules, regulations and duties set by the IBC and the IBBI. Furthermore, unlike a contract, whose breach is remedied by a claim for damages, the IBC prescribes penalties or prosecution in case of non-compliance of a Resolution Plan. Moreover, unlike a contract, a Resolution Plan also binds dissenting creditors equally to the ones assenting to it.
Therefore, since the validity of the Plan stems from the IBC, common law remedies based on the general principles of contractual law were held to be inapplicable since they do not align with the framework or intent of the IBC.
Lack of statutory provisions for withdrawal or modification within the IBC
The SC also pointed out that despite the IBC outlining a meticulous insolvency process the only provision available with regard to withdrawal is section 12A which allows for withdrawal of the application for initiating CIRP by the corporate debtor or the COC. It was noted by the Court, that no such provision exists for Resolution Applicants.
It held that unless explicitly provided for by the statutory law, the Court must exercise judicial restraint and not interpret the Code in such a way that would interfere with the framework of the IBC. If it indeed was the intention of the Code to provide a withdrawal mechanism for COC approved Resolution Plans, an explicit provision should have been included. Similar provisions available in the UNCITRAL Guide have found no space in the Code solidifying the intent to restrict modifications or withdrawals of COC approved Plans. In light of this, the Court is not empowered to confer the right of withdrawal upon a Successful Resolution Applicant.
Ambiguity surrounding modifications of COC-Approved Plans
Resolution Plans are formulated on the basis of certain assumptions rooted in economic, financial and commodity factors. These assumptions evolve over time particularly due to change in commodity prices and therefore, there exists a potential that the actual plan may be different from its initial blueprint.
The conception of Resolution Plan being based on such fluctuating factors makes it dynamic in nature necessitating changes over time to remain aligned with changing economic, financial and other related conditions. Such fluctuations may also occur within the interim period between approval of Resolution Plan by the COC and by the AA.
However, the Supreme Court’s decision in M.K. Rajagopalan v. Dr. Periyasamy Palani Gounder & Anr[4] in this regard is quite strict and restrictive. It held that any modification or change, regardless of being minor, cannot be made in the Resolution Plan submitted before the AA, if such minor changes are not approved by the COC. The placing of a Resolution Plan before the AA, which is different from the one approved by the COC even if inconsequential would amount to material irregularity.
In the case of SBI v. Meenakshi Energy Ltd. [5], the NCLT Hyderabad bench approved a ‘Consolidated Resolution Plan’ despite objections by one of the creditors that the plan approved by the COC and the one submitted before the Tribunal are different. An analysis of the arguments reveal that the Resolution Applicant raised their bid, inducing an inter-se challenge process by the COC allowing other applicants to raise their bids as well. However, as no other bids were received, the changed bid of the Resolution Applicant gained COC approval. Throughout this process, the changes in the Resolution Plan resulted in differing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) figures in the COC approved plan and the one presented before the AA.
The Tribunal held due to the fact the Consolidated Plan submitted was one consisting of all the addendums made to it, and that such changes were brought to the awareness of the COC, the Consolidated Resolution Plan is valid and is approved.
The Tribunal’s decision does not clarify whether the modified figures resulted as a consequence of a changing Plan have deemed to be accepted as a valid modification even post COC approval of the Plan.
These ambiguities with regard to the scope for modification of Resolution Plans make it difficult to prepare efficient Resolution Plans that are in alignment with evolving economic circumstances. Furthermore, a concern also arises in situations where there exists a delay in approval of the COC approved Resolution Plan by the AA as was the case with Ebix Singapore Pvt Ltd. The fluctuations of various factors may significantly affect the feasibility and viability of a Resolution plan, and the lack of a mechanism to modify it according to changing conditions makes it rigid, giving rise to a risk of inefficacy.
