This article is written by Sadhak Sharma.

Introduction

The COVID-19 pandemic has posed a great challenge to the insolvency process as businesses across the world are financially strained and cash-strapped. The pandemic has not only created liquidity issues but has also made valuation of businesses extremely difficult and uncertain. The economic fallout due to the pandemic may cause many Resolution Applicants (RA) to reconsider their decision of investing in the failing business of the Corporate Debtor (CD). But the law with respect to withdrawal of Resolution Plan (RP) after approval of Committee of Creditors (CoC) and in absence of order under Section 31^[1] of the Insolvency and Bankruptcy Code, 2106 (Code) is inconsistent and it needs clarity which can be provided by the Supreme Court.^[2]

Though this article shall in general delve into the present law with respect to withdrawal of the RP after approval by CoC but before Section 31 approval, specific emphasis shall be laid on effect of a force majeure event like COVID-19 upon the RP pre Section 31 approval order stage.

Whether resolution plan can be withdrawn after approval of CoC but before approval under section 31?

Though the order of the Adjudicating Authority (AA) approving the RP is binding upon all the stakeholders of the CIRP of the CD as provided under Section 31(1) of the Code^[3] and the obligations therein cannot be avoided, there is no specific provision under the Code which binds the prospective RA upon approval of its RP by the CoC and not by the AA.  

The NCLAT in Kundan Care Products Ltd. v. Amit Gupta & Ors.^[4] held that a RA cannot withdraw RP duly approved by the CoC even if the same has not been approved by the AA under Section 31 of the Code. The argument that delay in approval of RP by the AA had rendered the investment commercially unviable was rejected.^[5] It was categorically held that there is no express provision under the Code which may allow the RA to withdraw the RP after approval by CoC and by principle of estoppel by conduct, the RA is bound by the RP even though there is no specific provision under the Code which may compel specific performance of RP.

The AA’s authority of intervention with respect to RP is limited only to the grounds mentioned under Section 30(2) of the Code and it cannot encroach on the commercial decision of the CoC.^[6] However, the decision has been put on an ad-interim stay by the Supreme Court and therefore the question whether delay in approval of RP and subsequent commercial inviability can be a ground for withdrawal can be reconsidered.^[7] The Tribunal while delivering this decision had relied upon its own decision in Committee Of Creditors Of Educomp Solutions Limited & Anr. V. Ebix Singapore Pvt Ltd.^[8] wherein it was also held that once a RP is approved by the CoC, it cannot be allowed to be withdrawn but this decision has also been put on an ad-interim stay by the Supreme Court and is pending adjudication.^[9]

In contrast, a recent decision of NCLT Ahmedabad^[10] is worthy of mentioning wherein it was held that speed is of utmost essence under the Code and CIRP can be extended only in extra-ordinary circumstances.^[11] In this instant case, the RA was allowed to withdraw the RP which was approved by the CoC but undecided for a long time by the AA vis-à-vis Section 30(6) application. It was held that because CIRP was extended beyond the stipulated timeline^[12], the delay violated the ‘Term’ of RP.^[13]  It was held that in such a case, the RA has proper locus standi under Section 60(5) of the Code. Herein the delay was caused due to the COVID-19 pandemic thus causing huge economic loss to the RP.

Further, there are other instances wherein AA allowed withdrawal of RP after approval by COC and before Section 31 order being passed but the same was allowed either because Section 12A application was accepted^[14] or the RP itself violated Section 30(2)(e) of the Code ^[15]. Therefore, the concept of withdrawal of RP approved by CoC before Section 31 order is not foreign to the Code as has been observed above. Therefore there lies great inconsistency in law relating to withdrawal of RP approved by CoC before Section 31 order which will be decided only with the Supreme Court’s decision in Kundan and Educomp.

Effect of a force majeure event upon resolution plan

In a recent decision, the NCLT was approached by the RA to modify the terms of RP already approved by the COC but before Section 31 order due to financial difficulties caused by the pandemic.^[16] The RA had filed an affidavit before the AA and the CoC wherein the time frame for payment under the RP was prayed to be extended. While noting that the same was approved by the CoC, AA held that because extension of timeline for payment did not alter the nature and character of RP, the same could be allowed.^[17] It is pertinent to note it was allowed only because the substantive part of RP was not altered. Therefore this decision does not look into the aspect whether RP can be withdrawn due to a force majeure event and subsequent commercial inviability but does show that the Tribunals can take a liberal approach in cases of extreme economic crisis.

