This article is written by Pushkar Surendra Deo, pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.
The COVID-19 pandemic has caused massive economic disruption in India and around the world. The stringent restrictions imposed by the Governments around the world has forced corporations to reduce operations, lay off employees and incur significant losses. In the context of India, the 6-month lockdown coupled with a persistent weakness of the financial sector resulted in domestic supply and demand disruptions. In its report, Moody’s Investor Services slashed its estimate of India’s GDP growth for the 2020 calendar year from an earlier estimate of 5.3% to 2.5%. The bleak situation of the economy is also highlighted by the World Bank’s report which saw the South Asian region, comprising eight countries including India, growing by 1.8-2.8% this year from 6.3% projected earlier. Overall, the current state of the economy has painted a grim picture.
Impact of COVID-19 on the Corporate Insolvency Resolution Process
The spread of the coronavirus has also impacted the corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“Code”). Due to severe restrictions on movement of goods and services, businesses are under severe financial distress due to which they are defaulting on payment obligations. Perhaps the Micro, Small and Medium Enterprises (“MSME’s”) are the most vulnerable sectors due to their limited scope of operations and availability of funding.
Therefore, these MSME’s and other sectors were facing the looming threat of the corporate insolvency resolution process. However, the Government of India came to the assistance of such prospective corporate debtors and, on 24th March 2020, the threshold limit for initiation of the CIRP process was increased to one crore rupees. Furthermore, another major step was taken on 5th June, 2020 through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 whereby Section 10A was inserted which suspended the application of the Code for a period of six months for defaults arising on or after 25th March, 2020. This period of six months was further extendable for a period of one year, which was eventually confirmed by the Finance Minister. The provision also made it clear the debts and defaults prior to 25th March were not covered by suspension. The initiatives taken by the Government were with an aim to exempt COVID-19 related debts and reduce compliance burdens. They would give the financially distressed companies a new lease of life and are indeed noteworthy.
But, while measures for the benefit of prospective corporate debtors were appreciable, no such measures were introduced for resolution applicants whose resolution plans had already been approved by the Committee of Creditors (“CoC”). The uncertainty and financial constriction brought about by COVID-19 has left the resolution applicants in the lurch who are finding it difficult to abide by the Resolution Plans. Due to the sudden change in circumstances, many such Resolution Applicants would prefer to withdraw their submitted resolution plans. While no provision exists in the Code which specifically deals with withdrawal of resolution plans, Section 12A of the Code allowed withdrawal of an application filed for initiation of CIRP. As will be discussed in detail further, if an application is withdrawn under Section 12A, only then can a resolution applicant consider withdrawing his resolution plan as the latter becomes futile in the absence of the former.
Understanding withdrawal of application under Section 12A of the Code
Under Section 12A of the Code, the Adjudicating Authority i.e. the National Company Law Tribunal is empowered to allow withdrawal of an application filed under Sections 7 or 9 or 10 on an application made with the approval of 90% of the CoC. Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution of Corporate Persons) Regulations, 2016 (“CIRP Regulations”) also stipulates that such withdrawal can be made either before the constitution of the CoC or after the constitution of CoC and further lays down the procedure for the same.
Obviously, the question of withdrawal of a resolution plan would only arise if the application itself is withdrawn as once the main application itself is withdrawn, there is no need for financial restructuring of the Corporate Debtor as required by the Resolution Plan. Therefore, if a resolution plan has to be withdrawn, much would depend on the fact whether the application under Section 7 or 9 or 10 can be withdrawn under Section 12A.
Prior to the addition of Section 12A, the question of withdrawal of application for initiating CIRP was considered by the Hon’ble Supreme Court in Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP wherein the Hon’ble Court granted the parties permission to compromise their dispute and allowed withdrawal of application to initiate CIRP using its inherent powers under Article 142 of the Constitution of India. After this and other similar decisions, a need was felt to specifically insert a provision allowing withdrawal in the Code itself, which led to the inception of Section 12A.
