[Siddharth Kumar is a student at Vivekananda School of Law and Legal Studies, New Delhi and Aditya Prasad at Jindal Global Law School, Sonepat. They are also Editor and Associate Editor respectively of the CorpLexia Blawg]
The Insolvency and Bankruptcy Code, 2016 has arguably been one of the foremost developments in the Indian financial laws in recent times. While the Code has proven to be (or made to be) contentious in what seems to be almost every aspect of its substance and procedure, a new facet has been added to the realm of concerns under the new insolvency regime. In 2018, having reneged on its obligations under approved resolution plans for Amtek Auto Ltd and Adhunik Metaliks Ltd, Liberty House, the successful bidder has opened up the proverbial Pandora’s box of shortcomings and indecisions under the Code.
This post seeks to analyze the multifarious implications in cases where a successful bidder of an approved resolution plan fails to honour its obligations therein. This proposition is inspired by Liberty House’s failure in honouring its obligations under the approved resolution plans of Adhunik Metaliks and Amtek Auto Ltd, respectively.
What is a Resolution Plan?
Under the Code, a resolution plan, to put it simply, is a plan for the revival of the company from its insolvent position. It is submitted by an eligible resolution applicant and contains the terms for the revival of the company like the restructuring of business operations, financing decisions, terms of repayment of debts, etc., along with setting timelines for the implementation of the terms of the plan and the repayment of creditors. The Plan is submitted to the resolution professional who, after ensuring that the mandatory specifications of a resolution plan enumerated under section 30(2) of the Code have been complied with, submits the same to the committee of creditors (CoC) for their approval. If the CoC approves the resolution plan by the requisite majority, the same is sent for approval to the adjudicating authority. Most importantly, where the adjudicating authority approves the resolution plan, it becomes final and binding upon the corporate debtor and other stakeholders under the resolution plan.
Where the successful bidder fails to honour its obligations under the approved resolution plan, the following recourse is available to the CoC:
Punishment for Contravention of the Resolution Plan
The Code stipulates a punitive measure for the violation of the terms of an approved resolution plan under section 74(3). This provision aims to penalize the following entities for knowingly and willfully violating the terms of an approved resolution plan:
- the corporate debtor and/or any of its officers,
- the creditors, or
- any person on whom the approved resolution plan is binding.
The stipulated punishment herein is imprisonment between 1 to 5 years or a fine between Rs. 1 lakh and Rs. 1 crore or with both. This provision on bare perusal is aimed primarily at the corporate debtor and the creditors and only mediately covers the resolution applicant’s default. Nevertheless, the Resolution Applicant’s violation of the approved Resolution Plan still comes under the ambit of section 74(3).
Re-initiation or Resumption of CIRP
Under the Code, the corporate insolvency resolution process (CIRP) takes place upon the admission by the adjudicating authority, of an application brought by an operational or financial creditor or the corporate debtor itself, to this effect. The genesis of the CIRP stands to be the cognizance of the stipulated default on debt by the corporate debtor and the intent being the resolution of such default. This is the limited rational with which the CIRP operates and, thus, the Code does not comprehend of any provisions for the re-initiation or resumption of the CIRP with regard to the corporate debtor upon failure of implementation of the resolution plan. The Code, therefore, intends to give primacy to the binding nature of the resolution plan, come what may.
The same view has been affirmed by the Kolkata Bench of the National Company Law Tribunal (NCLT) on application for the revival of CIRP brought forth by the CoC of Adhunik Metaliks, in holding that the question of revival of CIRP could not be entertained at such a stage and that the only real option with the CoC is to opt for liquidation of the corporate debtor. Furthermore, the NCLT had opined that it does not have the power to order the resolution applicant to make good on its obligations under the approved resolution plan.
It would be expedient to note that section 11(b) of the Code bars the corporate debtor from applying for the initiation CIRP against itself where it has already completed a CIRP within the last 12 months. Nonetheless, all hope is not lost. The CoC or the aggrieved corporate debtor itself can petition the Supreme Court of India under Article 142 of the Constitution, praying for complete justice be done in the present matter, by the re-initiation of the CIRP. In Chitra Sharma v. Union of India the Supreme Court had re-initiated the CIRP against Jaypee Infratech Limited to uphold the interests of the home-buyers who were previously denied representation in the CoC of the corporate debtor. It is submitted that the same recourse is available to the aggrieved corporate debtors and their respective CoCs.
Amendments to the Approved Resolution Plan
As stated above, once a resolution plan is approved by the adjudicatory authority, it becomes binding upon all concerned parties. For this reason and in absence of any provision permitting deviation from the terms of the resolution plan, amendments to the resolution plan are not permitted under the Code and terms approved by the NCLT would prevail.
Considering Another Bidder?
Owing to the binding nature of the approved resolution plan and in the absence of any provision under the Code for switching resolution applicants, following the approval of the resolution by the successful bidder, it must be concluded that the same is impermissible under the Code. The same view was affirmed by the Kolkata bench of the NCLT on a petition brought by the CoC of Adhunik Metaliks to be able to consider the bid of another bidder, Maharashtra Seamless.
