The Frustrated Resolution Applicant

[Aayush Mitruka is a lawyer based in Delhi and can be reached at [email protected]]

The Insolvency and Bankruptcy Code, 2016 has replaced the erstwhile debtor friendly model where the defaulting debtors could secure moratoriums, retain control and yet write off loans with the ‘debtor-in-possession’ model. The new creditor driven process has instilled fear amongst delinquent borrowers and prompted reluctant promoters to repay their dues, at the risk of losing their company. In this backdrop, this post aims to analyse certain judicial decisions in the context of withdrawal of insolvency proceedings and the right of the directors to participate in the committee of creditors’ (CoC) meetings.

Section 12A of the Code allows the errant borrowers another chance to make good on the default and retain control over the company even after admission of insolvency. This provision allows withdrawal of an insolvency application, provided such withdrawal is supported by 90% of the CoC. In July last year, a regulation under the Code laid down that such withdrawal applications can only be accepted before the issuance of the expressions of interest (EoIs). In other words, there could not have been a withdrawal once the commercial process of bids commences.

However, the Supreme Court in the Brilliant Alloys Private Limited v S. Rajagopal has held that this regulation is only directory and that withdrawal applications may be allowed in exceptional cases even after the issuance of invitation for EoIs. The scope of these “exceptional cases” is unclear and would have to be decided on a case to case basis. It was pointed out that the regulations must be read along with the main provision under the Code, which does not impose the condition that withdrawal has to be filed before the invitation of EoIs. This position was subsequently endorsed by the Supreme Court in the celebrated case of Swiss Ribbons Private Limited v Union of India. Interestingly, the Supreme Court goes ahead to note that the CoC does not have the last word on the subject and, if the CoC arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT can always set aside such decision.

This provides a potent weapon in the hands of the errant promoters to hang on to their companies and assets. One may rightly argue that this may help in diluting the fear of losing control of the companies which have been dragged into insolvency. There is another known instance where the National Company Law Tribunal (NCLT) in Satyanarayan Malu v SBM Paper Mills Limited allowed the corporate debtor to withdraw the insolvency application at the stage when the plan was pending for the approval before the NCLT.

While these judgments were handed down in view of the central theme of value maximisation under the Code, these do raise some eye brows. The broad scheme of withdrawal becomes problematic as it may unfavourably impact the working of the Code and affect a swift resolution. First, these adversely affect deal certainty and may practically render the bidding process as a price discovery mechanism. Second, the promoters could now use the Code as a tool for deferment of payment of their liabilities. Finally, it may dilute the threat of use of the Code which has prompted payments in the past. While this is surely a deep cause of concern, this has failed to catch the attention of the regulator or the judiciary.

In this discourse, another decision which has further muddied the waters and needs to be discussed is Vijay Kumar Jain v Standard Chartered Bank, where the Supreme Court has held that the members of the erstwhile board must be given copies of the resolution plan and must be allowed to participate in all the CoC meetings. Needless to say, these directors would include the promoter nominated directors. This does throw open a can of worms when read with the above referred decisions under section 12A of the Code as this paves the way for facilitating a withdrawal by the promoters, after being privy to the entire bidding process.

Given that the board will now have access to vital documents including the proposed resolution plans of the companies they managed, this will help them to draw up a more robust settlement plan, effectively helping them regain control through the withdrawal process. Of course, while theoretically the resolution professional would obtain an undertaking in the form of a non-disclosure from the directors, however in practice it may not have the desired result.

It is feared that these directors would sit through the resolution process and, finally after knowing the bids, come up with a settlement plan at the end only to annul the resolution process. Obviously, at this stage, the section 29A bar would not be a hinderance as its rigours would not kick in during withdrawal. The ‘judicial hands-off’ approach of the courts may further help these errant promoters to advance their cause. In sum, when the process is almost close to finalisation, the promoter could come in with a better offer and walk away with the asset even though the resolution applicant may have spent time and money pursuing it. As we have seen in the past, it is unlikely that the CoC would at that stage consider much about the resolution applicant or the sanctity of the process if they are able to fetch better numbers.

While the intent behind these decisions is laudable, their combined effect discussed above may not be very promising. In addition to compromising the process, these create an imbalance in favour of the promoters and against the resolution applicants. Although this may lead to value maximisation, it is surely at the cost of destroying faith in the system. It would be unfortunate to allow such last-minute offers to overturn months of work and thwart the process. The Code thus needs a thorough and careful overhaul to avoid such situations.

– Aayush Mitruka

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