In V. Navaneetha Krishna v. Central Bank of India, Coimbatore & Another, the Hon’ble NCLAT observed that an application can be withdrawn under Section 12A even during the stage of liquidation if the CoC permits such withdrawal with 90% votes. Thus, a resolution plan can be withdrawn even at this stage, if the adjudicating authority permits withdrawal of application under Section 12A. Thus, it becomes clear that under the present law, an approved resolution plan can only be withdrawn if the adjudicating authority allows withdrawal of application. No provision exists under which the Resolution Applicant can independently ask for withdrawal of Resolution Plan.
Such a peculiar situation arose in Satynarayan Malu v. SBM Paper Mills wherein two applications were filed, one for withdrawal under Section 12A and another for withdrawal of the resolution plan. The Hon’ble NCLT, Mumbai allowed withdrawal of application under Section 12A but observed that there is no need to adjudicate on the second application as in the absence of the main petition, the resolution plan becomes fruitless. However, it observed that withdrawal of a resolution plan, once approved by the CoC, has far reaching effects and must be discouraged, unless compelling circumstances exist. Such withdrawal of a plan affects other Resolution Applicants who are deprived of viable business opportunities. NCLT then directed that only half of the earnest money be returned to the Resolution Applicant as a measure to discourage such tactics in the future.
Withdrawal of an approved resolution plan in absence of an application under Section 12A
In the preceding discussion, it became clear that an approved resolution plan can be withdrawn only if the main application under Section 7 or 9 or 10 is withdrawn using Section 12A. However, the question whether a Resolution Applicant can be allowed to withdraw a Resolution Plan independently without any application under Section 12A has been answered in various leading decisions, a leading of which has been referred to forthwith.
In Kundan Care Products Ltd v. Mr. Amit Gupta, Resolution Professional, the Appellant Kundan Care Products was the successful resolution applicant in the insolvency resolution process of M/s Astonfield Solar (Gujarat) Pvt. Ltd. (Corporate Debtor). The appellant had filed an application before the Adjudicating Authority for withdrawal of its Resolution Plan as it did not find its plan commercially viable on account of significant delays in the CIRP process. The Adjudicating Authority rejected this contention against which the appellant preferred an appeal before the Hon’ble NCLAT.
The appellate tribunal also rejected the appellant’s prayer and stated that the Code did not contain any provision which allowed a Resolution Applicant to withdraw its Resolution Plan. It further observed that an approved Resolution Plan cannot be withdrawn as it would be detrimental for the various stakeholders and could derail the entire CIRP process thereby devastating the Corporate Debtor’s asset value. The Resolution Applicant is estopped from wriggling out of its liabilities under the Resolution Plan and the principle of estoppel by conduct would apply to it.
Obviously, if a Resolution Plan which has been approved by the CoC cannot be withdrawn, then a withdrawal of a Resolution Plan which has been approved by both the CoC and the Adjudicating Authority is also strictly prohibited. This principle was laid down by the Hon’ble Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors..
Conclusion: resolution applicants in the lurch
The devastating effects of COVID-19 have seriously hampered the capabilities of Resolution Applicants to ensure their commitments towards their approved Resolution Plans. While these issues won’t arise now due to suspension of the Code for a period of one year, applicants who had submitted their plans prior to 25th March, 2020 are facing bleak prospects.
The string of precedents referred to earlier make it clear that a plan can only be withdrawn if an application under Section 12A has been allowed. But if no such application has been presented, withdrawal of a resolution seems difficult due to which Resolution Applicants are in the lurch. The possible remedies which such applicants can resort to are Frustration of contract or Force Majeure clauses, if any. However, per the dictum of the Hon’ble Supreme Court in M/s Alopi Prashad & Sons Ltd. v. Union of India, Resolution Applicants would face an uphill battle to prove frustration as the Apex Court has made it clear that relief of Frustration cannot be granted if performance merely becomes onerous for one party. Thus, a very high threshold exists to prove frustration.
Resorts can be had to Force Majeure clauses if they form a part of the contract or the Resolution Plan. The landmark decision in Satyabrata Ghose v. Mugneeram Bangur & Co. has established that Force Majeure clauses would be covered under Section 32 of the Indian Contract Act. But the underlying principles are similar to the frustration doctrine and a very high threshold must be met.
It is therefore a need of the hour to grant some form of relief to Resolution Applicants who had submitted their plans before the 25th of March, 2020. COVID-19 has affected the financial structure of all businesses and to ensure an equitable growth of the economy, such measures are quintessential.
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