Delimiting the Boundaries: Settlement Plan under the Insolvency Regime

[Varsha Gupta and Tushar Behl are 4th year students at the School of Law, UPES, Dehradun]

The Insolvency and Bankruptcy Code, 2016 was enacted with the objective of facilitating time-bound resolution of corporate persons, among others, for maximizing the value of assets of such persons. Considering the resolution objective of the Code, section 12A was introduced through the Insolvency and Bankruptcy (Amendment) Act, 2018 allowing for withdrawal of insolvency applications filed under the Code.

The Code bestows upon the corporate debtor, financial creditor and the operational creditor the right to trigger the corporate insolvency resolution process (CIRP). An application can be made to the National Company Law Tribunal (NCLT) by any of them under sections 7, 9 and 10 of the Code respectively. The Code, however, lacked a mechanism for withdrawing the application once it has been admitted by the NCLT.

Understanding the need for such ‘withdrawal mechanism’, Parliament filled this lacuna by introducing section 12A in the Code. Section 12A presupposes that a withdrawal application can be filed if it is approved by 90% voting share of the Committee of Creditors (CoC). To supplement this, regulation 30A was introduced by Insolvency Resolution Process for Corporate Persons (Third Amendment) Regulations, 2018 which laid down the particulars relating to the application filed under section 12A of the Code.

The objective of introducing section 12A was clearly justified by the Insolvency Law Committee Report 2018, which led to its enactment. The Committee recommended that a settlement may be reached amongst all creditors and the debtor for the purpose of a withdrawal to be granted, and not just the applicant creditor and debtor.

This provision is being used consistently to save the derailed corporate debtor from going into liquidation or from being taken over by some other entity. It also ensures that debts of creditors are satisfied by the majority rule. Despite this, the constitutional validity of the provision was challenged and interpreted in Swiss Ribbons v. Union of India and Essar Steel Asia Holdings Ltd v. Satish Kumar Gupta, which shall be discussed below.

Constitutional Validity of Section 12A

In Swiss Ribbons, the constitutionality of section 12A was challenged on the ground that it gives ‘unbridled power’ to the CoC to reject settlements reached between the creditors and the corporate debtor. However, the Supreme Court ruled in favour of the provision by highlighting that the threshold of 90% vote of CoC is required in light of the financial stakes involved and that the discretion lies with the NCLT to accept or reject the application. The Supreme Court ruling is a welcoming move in the insolvency regime where continuous challenges are being initiated against the provisions of the Code.

Regulation 30A being Directory in Nature

According to regulation 30A, the application for withdrawal shall be made before the issuance of the invitation for ‘expression of interest’. This regulation is a supplement to section 12A along with the requirement of filing a withdrawal application before the issuance of invitation for expression of interest which has been held to be ‘directory’ by the Supreme Court in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal. This clarifies the notion that withdrawal can be made even after the resolution applicants are being invited to submit their expression of interest. However, this interpretation should be used sparingly to avoid unnecessary disruptions in the CIRP. 

The Misunderstanding of Promoters with regard to Settlement Plan Provisions

Interestingly, the promoters of Essar Steel India Limited attempted to take shelter under section 12A by filing a settlement plan application to the NCLT. However, 70% of the majority shareholders filed an application before the NCLT, Ahmedabad under section 60(5) of the Code where they claimed their ‘right of redemption’ under the Transfer of Property Act, 1882.

The NCLT rejected the contentions raised by the shareholders of Essar Steel by relying on the observations made by the Supreme Court in Swiss Ribbons and Arcelor Mittal India Private Limited v. Satish Kumar Gupta. The NCLT was of the view that settlement is only permissible under section 12A and the application filed by the shareholders was not able to meet the requirements of that statutory provision. The requirement of section 12A is that an applicant filing an application to trigger the CIRP i.e. the corporate debtor, financial creditor or the operational creditor can ‘only’ file a withdrawal application. However, the promoters have misunderstood the settlement plan by filing an application under section 60(5) of the Code. Since the constitutional validity of section 12A has already been upheld by the Supreme Court in Swiss Ribbons, the NCLT cannot not interfere with it.

With respect to section 12A, the NCLT in Essar Steel Asia Holdings Ltd. held:

It is the wisdom of the Legislature which took a conscious decision by making a specific provision for settlement under Section 12A with the voting of 90 per cent members of the CoC for allowing such withdrawal by stipulating that such an application to be moved by the main applicant, i.e. Financial/ Operational Creditor and none else.

