This article is written by Daksha Kasekar, pursuing a Certificate Course in Insolvency and Bankruptcy Code from Lawsikho.com.
In the present article, we are going to understand about resolution plan and the challenges faced while implementing a successful resolution plan. To understand the challenges, we need to know the meaning of the Resolution plan and its implementation.
What is a resolution plan?
According to the Insolvency and Bankruptcy Code, 2016 (“the Code”), “resolution plan” means a plan proposed by the resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II. In simple words, the resolution plan is a set of schemes or proposals presented by a party interested in resolving the insolvency of the corporate debtor and taking over the company. The interested parties who present the plan are said to be the Resolution Applicants. The purpose behind the initiation of the corporate insolvency resolution process (“CIRP”) is to revive the corporate debtor company. To complete the process of CIRP, the resolution plan has to be accepted by the Committee of creditors (“CoC”). The CoC is constituted only by the inclusion of financial creditors. The Committee is formed after processing their claims. The creditors file an application to initiate CIRP as the revived company gives more returns than a company that goes into liquidation.
The process of CIRP begins when the applications getting admitted by the Adjudicating Authority. The Adjudicating Authority under this code is the National Company Law Tribunal (“NCLT”) which approves the plan. To remove the company from the debts, the Resolution applicants propose the plan and show their willingness to take-over the company going through the CIRP as a going concern. These plans are to take over the management and affairs, acquire the company and revive the company by paying the debts of the creditors.
After submission of the plans, the Interim Resolution Professional (“IRP”) presents the plans before the CoC. The CoC then takes the plan into consideration. After negotiation and improvements in the plans, the CoC chooses one plan by voting. For the approval of the plan, a 66% or more vote ratio of the CoC is required. Pursuant to the approval by CoC, the plan is further sent to the Adjudicating Authority for further approval. The NCLT holds almost no powers for recommendation to the plan. The approval by the NCLT means the end of CIRP. The plan has to be executed and implemented.
Implementation of the resolution plan
Implementation in a way means an arrangement as prescribed under the successful resolution plan. The Code in the explanation of section 5(26) clarifies that a resolution plan may include restructuring of the corporate debtor and such restructuring can be done by way of a merger, amalgamation, and demerger. While disbursement of the payments to the creditors one needs to refer to section 30 of the Code and Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations Code, 2016.
The implementation of the plan can be done by adopting several courses of action. It includes series of execution of contracts between the creditors and the successful Resolution applicant. It incorporates compliances of integration activities wherein the Corporate debtor company must have a bona fide will to complete the activities. The debt is primarily converted into equity, and new shares are issued. The arrangement can also include taking loans and funds from financial institutions. Thus, the plan is implemented and the debt is recompensated. The time frame for implementation of the resolution plan is fixed. If the resolution plan is not implemented effectively in a specific time frame, the whole process of CIRP fails and the company is liquidated.
Challenges faced while implementation of a resolution plan
- Past liabilities are invalid after approval of Resolution Applicant.
The approved resolution plan is binding on all parties including the Government. Section 31(1) of the Code prescribes the same. All the past liabilities of the Corporate debtor are discharged after the approval of the plan. The pre-CIRP liabilities i.e., the liabilities of the debtor before verification of claims of the creditors and which state unclaimed under the process are released from the clutches of the Corporate debtor as well as the approved resolution applicant. In the case of the Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta, it was held that undecided claims after approval of the resolution plan cannot be entertained.
The rationale behind this concept is that the resolution applicant should know about the exact details of claims and should not be burdened by undecided claims or pre-CIRP claims later. In Ultra Tech Nathdwara Cement Ltd. (known as Binani Cements Ltd.) vs Union of India through the Joint Secretary, Department of Revenue, Ministry of Finance & Ors., it was held that no demand of a period before approval of resolution plan can be raised after the implementation of resolution plan proposed by the successful resolution applicant. In spite of this fact, the creditors with rejected claims and the creditors who have failed to file proof of claim persistently disturb the ongoing proceeding by filing applications. This leads to countless hearings which hampers the interest of the successful resolution applicant as well as verified creditors.