From the previous analysis it may seem that liquidation of the company would be the only real option available; however, on a bare perusal of the Code, another instance of the lacuna under the Code with regard to the enforcement or treatment of the failure is manifest. Under section 33 of the Code, various grounds for the liquidation of the corporate debtor are stipulated. Moreover, under section 33(3) of the Code, which talks of liquidation in the face of a failure of implementation of the resolution plan, the same is limited to instances where it is the corporate debtor which has violated the terms of the resolution plan. Furthermore, this option is only available to persons other than the corporate debtor whose interest is prejudicially affected by the contravention. Herein, the intent behind the provision is manifest as being a recourse against the malfeasance of the corporate debtor and the recourse is predicated upon the same under section 33(4) of the Code. In the present circumstances, the position is such that liquidation itself is not an option.
Changes to the IBBI Regulations
In a reactionary measure to the above-mentioned lacuna in the Indian insolvency regime, the Insolvency and Bankruptcy Board of India (IBBI) has brought about certain changes under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the CIRP Regulations) months after Liberty House reneged on its promises under the respective approved resolution plans. These changes are as follows:
1. Firstly, regulation 36B(4A) of the CIRP Regulations stipulates that the resolution applicant must provide a “performance security” as part of a resolution plan, where such a plan is approved. The same may be forfeited where the resolution applicant fails in the implementation of or contributes to the failure of that plan in accordance with the terms and implementation schedule of such a plan. The “performance security” would be a security of such nature, value, duration and source, as may be specified in the request for resolution plans with the approval of the committee, having regard to the nature of resolution plan and business of the corporate debtor. Furthermore, a performance security may be specified in absolute terms or in relation to one or more variables such as the term of the resolution plan, the amount payable to creditors under the resolution plan, and the like.
2. Secondly, a resolution plan must include a statement giving details if the resolution applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the adjudicating authority at any time in the past [Regulation 38(1B)].
While the abovementioned provisions do bring some respite, the resolution process is still left heavily exposed to the uncertainty of processes and the repercussions of failure when it comes to the violation of the approved resolution plan by the resolution applicant. Beyond these provisions, it is incredibly important to vest the NCLT and the National Company Law Appellate Tribunal (NCLAT) with the power to ensure the successful execution of the resolution plan. The reason for the same is that the public knowledge of the violation of the resolution plan deals an overwhelming blow to the market position of the corporate debtor, from which it is rarely possible to recover for an already insolvent and encumbered firm.
A natural question that comes to the fore at this juncture is whether the rights of the corporate debtor and its CoC can be enforced by means outside the ambit of the Code itself say, under the Code of Civil Procedure, 1908 or the Specific Relief Act,1963 among other laws? The Supreme Court in Innoventive Industries Ltd. v. ICICI Bank had held that the Code, being a consolidating amending act, is deemed to be a complete code in itself and exhaustive of the matters dealt with therein. Therefore, the authors submit that the recourse to such other relief cannot be availed in so far as the enforcement of rights and liabilities under the Code are concerned. Nevertheless, the final call on this matter would rest with the courts.
As if litigation ready resolution applicants, promoters and directors were not enough of a challenge, it is now the resolution applicant. In the process of the enactment of the Code, the legislature made a grave error in essentially overlooking the eventuality of the resolution applicant defaulting on the terms of the resolution plan. Under the present framework, there exist no substantive means for the NCLT to ensure the enforcement of the award for resolution. This failure is pervades Part II of the Code. While the Bankruptcy Law Reforms Committee Report, which served as the travaux préparatoires of the Code, has set out a ‘time-bound process to better preserve economic value’ as one of the basic objectives behind the Code, this lacuna with regard to the provisions for the implementation of the approved resolution plan, or the lack thereof, upon failure of the resolution applicant detracts from such objectives.
Recently, the NCLAT had suggested that it will take action against defaulters of approved resolution plans like Liberty House. But it must be asked: what are the grounds on which any kind of reasonable action would be taken? At the time of the impugned default, the Code itself stood nearly vacant with regard to provisions for the effective enforcement of the approved resolution plan. If indeed action is taken against Liberty House, to what extent would it be maintainable under the letter of the law?
Despite the abovementioned changes to the CIRP Regulations, the law with regard to the matter at hands remains weak at best. The primary cause of this dilemma is the sheer absence of a sufficient enforcement mechanism behind the obligations created under the Code. Simply providing a penal provision with the hope to thwart abuse of process is truly misplaced and mistaken. Furthermore, the Code, along with the rules and regulations therein have failed in sufficiently empowering the adjudicating authority under Part II of the Code, i.e., the NCLT to meet the exigent developments and challenges under the Code. This has in fact led to the numerous challenges to the mandate of the Code. Illustratively, in Chitra Sharma, recourse to Article 142 of the Constitution had to be taken in order to uphold the interests of the home buyers of the corporate debtor. Such extraordinary recourse cannot be made part of the course under the Code and merely following a scheme of reactionary amendments is the very fountain from which these dilemmas flows.
The present situation has unearthed a far-reaching lacuna under the Code which strikes at the very foundational objects of the Code which are timely resolution and the preservation of maximum economic value during insolvency. While the insolvent company is already suffering under a debt-laden position, it is the resolution applicant that voluntarily takes up the task of resolving such insolvency. However, it becomes a losing fight for the corporate debtor (along with its members and employees), its creditors and other relevant parties where the successful bidder itself fails to honour its obligations under the Code. Stringent and express provisions are the only real means by which this lacuna can be corrected, lest it rock the very foundation of the Code and its ambitious objects.
– Siddharth Kumar & Aditya Prasad