The Indian Supreme Court holds in Ebix that once a Resolution Plan has been approved by the Committee of Creditors (CoC),it cannot be withdrawn by the Successful Resolution Applicant(“SRA”). It comes to this conclusion by holding that principle applicable under common law or the contract act, viz frustration or force majeure, are not available to the SRA under the Insolvency and Bankruptcy Code (“Code”) regime. The Hon’ble Court also effectively recognised a resolution plan to be a statutory creation, which would operate in terms of the Code and not a free-wheeling commercial or contractual negotiation with the CoC.
While the Hon’ble Court in Ebix has held in para 217 that the SRA is responsible for conducting its own due diligence, the moot question (and that which the Authors propose to discuss) is whether the judgement in Ebix would prohibit the withdrawal of a plan submitted on the basis of inaccurate and misleading information given by the Resolution Professional(“RP“). The Authors also propose to examine, if a fetter on withdrawal of resolutions plans is so cast upon the SRA, what the possible arguments could be urged to seek a review thereof.
In the studied opinion of the authors, Ebix puts no fetter on the right of an SRA to withdraw a plan submitted based on inaccurate information published in the Information Memorandum (“IM”) published by the RP for reasons which can be clubbed in two categories
- It is settled that the rigour of Article 141 attaches itself only to the “ratio” of a judgment. It was held by the Hon’ble Supreme Court in Union of India Vs Dhanwanti Devias2 that: “It is not everything said by a Judge while giving judgment that constitutes a precedent. The only thing in a Judge's decision binding a party is the principle upon which the case is decided and for this reason it is important to analyse a decision and isolate from it the ratio decidendi”
- A contextual reading of the judgment makes it clear that the issue being decided therein was the ability of an SRA to submit a‘conditional’ resolution plan which effectively gave the SRA an exit option in certain situations.In the context of the appeal, the Hon’ble Could did not have occasion to discuss, debate or otherwise deliberate upon the issue with respect to the consequences of a resolution plan submitted on the basis of misleading/inaccurate information given by the RP.
When perceived in the above context, the observation in para 217 of Ebix, may be best understood in when read in context of the succeeding paras 222 – 228, which make it abundantly clear that the suppression that was being alleged for with respect to developments that took place post submission of the Resolution Plan by the SRA.
Nonetheless, should Ebix be misconstrued in future to suggest an absolute sacrosanctity of approved resolution plans and force SRAs to implement them, even when SRA were blinded to important information regarding corporate debtors, the following arguments make a strong case for it to be reviewed in a future case:
- First, it is against the legislative mandate as expressed in the Code and the regulations framed thereunder. A co-joint reading of Sec. 25(g), Sec 29 and Reg. 36(A)(4) of the 2016 Regulations leaves no manner of doubt that the legislature thought it fit to place the duty of preparing the IM on the RP. It is also important that Reg. 36(A)(7) of the 2016 Regulations places no duty of “due diligence” on the SRA, particularly to second-guess or verify the information put together by the RP. A duty of “due diligence”incumbent upon the SRA cannot therefore be pressed into service to meet the argument of misrepresentation.
- Second, it offends the first principles of equity, good conscience and justice and it would lead to a situation wherein even though the order approving the Resolution Plan is based on an explicit fraud played on the SRA, the courts would find themselves power less to remedy such a wrong. It is an often quoted principles of jurisprudence that a judgement which has been obtained through fraud is a nullity in the eyes of law. The same applies on all four to a resolution plan approved on the basis of fraud played on the SRA. It would therefore be difficult to digest for most judicial palates.
- Third, it opens a pandora box for misuse. There are so many parties involved in an Insolvency case. If the RP is granted a carte blanch to mislead with impunity it could lead to very serious consequences.
The purpose of the Code is to resuscitate the corporate debtor and to maximise its value for the benefit of its creditors. Proceedings under the Code are not intended to and do not wipe out the entire debt of the corporate debtor. For instance, we have often seen that financial creditors proceed against guarantors for recovery of unpaid amounts. Therefore, if misleading information were to have the effect of increasing the resolution amount/ pay-outs offered to the CoC, such misrepresentation may often have the unintended effect of lowering the dues to be recovered from the guarantors or other third parties.
Take another example where the RP is favourable to a particular bidder. The Information Memorandum contains misleading/inaccurate information and the true facts are only known to the favoured bidder. He alone would be suited to get a submit an proper Resolution Plan. Many such examples can be made of potential misuse, which the authors feel should be nipped in the bud.