- Pending litigation delays the implementation.
The NCLT takes time for the approval of the plan approved by the CoC. After the approval of COC, NCLT receives many intervening applications from third parties. These applications are filed to stop the implementation process. The NCLT already takes months to approve the plan. The parties or third parties having an interest in the matter challenge the credibility of the Resolution professional, the constitution of the committee of creditors, oppose the plan of resolution applicant stating it is unconstitutional, etc. The Operational creditors often file applications demanding for them to be involved in the Committee of creditors. The Code also allows the Operational creditors who are not satisfied by the approved resolution plan to file an appeal within 30 days of passing such an order. The resolution applicants have no vested rights to challenge the rejection of their resolution plan. But the applicants can file a condonation of delay application for late submission of the resolution plan. Several criminal proceedings against the parties also delay the process of CIRP.
- Impossibility to perform the duties mentioned in the plan.
The Resolution applicants propose plans to acquire the debt-ridden Corporate debtor company. To do the same, a time period of 30-90 days is given by the NCLT. Sometimes, after the approval of the plan by CoC as well as the NCLT, it becomes impossible for the Resolution applicant to complete the agreed upon integration activities. The impossibility can be because of various reasons for e.g., due to natural calamity, unforeseen circumstances in the business of the successful resolution applicant, pandemic, lockdown, change in government regulations etc. One such example is the COVID-19 pandemic which showed an adverse effect on the implementation of the approved plans. The Hon’ble Supreme Court took suo moto cognizance of this situation and passed an order for relaxation of the limitation period under the Code.
The National Company Law Appellate Tribunal (“NCLAT”) in the case of Kundan Care Products Ltd. vs Mr. Amit Gupta (Resolution Professional) & others held that the NCLT has no jurisdiction to allow the resolution applicant to withdraw the successfully approved resolution plan. The judgment also established that there can be no modifications to the plan after the approval of CoC. The plan was found to be unviable and unfit for implementation. Reliance was placed on CoC of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd. & Anr. where the same principle was followed wherein the Hon’ble Supreme Court has granted an ad-interim stay on the same order. The precedent set by these judgments is rigid and draconian in nature as it gives absolutely no choice to the resolution applicant. Due to the aforesaid reason, implementation of the plan becomes burdensome.
- Invocation of Writ Jurisdiction
The NCLT has all the rights to dispose and adjudicate upon the matters arising out of CIRP in an expeditious manner. But, in the matter of Embassy Property Developments v. the State of Karnataka, the Hon’ble Supreme Court of India held that even the High Courts have the power to interfere once the writ jurisdiction under Article 226 and 227 is invoked. The competency granted to the High Court caused great relief to the aggrieved parties who had the option to appeal only at NCLAT for IBC matters.
Although the jurisdiction can be invoked only in the case of exceptional circumstances, the courts are filled with dubious petitions causing a delay in implementation of the resolution plan. This kind of relief has not cured the problem but has vitiated the proceedings. One such example of writ petitions can be noted in the matter of The Karad Urban Cooperative Bank Ltd vs Swwapnil Bhingardevay & Ors, where the financial creditors and resolution professional preferred an appeal. In this case, NCLAT set aside the order of the NCLT which approved a resolution plan. After invoking writ in the Hon’ble Supreme Court, the court held that the impugned order of the NCLAT is flawed and hence should be set aside.
- OTS by the Corporate Debtor
Section 10 of IBC allows the Corporate debtor to file an application for initiation of the corporate insolvency resolution process by itself or through the Corporate applicant. The application can be withdrawn by the Corporate debtor by offering a one-time settlement to the creditors. On one occasion, the Corporate debtor came up with a one-time settlement when the resolution plan was pending approval before NCLT. In the matter of Satyanarayan Malu vs SBM Paper Mills Ltd, an issue came up that whether a Resolution Applicant who has submitted a resolution plan, which is approved with a majority vote by CoC, can be allowed to withdraw the said resolution plan which is under consideration for approval before the NCLT?
