The Insolvency and Bankruptcy Code, 2016 (“the Code”) aims to resolve the woes of stressed businesses (“Corporate Debtors”) by putting them through a corporate insolvency resolution process (“CIRP”) and transferring them as ‘going concerns’ to persons/entities (“Resolution Applicants”) willing to take over their management and assets, and 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.
The solution is left to the market. Interested resolution applicants can participate in the CIRP and submit ‘resolution plans’, which are basically instruments for taking over the corporate debtor, paying the dues of its creditors and undertaking its revival and turn-around. These plans are placed for consideration before the Committee of Creditors (“CoC”), which may examine, negotiate and approve any one of them by a vote of 65% or higher.
The Code mandates certain provisions in a plan, such as payment of CIRP cost in priority over other debts, payment to operational creditors and dissenting financial creditors, etc. It does not, however, specify, or in any manner regulate how the corporate debtor is to be taken over, revived and/or turned around by the resolution applicant. This is left to the ‘commercial wisdom’ of the CoC, which is ultimately reflected in the approved resolution plan. Essentially, the approved plan is a concluded contract which is regulated, to some extent, by the Code.
The approved plan is ultimately examined and approved by the Adjudicating Authority/National Company Law Tribunal (“NCLT”), marking the conclusion of the CIRP. The NCLT has limited powers while examining an approved plan and cannot sit in appeal over the CoC’s commercial decision. Once approved by the NCLT, the plan must be fully and effectively implemented. But what happens if the plan, post approval by CoC but before its effective implementation, becomes unviable and incapable of being implemented? Should all other stakeholders ride on their interest at the resolution applicant’s expense?
These questions involve an interesting interplay between the respective rights and obligations of the two, arguably the most important, stakeholders in the CIRP, viz. ‘creditors’ and ‘resolution applicant’, who stand at the crossroads of contractual rights and obligations on one hand, and statutory objectives of the Code on the other. We propose to examine how this clash of rights and obligations plays out when plans undergo a ‘material adverse effect’ post approval from the CoC, and where it leaves these two stakeholders in such situations.
Recently in Educomp Solutions a two-member bench of the National Company Law Appellate Tribunal (“NCLAT”) has rejected the successful resolution applicant’s plea for withdrawal of his plan, due to apparent unviability, post CoC’s approval, holding that the NCLT has “no jurisdiction” to entertain such a plea once the plan is approved by the CoC. The NCLT, New Delhi in Astonfield Solar has also taken an identical 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, while these decisions have been passed without referring to the decision of a three-member bench of NCLAT in Metalyst Forgings (wherein it was held that a plan could be withdrawn even after approval of the CoC), they also do not refer to any provision in the Code which bars or prohibits the NCLT from ‘entertaining’ a plea of withdrawal or modification of the plan after CoC’s approval.
An examination of the Code reveals that it contains no provision imposing a ban, bar or prohibition, express or implied, for withdrawal or modification of a plan post CoC’s approval, nor any provision to compel specific performance of a plan. It is silent on these aspects and no such prohibition or compulsion should be read into it through judicial dicta. To the contrary, sub-clause (c) of sub-section (5) of section 60 vests with the NCLT the “jurisdiction to entertain or disposed of………..any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings….”, and Rule 11 of the NCLT Rules, 2016 gives it “inherent powers” to pass orders as it may deem fit in given facts and circumstances. We see no reason why the scope of these widely worded provisions ought to be restricted when it comes to the question of withdrawal or modification of a resolution plan.
For argument’s sake, if we are to restrictively read into these provisions a bar on jurisdiction for entertaining applications for withdrawal/modification of resolution plans, it would follow that the resolution applicant would have to file a civil suit for redressal of his grievances. This is owing to the well-recognized latin maxim, ‘Ubi jus ibi remedium’ (Where there is a right, there is a remedy.) However, should the resolution applicant proceed to file a civil suit, he will be faced with section 63 which expressly bars the civil court from entertaining “any suit or proceedings in respect of any matter on which the NCLAT or NCLAT has jurisdiction under this Code.” This will take us back to the wide wording of sub-section (5) of section 60.
To avoid moving in circles, it would be profitable to take the example of a similar provision, i.e. section 18 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 which bars the civil court’s jurisdiction in respect of matters falling within the DRT’s jurisdiction under section 17 of the said Act. This provision was considered in a landmark Supreme Court judgment in Nahar Industries, and it was held that this provision will not come in the way of ‘borrowers’ filing civil suits for redressal of their grievances, for the simple reason that the said Act does not contain any provision for entertaining any application from the ‘borrower’ for redressal of his grievances. This is not the case under the Code, which clothes the NCLT with the power to entertain “any application or proceeding by or against the corporate debtor or corporate person”. The remedy of the resolution applicant will, therefore, lie before the NCLT and his suit will accordingly fail.