It is pertinent to note that the language of section 12A as interpreted by the Supreme Court in  is ‘unambiguous’ and, hence, the application filed in Essar Steel was rightly rejected by the NCLT. Accordingly, when the meaning of a provision is clear and unambiguous, the promoters of Essar Steel ought not to file an application for consideration of settlement plan under section 60(5) of the Code.

The promoters of Essar Steel disregarded the decision of the Supreme Court in Swiss Ribbons and failed to understand the clear requirements of filing an application under section 12A. Moreover, following the rejection of the settlement plan by the NCLT, the operational creditors of Essar Steel moved the Supreme Court. However, the Supreme Court rejected the petition on the ground of unnecessary delay and further directed the NCLT to resolve on the resolution plan. Finally, the NCLT approved the resolution plan of Arcelor Mittal for Essar Steel India Limited imposing certain limitations. This did not stop here: the promoters appealed before the National Company Law Appellant Tribunal (NCLAT), which also rejected the application filed by the promoters and approved the takeover bid for Essar Steel by Arcelor Mittal.

Delimiting the Potency of Settlement Plan Stipulations

It is quite clear that section 12A serves a purpose holding clear specifications for future insolvency resolution processes. Prior to this scenario, settlement could be granted by the NCLT by invoking their ‘inherent powers’ under Rule 11 of the NCLT Rules, 2016. However, generally, the Tribunal had to examine everything while considering the possibility of using its inherent powerswhile allowing the settlement. The lower threshold of Rs.1 lakh for triggering CIRP against the corporate debtor often leads to the filing of more number of insolvency applications in India. The possibility of settlement is higher after the admission of an insolvency application with such a lower threshold. Therefore, section 12A came as a first aid to the corporate debtor by providing the much needed relief from liquidation and also to the creditors who are not interested in participating in the long and dreary process.

It should be understood that regulation 30A could not be construed as ‘directory’ in nature when there is no such stipulation for filing an application under section 12A. To unfasten the difficulties, the Supreme Court held that regulation 30A is directory and that an application can be filed even after issuing of the invitation of expression of interest. However, this dilutes the very purpose of such stipulation laid down in regulation 30A, and the ambit of filing withdrawal application has been interpreted very widely. This might invite withdrawal applications to delay the process without abiding by regulation 30A at any time. Therefore, the settlement provision, though effective in the interest of both the creditors and the corporate debtor, might hinder the CIRP unnecessarily in the long run.

It is to be duly noted that more than 570 days have already been passed for Essar Steel CIRP. The promoters of Essar Steel India Limited wanted to prevent Arcelor Mittal from acquiring it. This is clearly understandable through a reference to section 29A of the Code, which prevents certain entities from submitting the resolution plan. Similarly, the resolution plan of Arcelor Mittal has been approved keeping in mind all the possibilities and viability. The NCLT order also justifies that the promoters, who were behind the adverse management of the corporate debtor, should not be allowed to run it. This clearly shows that, for consideration of the settlement plan, the NCLT looks into the viability of the resolution plan already submitted and the amount of time given to the corporate debtor. In the instant case, the NCLT did not look closely into the validity of the settlement plan because the Supreme Court had already decided that Arcelor Mittal is an eligible bidder and its resolution plan had been affirmed by the majority vote of the CoC. Therefore, the NCLT might also reject a settlement reached between the creditors and the corporate debtor if the resolution plan is already approved by the CoC.

The NCLT, the NCLAT and the Supreme Court have been vigilant in considering the settlement plans and permitted only unprejudiced settlement plans to succeed. There is always a system of constant checks and balances where there is no such capricious or arbitrary power in the hands of CoC to accept or reject settlements. The NCLT can reject a settlement plan even if promoters are willing to pay more than what the successful resolution applicant agrees to pay. Essar Steel is a classic example of the failure faced by the promoters. While section 12A does not have any ineligibility criteria unlike section 29A of the Code, there is a clear specification that only an applicant can file a withdrawal application. This further strengthens the objective of the Code and supplements the reasoning given by the Supreme Court in Swiss Ribbons. Ultimately, the Supreme Court has clearly enunciated the need for having such provisions and their effective and efficient impact on the corporate debtor and creditors.

– Varsha Gupta & Tushar Behl