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This article has been written by Soha Goyal, pursuing a Certificate Course in Banking & Finance Practice: Contracts, Disputes & Recovery from LawSikho.

Introduction

Insolvency & Bankruptcy Code, 2016 (“Code”) was brought in to reform and rehabilitate the health of the financial institutions of India. The Code was enforced with Resolution as its objective and a purpose being the maximization of asset value of the company (“Corporate  Debtor/CD”) and thereby for all creditors. Additionally, the aim is to encourage entrepreneurship, availability of credit facilities and stabilize the interest of all stakeholders and not only a particular one or a set. A resolution plan is a mechanism that focuses on resolving the insolvency of the corporate debtor and its incapacity to clear off the creditor’s debts. In order to get implemented, the resolution plan requires the assent of the Committee of Creditors (“COC”) as well as compliance of some mandatory obligations as prescribed by the Code.

Resolution plan

A Resolution Plan is a rehabilitation plan for a CD going in insolvency. It is a report prepared based on the information memorandum provided by the Resolution Professional targeting – Legal, Financial, Management and Technical strategies in order to bring the CD back on its feet at the earnest. 

However, the Code does not provide any specifications about the particulars of the Resolution plan, thus it is left to the discretion of stakeholders. A resolution plan is not a sale process or auction in which the highest bidder would be given the assets of corporate debtor; neither is it a liquidation or recovery process, rather plan which aims to revive the CD by bringing it out of  Intensive Care Unit. Section 5(26) of IBC, 2016 says -“Resolution plan means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II.”

Important components of a resolution plan

As the resolution plan is of significant importance for the stakeholders of CD, the onus of evaluating and deciding over the resolution plan is left to the reasoning of the CoC. Thereafter, the CoC analyses the “feasibility and viability” of the plan as well as the manner of dispersal of money among the different classes of creditors. The following points needs to be taken into account while drafting a resolution plan:

Informative content

  1. Details of the Resolution Applicant with information and disclosure that it is eligible to submit a Resolution Plan under Section 29A.
  2. Executive overview highlighting the main elements of the plans such as Financial Creditors, Operating Creditors and Other Creditors Treatment of Claims of Creditors and timeline for the execution of a resolution plan. 

Business plan and financial projection

The resolution plan can be further divided into a business plan and a financial projection. A business plan shall consist of the following elements:

  1. The Resolution Applicant’s profile and his/her experience in the given sector.
  2. Analysis of its Strength, Weakness, Opportunities and Threat (SWOT).
  3. Proposition for appointment of board directors, employee retention, technical experts and so on. Further, it should address the key issues relating to business, legal, employment, tax, intellectual property and liability issues.
  4. To achieve optimum valuation of its properties, a resolution plan must include the required steps in order to resolve the insolvency of the CD, which may also include the transfer or sale of assets or parts thereof, which may or may not be subject to security interest. The plan shall ensure that any security interest of the secured creditor is contented or amended and may also provide for a reduction in the amount payable to the different groups of creditors. 
  5. The IBBI Regulations 2016, Regulation 38 (3) in reference to the Insolvency Resolution Process for CD makes it mandatory to mention in the Resolution Plan the reason of default and how it proposes to curb with its plan.

Mandatory contents of the resolution plan

Regulation 38(1) specifies the obligatory content which has to be included in the resolution plan. It requires to mention the amount payable to::

Financial creditors

Financial creditors are the only ones who has a say as well as voting rights in plan approval. Thus, it becomes important for a Resolution Applicant to tempt the Financial Creditors to get into a pact by offering more to them.

Operational creditors

The Section 30 of the Code talks about the repayment of Operational creditor’s debt which shall not be less than the total amount payable to the operational creditor in case the corporate debtor is being liquidated in compliance with the ‘waterfall mechanism’ provided under Section 53 of the Code.

Further, with reference to Regulation 38, the total amount payable under the resolution plan to the Operational creditors shall be prioritised over the Financial Creditors, if any.

Stabilizing the Interest of all Stakeholders

The guiding principle of the Code as mentioned in the Preamble includes balancing the interest of all the stakeholders – the workers shall be paid, in the long run the creditors will be fully repaid, and shareholders /investors are able to maximize their investment. Thus, it is important to take care of each and every stakeholder.