In this backdrop, the decisions in Educomp Solutions and Astonfield Solar effectively lay down that a resolution plan, once approved by the CoC, cannot be withdrawn or modified under any circumstance, no matter the extent of impossibility or unviability that may have arisen subsequently. This proposition is seriously flawed and will likely lead to draconian and absurd 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 will also discourage prospective applicants from coming forward with their plans in future, defeating the very purpose and object behind the Code. The Tribunals under the Code cannot be mute spectators in such situations, and for this very purpose they are vested with powers and jurisdiction of the widest amplitude.
The Code never intended a situation where an unsuspecting resolution applicant is forced to take over a continuously bleeding corporate debtor, through a plan that has subsequently become unviable, solely to benefit one class of stakeholders – the creditors. To the contrary, it strives to strike a balance between competing interests of all stakeholders of the insolvency resolution process. The object in approval of the plan is to save the corporate debtor and to put it back on its feet. This cannot be done by an unwilling resolution applicant whose plan has become commercially unviable due to subsequent ‘material adverse effects’ for reasons beyond its control. The approval of such a plan would be antithetical to the objectives of the Code, as it may ultimately result in repeated insolvency or liquidation of the Corporate Debtor.
Hence, the inquiry of the NCLT should be into the merits of the applicant’s plea, as also the terms of the resolution plan itself, to determine whether it can be withdrawn or modified post approval. The commercial decision of the CoC is contained in the plan. If the plan itself is contingent or premised on certain conditions, non-fulfilment of such contingencies or conditions would authorize withdrawal or modification of the plan. In cases where the plan itself has become unviable, which means the underlying commercial basis of the plan stands eroded, it must be allowed to be withdrawn or suitably modified.
‘Viability’ is at the core of a resolution plan and has also been given paramount importance under the Code. Section 30(2)(d) of the Code mandates that a plan ‘must’ contain provisions for its implementation and enforcement. Under Section 30(4), the CoC is mandated to satisfy itself of the plan’s ‘viability’ before approving it. Similarly, the proviso to sub-section (1) of Section 31 mandates the NCLT to ensure that the plan is capable of ‘effective implementation’ before according its approval. Thus, far from prohibiting the withdrawal/modification of a plan, the Code imposes a duty on the NCLT to reject a plan that has subsequently become unfeasible or unviable post CoC’s approval. The test of ‘feasibility’ and ‘viability’ of the plan was pithily explained by the United States Bankruptcy Court in Mount Carbon and it was held that in order to attain approval, a plan should offer a reasonable prospect of success and should be workable, and the prospect of success of the plan would be gauged from a projection of reasonable income and expense.
The importance of ‘viability’ of the plan had weighed with NCLT, Mumbai in Deccan Value while permitting withdrawal of the resolution plan post CoC’s approval. It was held that the Code neither confers the power or jurisdiction on the NCLT to compel specific performance of a plan by an unwilling resolution applicant; the letter and spirit of the Code mandate the acceptance of only a viable and lawful resolution plan being implemented at the hands of a willing resolution applicant; and the fact that a resolution plan is to be approved by the CoC only after being satisfied that it is feasible and viable, clearly implies that if a plan is not viable or fit for implementation, or is based on incorrect assumptions, which would lead to its failure and the eventual death of the corporate debtor, it cannot be approved by the NCLT in exercise of its power under section 31 of the Code.
The aforesaid decision was confirmed by the NCLAT in Metalyst Forging, which continues to be good law and has not been stayed by the Supreme Court, though the appeal is pending. Until this judgment is set aside by a larger bench of the Tribunal or by the Supreme Court, it constitutes a binding precedent. Besides, there are other such precedents; for instance Tarini Steel where the NCLAT had permitted the withdrawal of a plan post approval from the NCLT, and DIGJAM Ltd. where NCLT, Ahmedabad has permitted modifications in the resolution plan post CoC’s approval, at the resolution applicant’s request, on account of the COVID-19 crisis.
We believe the decisions in Educomp Solutions and Astonfield Solar set a dangerous precedent and should be reconsidered. They do not discuss the three-member bench’s decision in Metalyst Forging (which amounts to judicial impropriety) or the relevant provisions of the Code. It is important that the position of law is clarified at the earliest, as the regulatory uncertainty created by these decisions will severely affect pending resolution processes where plans are yet to be submitted. Prospective resolution applicants are likely to be discouraged from coming forward with their plans, especially when the CoCs these days, in general, are reluctant to accept conditional or contingent plans. Even where the CoC accepts a conditional or contingent plan, it is not clear whether withdrawal or modification of the same, after CoC’s approval, on reasonable grounds and considerations, will be permitted by the Tribunals.
It is hoped that resolution plans are not allowed to become the resolution applicant’s albatross.