Herein the decision of NCLT Ahmedabad^[18] is again worthy to mention because it deals with the application of Section 56 of the Indian Contract Act, 1872 to RP (which enshrines the concept of a force majeure event). The Tribunal observed that in certain cases the RPs may contain Material Adverse Change (MAC) in their terms and in such a case, if COVID-19 is covered under the same, the execution of RP can be modified. But if the same is not included in the terms, it was observed that Section 56 shall come into application and with strict application of law laid down under the provision, the RA can be absolved of its liability under RP.^[19] Though the Tribunal applied the provision stating that the object of the RP was frustrated due to inordinate delay in its approval, this delay was caused due to force majeure COVID-19 event which had also caused tremendous loss to the RA thus making it financially unstable.

The above decisions highlight that not only the concept of withdrawal of the RP before Section 31 approval order is not alien to the Code but the Tribunals can also take a liberal approach while dealing with approval of RP wherein in one instance, terms of payment were modified due to an economic crisis caused by the force majeure event and in another, observing that RP can be withdrawn under Section 56 of the Indian Contract Act due to inordinate delay caused by the force majeure event and the subsequent economic crisis.

Conclusion

The object of the Code is maximization of assets of CD and liquidation of any business is the last resort. In essence of the same, the various authorities have not allowed successful RA’s to withdraw their RP because not only would it decrease the value of CD’s assets but it would also be injustice to other RAs which lost their bid and the creditors and other stakeholders. But in my humble submission, they have failed to consider the commercial ramifications caused by over-stretched CIRP generally and force majeure events such as COVID-19 specifically.

Such instances cause depreciation of value of CD’s assets which may upset the investment plans of the RA as the RP would have be formed while keeping in mind the initial value of the assets before the force majeure event and the subsequent economic fallout. Further, such force majeure events can not only depreciate the value of CD’s assets but can also financially strain the RA itself.  Herein guidance can be taken from Regulation 38(3) of the CIRP Regulations, 2016 wherein it is stated that every RP must demonstrate that the RA “has the capability to implement the resolution plan.” Therefore, if a force majeure event such as COVID-19 crumbles the financial position of the RA, it may not be capable to implement the RP which must be looked into by the AA.

Further guidance can also be taken from the doctrine of frustration under Section 56 of the Indian Contract Act wherein the Supreme Court has held that even if commercial inviability is not looked into, if the purpose of the transaction becomes “useless from the point of view of the object and the purpose which the parties had in view”,^[20] then the doctrine of frustration must be applied. Therefore, a financial crisis caused by a force majeure event upsetting the investment plans of the RP can be considered as frustrating the object and purpose of the RP. In my humble submission, the application of the provision vis-à-vis the RP must be allowed only when object of the RA’s investment in the RP is frustrated due to a force majeure event only and not due to its own commercial decisions or the market forces. 

 The Courts must therefore take a liberal approach and allow the RA to either modify or withdraw the RP otherwise there may arise a situation wherein in order to revive an already failing business, the Courts might lead the RA itself into insolvency. Therefore, in my humble submission, even though there is no specific provision under the Code to either modify or allow withdrawal of RP, only in force majeure events, the Courts must take a liberal approach and the NCLT must invoke its inherent powers under Rule 11 of NCLT Rules, 2016.     

References

[1] After approval of RP by AA under Section 31, the RP becomes binding on all parties.

[2] Civil Appeal No. 3560/2020.

[3] IBC

[4] Company Appeal (AT)(Insolvency) 653/2020.

[5] Siddharth Srivastava, Harshit Khare & Raunak Singh Rahangdale, Successful Resolution Plan Not Permitted to be Withdrawn under IBC: NCLAT; available at: https://www.mondaq.com/india/corporate-and-company-law/996814/successful-resolution-plan-not-permitted-to-be-withdrawn-under-ibc-nclat.

[6] Committee of Creditors of Educomp Solutions Ltd. V. Ebix Singapore Pte. Ltd. & Anr, Company Appeal (AT) (Insolvency) N0. 203 of 2020

[7] Order dated 16.11.2020 in Civil Appeal No. 3560/2020

[8] C.A. No. 1816(PB) of 2019 in C.P.(IB)No. 101 (PB) 2017.

[9] Civil Appeal No. 3224/2020.

[10] Suraksha Asset Reconstruction Ltd. & Ors. v. Shailen Shah for Wind World (India) Ltd. & Anr, CP(IB) 14/2018.

[11] Committee of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors.

[12] Section 12 of IBC.

[13] Regulation 38(2) of the Insolvency Resolution Process for Corporate Persons, 2016.

[14] In the matter of SBM Paper Mills Ltd.,  M.A. 1396/2018, 827/2018, 1142/2018, & 828/2018.

[15] Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP & Ors, Company Appeal (AT)(Insolvency) 1276/2020.

[16] Sunil Kumar Agarwal RP of DIGJAM Ltd. v. Suspended Board of Directors of DIGJAM Ltd. & Ors., C.P. (IB) 594/2018.

[17] Ibid, Para 20.

[18] Supra, Note 7.

[19]Supra, Note 7, Para 54 and 55.

[20] Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 301.

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