Need for inclusion of statutory provision to allow modifications within the interim period
The IBC was designed on the basis of the Recommendations and principles set out in the UNCITRAL Legislative Guide on Insolvency. This Guide clearly sets out that an insolvency law should permit amendment of a plan at all stages and should establish a mechanism for approval of amendments to a plan that has been approved by creditors. [6]
Therefore, a provision designed on the basis of these recommendations must be provided for even if only for certain extreme exigencies or limited reasons. No provision for modification shall only decrease the desirability of making bids as the Resolution Applicant as the applicant would have no safeguards against any event that may lead to a diminished value of the corporate debtor.
Protecting the SRA’s Rights: A Check on the Powers of the NCLT?
Another recent development in regards to the procedural ramifications of the CIRP process has been set in stone by way of a precedent of the NCLAT Principal Bench. The precedent, namely One City Infrastructure Pvt. Ltd. v. Pratham Expofab Private Limited & Ors.[7] lays down a particular guideline which curtails the discretionary power of the NCLT to order the Committee of Creditors to consider a settlement proposal by the suspended management of the corporate debtor, without first hearing out the Successful Resolution Applicant. The precedent works on the lines of the principle of audi alteram partem and makes sure that the Successful Resolution Applicant is not devoid of a chance to make a case as to why the suspended management should not be an offeree in such a scenario.
SRA vis-à-vis The Management
The facts which led to the precedent included a pending approval application in front of the NCLT through which approval for the resolution plan submitted by the SRA was sought. While the application was yet to be ruled on, the suspended management filed for the consideration of a Settlement Proposal by them alongside the resolution plan. The same was approved by the NCLT without giving any chances to the SRA to contest the same.
After the initial rejection of the application for withdrawal of the CIRP by the ex-director of the Corporate Debtor, a second application was filed by him under Section 12A of the IBC proposing a settlement, and the same was asked to be considered by the CoC. The key factor here is, the Resolution plan by the SRA had already been approved by the CoC by 80.84% voting share. The NCLT instructed the two offers to be compared and for a decision to be taken accordingly.
Section 12A: A Backdoor?
For the longest time, since it’s very conception, the Section 12A of the IBC has had critics claiming for it to be a backdoor for defaulting promoters to gain back control of their companies. In a landmark order[8] by the NCLAT, the distinction between the Sections 12A and 29A was laid down and it was held that both the sections were “mutually exclusive”, but the same order has been subjected to much criticism by the legal and the corporate sector alike.
The CIRP is supposed to be a creditor-oriented process which is expected to have little to no influence of the defaulting management, so that the creditor-focused approach can lead to efficient and profitable revival of the entity. The Section 12A works contrary to that very idea since it gives a direct access to the defaulting management to waltz back into the picture, defeating the purpose of Section 29A as well as contravening the very principles that the CIRP process is based on.
A Ray of Hope?
The present decision happens to be a fair and just one, considering the varying degrees of trust that exists between the partied involved here, and actions that have led to it. In case of the suspended management of the corporate debtor, giving the said management the exact same leeway or even comparing its offer for compromise to the SRA’s resolution plan doesn’t make sense.
The first reason being that the very management that has led to the corporate debtor ending up in financial turmoil cannot be trusted to the same degree as the resolution applicant who’s assured the revival of the entity. And secondly, the consideration and approval of a resolution plan proposed by the SRA is the norm, while the consideration of an OTS by the defaulting management is an exception.
By weighing the two approaches on two sides of the same scale, the CIRP process and it’d very foundations are being undermined. The present NCLAT order not only secures the natural rights of the SRA, but further makes sure that the sanctity and the foundational principles of the CIRP process are not compromised. It has not reversed the mutually exclusive status of the two sections, but it sure has added a hint of logic to the pecking order of approaches which are to be taken to revive a distressed entity and nurse it back to health.
Substitution Post Approval of Resolution Plan
On similar lines as the previous development, another issue relating to the resolution plan post approval has been resolved by the Principal Bench of the Appellate Tribunal recently. The issue concerns itself with the substitution of the SRA with another Resolution Applicant. The development was precedented in the case of UV Asset Reconstruction Company Ltd. & Anr. v Aircel Ltd. Through Its Monitoring Committee[9] in which the UV Asset Reconstruction company send a resolution plan for the rehabilitation of the Corporate Debtor, Aircel Ltd.
