Stay on NCLAT Order Rejecting Withdrawal of Resolution Plan – Unsettling the Dust Once Again

[Richa Pathak is an alumna of the London School of Economics and Indian Institute of Management, Ahmedabad and Mansi Mishra is a fourth-year student at National Law Institute University, Bhopal]

   The Supreme Court vide its order dated November 16,  2020, stayed the operation and effect of the judgment of the National Company Law Appellate Tribunal (“NCLAT”) in the case of Kundan Care Products Limited v. Amit Gupta, dated September 30, 2020 (“NCLAT Order”). The NCLAT had held that a successful resolution applicant whose resolution plan has been approved by the Committee of Creditors (“CoC”) could not be allowed to withdraw the plan while it is pending approval from the National Company Law Tribunal (“NCLT”) under section 31 of the Insolvency and Bankruptcy Code, 2016 (“Code”). This post seeks to discuss and analyze the NCLAT Order, and put forth the issues that the Supreme Court would have to clarify in order to put this contention around withdrawal of resolution plan to rest.

Factual Background

Astonfield Renewables Pvt. Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”), after filing an application under section 7 of the Code, by the NCLT vide an order dated November 20, 2018. Eventually, after the consideration of a total of three resolution plans by the Committee of Creditors (“COC”), Kundan Care Products Ltd. (“Successful Resolution Applicant”), emerged as the successful resolution applicant. Accordingly, the resolution plan was submitted before the NCLT for its approval. Subsequently, while the said approval on the resolution plan was pending under section 31 of the Code, the Successful Resolution Applicant sought to withdraw its resolution plan through an application filed before the NCLT. The NCLT rejected the said petition (New Delhi, Special Bench) vide its order dated July 3, 2020, in I.A. No.1679/2019 in C.P. No. (IB)-940(ND)/2018]. Hence, the Successful Resolution Applicant filed an appeal before the NCLAT.

Issue

The issue for consideration before the NCLAT was whether the order passed by the NCLT rejecting the application filed for withdrawal of the resolution plan by the Successful Resolution Applicant suffers from any legal infirmity.

Arguments

The Successful Resolution Applicant contended that the NCLT’s finding, to the effect, that it did not have the jurisdiction to allow withdrawal of the resolution plan post its approval by the CoC, was baseless. The same was also contrary to the view taken by the NCLAT in the case of Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP  (“Deccan Value Investors case”). It was further contended that an unwilling resolution applicant could not be compelled to render a specific performance of a resolution plan when such plan is inter alia found to be unviable. Accordingly, it was submitted that since the resolution plan of the Successful Resolution Applicant had been rendered commercially unviable on account of delay in conclusion of the CIRP, hence, the withdrawal must be allowed.

On the other hand, the COC of the Corporate Debtor argued that the present appeal is not maintainable since the subject matter in question has already been covered by the NCLAT in the Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd. (“Educomp case”) where the NCLAT held that post the approval of a resolution plan by the CoC, it cannot be withdrawn through an application before the NCLT. This was because the NCLT cannot delve into the majority decision of the CoC rendered by them exercising their commercial wisdom. Furthermore, no provision in the Code allows for such withdrawal of an approved resolution plan. Lastly, if such a withdrawal is allowed, the same would have the effect of pushing the Corporate Debtor into liquidation.

Observations of the NCLAT

The NCLAT observed that the NCLT, besides relying upon the finding that it had no jurisdiction to entertain an application for withdrawal of the resolution plan post its approval by the COC, also relied upon the fact that a similar issue was sub-judice before the Supreme Court while rejecting the  Successful Resolution Applicant’s application. The NCLAT further noted that prior to receiving an approval from COC, a resolution plan undergoes multiple stages and the entire CIRP process has to be completed within fixed timelines. Moreover, primacy is given to the COC for deciding upon the soundness of a resolution plan, and the same is not justiciable.

Since the approved resolution plan becomes binding upon all the stakeholders after the NCLT passes an order under section 31 of the Code, the successful resolution applicant is not at liberty to change their mind and withdraw the plan to the detriment of creditors. The argument advanced by the Successful Resolution Applicant that no provision of the Code compels the resolution plan’s specific performance by an unwilling applicant was also devoid of any merit per the NCLAT. It observed that: (i) Code does not provide for withdrawal post approval by the COC; (ii) the plan even though not binding is also not a contract of personal service that may become legally unenforceable; (iii) the successful resolution applicant is estopped from wriggling out of liabilities incurred under the said plan and (iv) the value of assets of a Corporate Debtor would decline devastatingly for the creditors if the withdrawal of the plan is allowed. Lastly, the NCLAT stated that the Deccan Value Investors case would not come to the Appellant’s rescue as in that case the resolution plan was in contravention to section 30(2)(e) of the Code. The aforesaid provision states that a resolution plan must not be in contravention of any law for the time being in force.

