Status as on- 31/03/2021
The Insolvency and Bankruptcy Code, 2016 (the Code) seeks to alleviate the problems of stressed companies (Corporate Debtors) by bringing them into a corporate insolvency resolution process (CIRP) and assigning them as “going issues” to persons/entities (Resolution Applicants) able to take over their management and properties, as well as service their debts. The CIRP is seen as a more beneficial alternative to liquidation, as a going concern is likely to fetch a higher value for the creditors than a simpliciter sale of its assets.
What is Resolution Plan?
At first, resolution applicants enter the CIRP and prepare “Resolution Plans,” which are effectively instruments for taking over a corporate debtor, paying its creditors’ debts, and completing its recovery and restructuring. These proposals are submitted to the Committee of Creditors (CoC), which has the power to review, negotiate, and approve all of them with a vote of 65% or above.
Certain clauses in a plan are required by the Code, such as payment of CIRP costs before other debts, payment to operational creditors and dissenting financial creditors, and so on. It does not, however, define or control in any way how the resolution applicant can take over, restore, and/or turn around the corporate debtor. This is left to the CoC’s “Commercial Wisdom,” which is expressed in the resolution plan that has been approved. The approved plan is essentially a signed document that is governed to some degree by the Code.
The Adjudicating Authority/National Company Law Tribunal (“NCLT”) then reviews and approves the approved proposal, bringing the CIRP to an end. When considering an approved proposal, the NCLT has limited powers and cannot hear an appeal of the CoC’s commercial decision. The proposal must be thoroughly and successfully executed after it has been approved by the NCLT. But what if the proposal becomes unviable and incapable of execution after it has been approved by the CoC but before it is put into action? Should all those stakeholders depend on their own interests at the detriment of the resolution applicant?
In the case of Educomp Solutions, a two-member bench of the National Company Law Appellate Tribunal (“NCLAT”) recently dismissed the successful resolution applicant’s plea for withdrawal of his plan due to obvious unviability after the CoC’s approval, holding that the NCLT has “no jurisdiction” to entertain such a plea once the plan has been accepted by the CoC. The NCLT, New Delhi in case of Astonfield Solar has also taken a similar stand, that it has “no jurisdiction” to entertain the resolution applicant’s plea for withdrawal or modification of the plan post CoC’s approval.
Interestingly, these decisions were made without mentioning the decision of a three-member bench of the NCLAT in the case of Metalyst Forgings (wherein it was held that a plan could be withdrawn even after approval of the CoC), nor do they mention any clause in the Code that forbids or prevents the NCLT from ‘entertaining’ a plea of withdrawal or alteration of the proposal after the CoC has approved it.
The decisions in Educomp Solutions and Astonfield Solar effectively establish that, once accepted by the CoC, a resolution plan cannot be withdrawn or changed under any circumstances, regardless of the degree of impossibility or un-viability that may have arisen later. This claim is deeply flawed and would almost definitely result in draconian and ludicrous consequences. In a hypothetical case, even if the very commercial basis of an approved plan is eroded by a subsequent event, say a natural calamity that destroys the only asset of the corporate debtor, the successful resolution applicant will not be permitted to withdraw or modify the plan, even if it runs the risk of facing penal consequences under Section 74 of the Code for its unavoidable failure to implement the plan, or at the very least, the risk of repeated insolvency of the corporate debtor. This would also deter potential applicants from submitting their plans, defeating the very aim and object of the Code. In such cases, the Tribunals established by the Code cannot remain silent observers, and they have been given broad powers and jurisdiction for this reason.
The Code never intended for an innocent resolution claimant to be compelled to take over a constantly bleeding corporate debtor in an unviable scheme solely to support one class of stakeholders – the creditors. On the contrary, it seeks to strike a balance between the conflicting interests of all insolvency resolution stakeholders. The aim of the plan’s approval is to save the corporate debtor and get it back on its feet. This cannot be achieved by a reluctant resolution applicant whose proposal has become economically unviable as a result of subsequent “material adverse effects” due to circumstances beyond its control. Approval of such a scheme would be counter productive to the Code’s goals, as it could lead to the Corporate Debtor’s repeated insolvency or liquidation.
As a result, the NCLT should look at the validity of the applicant’s claim as well as the terms of the settlement plan itself to see whether it can be withdrawn or changed after it has been accepted. The CoC’s commercial decision is reflected in the schedule. If the plan is contingent or premised on the fulfillment of such contingencies or conditions, the plan will be withdrawn or modified if such contingencies or conditions are not met. It must be required to be removed or suitably changed in situations where the proposal has become unviable, which means the plan’s underlying commercial basis has deteriorated.
Viability of Resolution Plan
The idea of ‘viability’ is at the heart of a resolution strategy, and it has been given top priority in the Code. A proposal “must” include requirements for its implementation and execution, according to Section 30(2)(d) of the Code. The CoC is required as per Section 30(4) to determine the plan’s “viability” before approving it. Similarly, the proviso to Section 31 sub-section (1) allows the NCLT to ensure that the proposal can be “effectively executed” before authorizing it. Rather than barring a plan’s removal or alteration, the Code requires the NCLT to reject a plan that has become unfeasible or unviable after the CoC’s approval.
The NCLAT upheld the ruling in Metalyst Forging, which is now binding law and has not been stayed by the Supreme Court, despite the fact that the appeal is still pending. This decision is a binding precedent unless it is overturned by a broader bench of the Tribunal or the Supreme Court. There are other precedents, such as Tarini Steel, where the NCLAT allowed the withdrawal of a proposal after it had been approved by the NCLT, and DIGJAM Ltd., where the NCLT, Ahmadabad, allowed modifications to the resolution plan after the CoC had been approved, at the resolution applicant’s request, due to the COVID-19 crisis.
The decisions in Educomp Solutions and Astonfield Solar set a dangerous precedent that should be revisited. They make no mention of the three-member bench’s decision in Metalyst Forging (which amounts to judicial misconduct) or the Code’s related provisions. It is critical that the legal situation be clarified as soon as possible, as the regulatory ambiguity caused by these decisions will have a significant impact on pending settlement processes where proposals have not yet been submitted. Prospective resolution applicants are likely to be discouraged from submitting their plans, particularly because CoCs are generally reluctant to consider conditional or contingent plans these days. Even if the CoC approves a conditional or contingent proposal, it is uncertain if the Tribunals will authorize withdrawal or alteration of the plan after the CoC’s acceptance on appropriate grounds and considerations.
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