Later, the Tribunal allowed the withdrawal of the insolvency application and also the resolution plan. This outlook delays the whole process leaving no possible outcome. Some corporate debtors may apply for a one-time settlement with less payment to creditors and try to save the company from the unwanted merger or takeover. The Corporate Debtor, if not interested in the plan of the Resolution applicant will try to offer a one-time settlement if this apparatus is allowed. Thus, one-time settlement can also be a challenge even if not severe for the implementation of the resolution plan.
- Frivolous bids by the resolution applicants
After the resolution plan is approved by NCLT and the CoC, it becomes necessary for the successful bidder to complete the process of implementation. But in the history of the implementation of the plan, it has come to notice that many frivolous bids are proposed by the resolution applicants. The Government repetitively has tried to take effective steps against the resolution applicants who make frivolous bids. The NCLT has also imposed a cost on the successful resolution applicant Ingen Capital in the case of Orchid Pharma Case. Ingen Capital could not mobilize enough funds for the implementation.
The NCLAT imposed a fine of Rs. ten Lakhs on Ingen Capital which was to be paid in the favour of CoC. In another case of ARGL Ltd, Liberty House proposed a plan which was later approved by the CoC. While the application for approval was pending in front of the Adjudicating Authority, Liberty House withdrew the plan. Even though the NCLAT allowed the applicant to withdraw the plan, it construed that Liberty House will be banned and declared ineligible for proposing future plans. A cost of one lakh rupees was also imposed. The same view was taken in the case of Castex Technologies Limited. The measures taken by the tribunal have hardly worked as the deterrence as the number of frivolous bids have still not decreased. The best way forward would be to add such resolution applicants as ineligible person vis-à-vis a resolution applicant.
We went through the possible challenges faced while implementation of the resolution plan. The Insolvency and Bankruptcy Code, 2016 is a complete code by itself but the Insolvency and Bankruptcy Board of India (“IBBI”) should devise a mechanism in such a way that it gives a guarantee of implementation of the plan. Due to the failure of the CIRP, the corporate debtor has to compulsorily go into liquidation. The Code also punishes non-implementation of the plan. Section 74(3) of the Code penalizes by imposing a fine of minimum of Rs one lakh to Rs. one crore or imprisonment of 1 to 5 years or both. Similar to this, more penal provisions must be added to the Code.
The IBBI must analyze the notion as there is no section that protects the corporate debtor after failure from the implementation of a resolution plan. Heavy cost identical to the cost imposed for non-implementation of the plan, and proposal of frivolous bids should be imposed on all kind of hindrances slowing down the process. The debt of the creditors who file applications and intervening applications with malice to limit the process should be discharged de facto. If the applicant is a Creditor and has filed a frivolous complaint, then the whole debt of the creditor must be exempted from the clutch of the corporate debtor. To avoid this scenario in totality, a certain set of applications should be completely banned by the tribunal. When IBBI will mention such substantial penalties in the code itself, it will be difficult for the ill-natured applicants to interpose.
Conclusion: viable solution to avoid problems
The object of this Code is to address the stressed assets in a time-bound manner but the whole object fails because of the challenges faced while implementation. The Hon’ble Supreme court in the past precedents has repeatedly laid down that the priority should be given to the CoC and plan shall be implemented according to the commercial wisdom of the CoC. A failure of a successful resolution plan will result in a loss of the applicant. The earnest money deposit (“EMD”) and the performance security paid by the successful resolution applicant while proposing the plan will be forfeited with the effect of the failure of implementation of the plan. To complete the process of CIRP and to propose a plan, the company often spends lakhs of rupees in framing and drafting the Resolution plan.
From the above challenges, it can be noted that many applications are purposely made to cause a delay. The rights and time of the creditors, corporate debtors and also the innocent resolution applicants should be sheltered. The Insolvency and Bankruptcy Code through its revival mechanism helps to detect the sick industries at an early stage. Although the Code per se has been a success, the timely implementation has become a great barrier.
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