Decision of the NCLAT

The NCLAT dismissed the appeal by holding that the sanctity of the resolution plan needs to be protected, and hence, the Successful Resolution Applicant was not allowed to withdraw its resolution plan approved by the COC.

Observation

The issue decided by the NCLAT has been a matter of contentious debate as there have not been consistent precedents on the same till date. In this setting, such decision of the NCLAT could have settled the confusion regarding the position of law to some extent had it not been stayed by the Supreme Court.

Threat to Corporate Debtor

The concern of the NCLAT regarding protecting the sanctity of the CIRP is valid. It has been held in a catena of judgments, for instance in Pioneer Urban Land and Infrastructure v. Union of India decided by the Apex Court, that the proceedings under the Code are in rem, thereby involving dependence of interests of a large number of stakeholders on the CIRP. Prior to getting its plan approved by the CoC, the successful resolution applicant competes with other rival resolution applicants. The entire CIRP involves multiples steps and the process pertaining to the same has to be completed in a time-bound manner. When a successful resolution applicant moves the NCLT for withdrawal of the plan, the corporate debtor runs a huge risk of going into liquidation. This is because the time consumed in the CIRP is inversely proportional to the value of the assets of a corporate debtor and there is a good chance that none of the rival resolution applicants, who were earlier interested, would be willing to come forward later. Therefore, it follows that if such withdrawal is allowed and no new successful resolution applicant emerges, then such corporate debtor is sure to go into liquidation, which is contrary to the object of the Code. Instead, the Code aims to resolve insolvency in a time-bound manner and maximize the corporate debtor’s assets.

Forced Performance by Unwilling Resolution Applicant

However, there is another side to this argument. The preamble of the Code as well as a catena of judicial precedents, (for instance in Duncans Industries Ltd. v. A.J. Agrochem decided by the Supreme Court), provide clarity on the fact that proceedings under the Code are not adversarial. Instead, they aim to give a new lease of life to a corporate debtor. The question which arises here is whether an unwilling resolution applicant, after being forced to go ahead with a bargain that it no longer considers viable, be trusted with the revival of a corporate debtor. In such a situation, there is nothing that would disincentivise such a resolution applicant from running the corporate debtor into liquidation. In the Deccan Value Investors case, the three-judge bench of the NCLAT took the same view that an unwilling resolution applicant may be permitted to withdraw a plan, and the NCLT has no jurisdiction to compel specific performance of the plan, which is no longer viable, by the unwilling resolution applicant. The same would be contrary to the spirit of the Code. Since the decision was rendered by a three-judge bench, the subsequent decision in Educomp case, which was decided by a two-judge bench, cannot be said to have an overriding effect on the same.

Applicability of Indian Contract Act, 1872

Section 56 of the Indian Contract Act, 1872 (“Contract Act”) provides for the impossibility of performance of agreements. The pertinent question that arises is whether a resolution applicant can rely on this said provision of the Contract Act while praying for withdrawal of resolution plan on the ground that the performance of the plan is no longer viable due to lapse of excessive time taken by NCLT for approving or rejecting the plan. This has been answered in the affirmative by the NCLT vide an order dated September 8, 2020, in Suraksha Asset Reconstruction Ltd.  v. Shailen Shah, Resolution Professional of Wind World (India) Limited  (“Suraksha case”). While holding the aforesaid, the NCLT laid down that while deciding upon release of a party from performance of resolution plan on grounds of unviability, the NCLT would consider factors like, whether the resolution applicant itself induced the resultant unviability, or whether the terms of process documents expressly prohibit such withdrawal. In this regard, it is only when such factors are answered in the negative that protection under section 56 would come into play. Therefore, the NCLT held that “without default of either party, if a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for have rendered the performance impossible then a party may be released from its performance obligation.” This decision has given a new turn to the debate by explicitly recognizing the application of Contract Act under the Code.

Conclusion

In light of the above discussion, it would be interesting to see how the Apex Court settles the inconsistency in the position of law with respect to withdrawal of resolution plan post CoC’s approval and prior to NCLT approval. It would especially be significant if the Supreme Court upholds a position similar to that in Suraksha case.

– Richa Pathak & Mansi Mishra

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