[Shebani Bhargava is a 4th year student at the Maharashtra National Law University Mumbai (MNLU Mumbai)]
The novel coronavirus and the unprecedented nationwide lockdown have disrupted the country’s economy. As a consequence, multiple businesses may face the threat of insolvency. In order to soften the setback and ease the financial stress, the Government, along with the Insolvency and Bankruptcy Board of India (IBBI), has taken steps to address the anticipated implications in the implementation of the insolvency framework. Firstly, the Central Government increased the minimum threshold amount of default required to initiate an insolvency from Rs. 1 lakh to Rs. 1 crore. Secondly, the IBBI amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the “CIRP Regulations”) to provide that the period of lockdown imposed by the Central Government shall not be counted for the purposes of the time-line for any activity in relation to a corporate insolvency resolution process (CIRP) that could not be completed due to the lockdown. Lastly, the newly added section 10A to the Insolvency and Bankruptcy Code, 2016 suspends sections 7, 9, and 10 of the Code for any default arising on or after 25 March 2020 for a period of six months. The six-month period could be extended further until one year.
While these measures may provide some respite, one important aspect that has not been addressed by either the Government or the IBBI is the implementation of an approved resolution plan during the Covid-19 pandemic. Will a resolution applicant be allowed to alter, modify or rework a plan approved by the National Company Law Tribunal (NCLT)?
In light of the pandemic and the lockdown, a resolution applicant may wish to modify or alter a plan approved by the NCLT for primarily two reasons: (i) the plan may no longer be commercially feasible and viable; or (ii) the parties may no longer be in a position to adhere to the timelines approved in the plan. In fact, recently, Ramkrishna Forgings, the winning bidder of Acil Ltd, an insolvent automotive components maker, has demanded renegotiation of its bid citing demand disruptions caused by the Covid19 and the lockdown.
Further, non-implementation of the resolution plan can lead to the corporate debtor being pushed into liquidation, and it can lead to the attraction of criminal liability for contravention of the plan under section 74 of the Code. This post seeks to highlight whether the framework of the Code allows for NCLT-approved resolution plans to be withdrawn or modified.
Process of Approving a Plan
In the CIRP of a corporate debtor, the resolution plan undergoes three stages to attain finality. First, a resolution applicant is required to submit a plan to the resolution professional for consideration. This plan should adhere to the conditions mentioned in section 30(2) of the Code and regulation 38 of the CIRP regulations. Thereafter, the resolution professional is required to present the plan before the committee of creditors (CoC) for approval. The second stage involves the approval of the plan by 66% of voting share of the financial creditors in a meeting of the CoC. The last stage is where this approved plan is submitted to the NCLT for obtaining approval. Once the NCLT approves a plan, it becomes binding on the corporate debtor, and can be implemented.
Withdrawal & Modification of Plans
On the aforesaid basis, there are three stages at which a resolution applicant can seek to withdraw or renegotiate a resolution plan: (i) after the plan is submitted to resolution professional; (ii) after the plan is approved by the CoC; or (iii) after the plan is approved by the NCLT. In the first scenario, the resolution applicant is allowed to withdraw or renegotiate its resolution plan because, at this stage, the plan has only been submitted to the resolution professional and not to the CoC.
With respect to the second scenario, an earlier post, after discussing decisions rendered by the NCLT Mumbai in Satyanarayan Malu v. SBM Paper Mills Ltd and Deccan Value Investors L.P v. Deutsche Bank, argued thatwithdrawal should be permitted in reasonable circumstances when the resolution applicant is not at fault. Further, in a recent decision of Sunil Kumar Agarwal RP of DIGJAM Ltd. v. Suspended Board of Directors of DIGJAM Ltd., the NCLT Ahmedabad allowed the resolution applicant to modify a plan (which was already approved by the CoC) due to Covid-19 and the subsequent lockdown. However, the modification allowed is only with respect to the timeline for payments to financial and operational creditors and other stakeholders. The NCLT observed that a change in the timeline would not affect the nature and character of the resolution plan.
It is the third scenario that warrants attention. It is safe to assume that both the corporate debtor as well as the successful resolution applicant may suffer losses due to Covid-19 and the nationwide lockdown. The value of assets of a corporate debtor may get impaired, making it difficult for it to continue as a going concern, and the funds at the disposal of a successful resolution applicant may reduce. Therefore, these circumstances may warrant a withdrawal or modification in a number of approved resolution plans.
The plans that have clauses such a force majeure or “material adverse change” may be saved and would not require any modification or withdrawal. However, since the Code does not mandate that a resolution plan envisage such a clause, the possibility of plans not having such clauses cannot be denied. What recourse is then available to such plans and resolutions applicants?
Unfortunately, withdrawal of resolution plans approved by the NCLT cannot be resorted to. Recently, the Supreme Court in Maharashtra Seamless v. Padmanabhan Venkatesh held that an approved plan cannot be withdrawn by the resolution applicant under section 12A of the Code. Therefore, the only available recourse is the modification of the approved plans. There is no statutory provision in the Code that provides for the modification of plans approved by the NCLT. Therefore, it is pertinent to look at the inherent powers of the NCLT.
Powers of the NCLT
The inherent powers of the NCLT have been laid down under section 60(5)(c) of the Code, according to which it has the jurisdiction to entertain or dispose any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution of the corporate debtor. Further, under rule 11 of the NCLT Rules, the NCLT has inherent powers to make necessary orders for meeting the ends of justice.
The Supreme Court in Rahul Jain v. Rave Scans Pvt. Ltd. has held that once a resolution plan is approved by the NCLT, it attains finality and cannot be disturbed. The National Company Law Appellate Tribunal (NCLAT) followed the same reasoning and conclusion in QVC Exports Pvt. Ltd. v. United Tradeco FZC and held that the adjudicating authority is not permitted to alter a plan under the guise of inherent powers. Orders which have attained finality cannot be reviewed under the inherent powers of the court. This power can only be exercised to correct clerical errors or arithmetical mistakes in the judgment.
In essence, the NCLT cannot use its inherent powers to alter or review resolution plans that have already been approved by the NCLT. Additionally, it is also pertinent to mention that according to the ruling of the NCLAT in R.G.G Vyapar Pvt Ltd v. Arun Kumar Gupta, the adjudicating authority has no jurisdiction to reopen resolution process even under section 31 of the Code.
The Way Forward
In order to combat the situation created due to the pandemic, there are three alternatives. First, an application can be made under section 60(5) of the Code and, though the NCLT cannot on its own modify or review a resolution plan already approved, it can use its inherent power to refer the same to the CoC for reconsideration in light of the pandemic. However, this of course comes with the condition that the plan be reconsidered and modified only if the resolution applicant can reasonably show that the problem in implementation is directly related to Covid-19. Second, timelines for the payment to financial and operational creditors or other stakeholders should be allowed to be modified and extended due to Covid-19. Lastly, just as the NCLAT has ordered, the period of lockdown ordered by the Central Government and the State Governments is to be excluded for the purpose of counting of the period of CIRP under section 12 of the Code. The period of lockdown should also be excluded from the implementation schedule of an approved Plan. Unless sufficient attention is provided to address this conundrum, stakeholders in the insolvency process could suffer greater hardships.
– Shebani Bhargava