Facts of the Matter
While the plan was under consideration of the CoC, the RBI issued the RBI issued a circular intimating that Asset Reconstruction Companies cannot be Resolution Applicant unless they have achieved certain net worth. The Resolution Applicant, in the present case happened to be one of the companies which had not yet achieved the mentioned net worth, and this led to it filing an application before the tribunal in which it asked for another Resolution Applicant to be substituted in its place. Subsequently, a show-cause notice was issued by the RBI to the SRA seeking an explanation on the situation.
The Tribunal (NCLT) observed in the hearing, that the statutory guidelines prohibit the modification or withdrawal of a resolution plan which has been approved by the CoC and has been sent to the Adjudicating Authority for approval. Under the ambit of ‘modification’ falls the substitution of another entity with the original resolution applicant, as the executioner of the plan remains to be a critical part of it. Ruling on the lines of the statute, the Tribunal laid down that since the plan has been approved and the SRA was supposed to lead it, another person cannot be substituted to perform his duties.
The Tribunal further observed that substitution is not the route to take to ensure compliance with the RBI norms, and neither is there any provision which gives the tribunal the authority to substitute the resolution applicant. Following the dismissal of the application by the NCLT, the SRA moved to the appellate tribunal.
NCLAT Verdict: The Final Chapter
The Appellate Tribunal upheld the verdict of the tribunal, and further affirmed it’s decision. Instead, as an alternate recourse, the Principal Bench allowed a Monitoring Committee of the Corporate Debtor to take cognizance of the issue and file an application regarding the same in front of the Tribunal to find a way forward which can lead the Corporate Debtor out of this situation which has led to the contravention of the regulations modified by the RBI. Finally, it was held that the SRA cannot be substituted once the CoC has approved the Resolution Plan.
Conclusion
The fact that IBC is a relatively new statute brings along a lot of potential for development and evolution. The core issues relating to previous insolvency regime were primarily the extremely time-taking, and redundant process which wasn’t fair to the creditors. With the overhaul of the entire regime and the establishment of a fresh mechanism, the primary concerns were taken care of. But every new law has some holes, some gaps in its execution, and whenever these gaps are encountered by aggrieved parties, lacunae are created. It is through these lacunae, that the law develops and progresses.
With a precedent for each issue, a new crevice is plastered. In this piece of writing, the same process has been highlighted through three different precedents that have addressed three different lacunae that were encountered. This led to three outcomes; provision of a solution for the aggrieved parties, establishment of a set precedent and course of action for that particular problem, and the filling of the lacunae in law which led to those problems so that the law develops on its own.
The establishment of a tribunal which can address issues pertaining to these issues, as well as giving the tribunal the authority to govern the procedural ramifications of the process in lines with the IBC, 2016 has proved to be extremely detrimental to the development of the law of insolvency as a whole.
References:
[1] § 5 (26), The Insolvency and Bankruptcy Code, 2016.
[2] Deccan Value Investors L.P. & Anr. Versus Dinkar Venkatasubramanian & Anr. (2024) ibclaw.in 98 SC
[3] Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Anr. (2021) ibclaw.in 153 SC.
[4] M.K. Rajagopalan v. Dr. Periyasamy Palani Gounder & Anr. (2023) ibclaw.in 60 SC.
[5] SBI v. Meenakshi Energy Ltd., 2023 SCC OnLine NCLT 1640.
[6] IV. A. 52 & 67, p. 237, Recommendations 155 & 156, UNCITRAL Guide, https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf.
[7] One City Infrastructure (P) Ltd. v. Pratham Expofab (P) Ltd., (2024) ibclaw.in 114 NCLAT.
[8] Shweta Vishwanath Shirke v. Committee of Creditors, (2019) ibclaw.in 470 NCLAT.
[9] UV Asset Reconstruction Co. Ltd. v. Aircel Ltd., (2024) ibclaw.in 137 NCLAT.