Execution of Resolution Plan

In order to implement the plan, IBC under Regulation 38 (2) make its mandatory the resolution plan to explain these points: 

  • The conditions and the implementation schedule of the plan like – (1) timeline for payment CIRP Cost, OC, dissenting FC and to other stakeholders if any (2) obtaining approval under Competition Commission Act, RBI in relation to ECBs, SEBI depending on case to basis.
  • The control and management of the operations of the CD during its term.
  • Adequate requirements for supervising the implementation during which the Resolution Applicant may or may not suggest resolution plan to be a part of monitoring committee.

Summing it all up, after the committee of creditors approves the resolution plan under Section 30 (4)  and subsequently the Adjudicating Authority by its order under section 31(2), the resolution plan becomes applicable on the CD and its stakeholders also including the Central Government, the State Government, or any other local authority who the CD owes any statutory dues. 

Section 238 of the IBC which has an overriding effect states that if there exists an inconsistency between the provision of the Code and other laws of the country, the Code shall prevail over the other laws which have been confirmed by the Supreme Court in its several judgments. Section 32A of IBC which later became effective in December 2019, provides immunity with regards to the liability of a CD for an offence (civil or/and criminal) committed prior to the commencement of the corporate insolvency resolution process.

Case laws

The Apex Court in the case of Maharashtra Seamless Steel Ltd. v. Padmanabhan Venkatesh & Ors. observed that the way of dealing with the dues of an operational creditor is provided under Section 30 of the Code which has been further explained in the Supreme Court judgement of Essar.

In the Essar judgment, the Supreme Court relied upon the Preamble to the IBC and held that maximization of value of assets of the corporate debtors so as to run them properly as going concerns, is a significant objective of the IBC. When the committee of creditors exercises its commercial wisdom to arrive at business decisions, it must take into account key features of the IBC. So long as the provisions of the IBC and its regulations have been met, it is the commercial wisdom of the requisite majority of the committee of creditors which holds sway.

The Supreme Court stated that MSL had consented to clear the operational creditors’ dues as of the financial creditors while complying with Section 30(2)(b) of the Code. The Apex Court also mentioned that none of those operational creditors had come before them questioning the legality of the resolution plan.

Further, it observed that according to IBC and its regulations there is no requirement that the bid of any resolution applicant shall match the liquidation value found at as per the Clause 53 of of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. These regulations were objected to assist the CoC and thus, once a plan has received the assent of the CoC, the adjudicating authority’s obligation is to ascertain if the plan meets the requirement under Section 30(2) and (4) of the Code.

In the matter before us, there has not been any violation of these provisions and thus the NCLAT must concede to the commercial intelligence of the CoC rather than to assess the resolution plan itself when there is no violation of Section 30(2)(b).

Conclusion

Earlier, it was a common understanding that resolution plans must offer an amount higher than the liquidation value. However, it appears that the intent is to only provide a negotiating capacity to the CoC by keeping the liquidation value at the back of mind and to ascertain the final amounts applicable to operational creditors.

It is now a settled principle that the resolution plans need not match with the liquidation value and the CoC is fully within its power to accept such a resolution plan in its commercial wisdom as long as the provisions of the Section 30(2)(b) are followed. It shall be interesting to judge the impact of this on ongoing CIRPs.

References

  1. http://sunresolution.in/wp-content/uploads/2019/11/Mandatory-Content-of-RFRP.pdf
  2. https://taxguru.in/corporate-law/resolution-plan-ibc-2016.html
  3. https://www.icsi.edu/media/filer_public/79/20/79200d47-3966-415c-bb43-9bedc9cdef4b/drafting_and_negotiating_plan.pdf
  4. https://icsiiip.com/Portals/0/IBC_Capsule_10.pdf
  5. http://vinodkothari.com/2017/11/contents-of-resolution-plan-redrawn/
  6. https://www.taxmanagementindia.com/web/tmi_blog_details.asp?id=503003
  7. https://www.lexology.com/library/detail.aspx?g=fd251111-b6e9-44d3-b926-701441f2bd60
  8. https://www.livelaw.in/know-the-law/explainer-resolution-plan-under-ibc-major-decisions-164271

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