[Aadya Bansal and Navya Saxena are 4th year students at National Law Institute University, Bhopal]
On 13 September 2021, the Supreme Court, in its landmark decision in Ebix Singapore Private Ltd. v. Committee of Creditors of Educomp Solutions Ltd., provided a much needed conclusion to a recurring debate under the Insolvency and Bankruptcy Code, 2016 by ruling that a resolution plan approved by the committee of creditors (“CoC”) cannot be withdrawn or modified by the successful resolution applicant (“RA”).
While attempting to steady the rocky landscape on this matter, the Supreme Court’s decision has arguably charted a new course in the discourse. In this post, the authors discuss the “topsy-turvy stance” adopted by courts pre-Ebix case and the relevant principles concretised through the judgement in the present case. Following this, the authors measure the ripples the decision creates both in operation and in policy.
Factual Background
Educomp Solutions Limited filed a petition under section 10 of the Code for the initiation of a voluntary corporate insolvency resolution process (“CIRP”). For this, the CoC chose Ebix Singapore Private Limited as the successful RA. However, after submission of the resolution plan, there arose a controversy concerning Educomp’s financial affairs and transactions, thereby leading to requests by Educomp’s financial creditors for investigation into it. Consequently, Ebix sought to withdraw or modify its resolution plan owing to reasons such as the impact of ongoing investigations on the resolution process, financial hardship, material change in position of the corporate debtor due to COVID-19, and delay in approval of resolution plan. It, thus, filed an application under section 60(5) of the Code for withdrawal of the resolution plan.
After rejecting the application twice, the National Company Law Tribunal (“NCLT”) allowed the third withdrawal application filed by Ebix and held that “the application for withdrawal was not barred by res judicata since in the previous proceeding relating to the First Withdrawal Application, it had not consciously adjudicated on whether the Resolution Plan could be withdrawn.” Resultantly, the Educomp CoC filed a withdrawal appeal before the National Company Law Appellate Tribunal (“NCLAT”). After taking into consideration the NCLT order, the NCLAT reversed it, stating that once the resolution plan was approved by the CoC, the NCLT did not have jurisdiction to permit its withdrawal. Ebix challenged the same before the Supreme Court, leading to a decision by a division bench, which the authors examine in this post.
Oscillating Stance of Courts
This is not the first time that the courts have analysed the possibility of withdrawals and modifications of resolution plans. In 2020, in Maharashtra Seamless Limited (MSL) v. Padmanabhan Venkatesh, a three-judge bench of the Supreme Court had held that there cannot be any withdrawals of approved plans. The Court emphasised that it is within the CoC’s discretion to consider the feasibility and viability of the resolution and, once it approves the plan, the adjudicating authority has to move on to the next step of the process in terms of section 31(1) of the Code. Thus, the RA cannot be permitted to take a contrary stance by seeking a withdrawal of the plan. Furthermore, in the same thread, the NCLAT in Kundan Care Products had noted that the withdrawal shall not be permissible as, if allowed, it was “fraught with disastrous consequences to the debtor.” Even during the pandemic, the NCLAT has upheld this position in the S.S.Natural Resources case stating that no withdrawals can be permitted on account of COVID-19.
While this may allude to a consensus among the tribunals concerning the lack of permissions for withdrawals, a three-member bench of the NCLAT held in the case of Metalyst Forgings that there is no restriction to withdrawal of plans even after they had been approved by the CoC. The bench had relied on decisions such as Deccan Value Investors L.P. and DVI PE (Mauritius Limited) v. Deutsche Bank AG and Ors., wherein the NCLT Mumbai had permitted such a withdrawal and had referred to the letter and spirit of the Code, stating that it mandates the acceptance of only viable and lawful plans by a willing RA. The tribunal had emphasised the central role “viability” plays in a resolution plan and referred to section 30(2)(d) of the Code which mandates that a plan must contain provisions for its implementation and enforcement. Additionally, under section 30(4), the CoC has been directed to satisfy itself of the plan’s viability before approving it. The tribunal had thus concluded that the Code does not prohibit withdrawals and modifications, but rather imposes a duty on the adjudicating authority to reject plans if they were found to be inviable. The NCLAT in Metalyst Forgings confirmed this reasoning while allowing the withdrawal of the plan. Furthermore, even in the cases of Tarini Steel, Panama Petrochem and DIGJAM Ltd., the adjudicating authority had permitted withdrawals and modifications in the resolution plans post the approval of CoC. Interestingly, neither the NCLAT nor the Supreme Court in the present case addressed the decision rendered in Metalyst Forgings, or any of the other aforementioned judgments.
Thus, as evidenced, the common factor remained not the stance of the courts on the subject, but rather the oscillating views rendered by the courts and tribunals. This amplifies the significance of the decision in the present case, for now the Court has finally given its conclusive opinion.
Supreme Court in the Ebix Case
The Supreme Court in the Ebix case conclusively held that a resolution plan, once approved by the CoC of the corporate debtor, cannot be withdrawn from consideration. This observation was founded on, firstly, the treatment of a resolution plan as not an ordinary contract but a creation of the IBC, and secondly, the lack of addressal of a situation of withdrawal of an approved resolution plan in the legislative framework.
The nature of a resolution plan
To determine how legal force is accorded to a resolution plan, the Court discussed the nature of a resolution plan to understand whether an option of withdrawal can be derived from the law of contract. It was held that the validity of the resolution plan is not premised upon the agreement or consent of those bound, but upon its compliance with the procedure stipulated under the IBC. Relying on its decision in SK Gupta v. KP Jain, it further noted that legal force is conferred upon a resolution plan only by virtue of the IBC and it does not operate merely as an agreement between the parties. Additionally, common law remedies such as withdrawal or modification of the resolution plan on account of frustration or force majeure are not applicable to a plan owing to the nature of the Code. Therefore, the Court declined to import contractual principles and common law remedies, which do not find a tether in the wording or the intent of the IBC.
Withdrawal is not permitted under the framework of the Code
To answer the pertinent question raised in this appeal, the Court embarked upon analysing the legislative framework surrounding withdrawal or modifications of a resolution plan after its submission to the adjudicating authority. In this regard, the Court first noted a distinct absence of a provision in the Code that can legitimise such a claim. A situation of withdrawal is envisaged only under section 12A of the Code and regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the “CIRP Regulations”), whereby an application admitted under sections 7, 9, and 10 of the Code may be withdrawn in the interest of the CoC. Therefore, the course of action was explicitly affirmed by the insertion of section 12A which vested the CoC with the power to withdraw the CIRP or vote on such withdrawal, if sought by the corporate debtor. Permitting withdrawals for plans when no such exit route has been contemplated for the resolution applicant, especially in the face of patent silence in section 12A or other provisions of the Code, would amount to rewriting the statute.
Secondly, the Court reiterated the onus placed upon the resolution applicant in the process. Resolution applicants are presumed to have submitted an informed plan with feasible and implementable timelines, having assessed the commercial operations of the corporate debtor, in accordance with regulation 38(3) of the CIRP Regulations. Therefore, a resolution plan whose implementation can be withdrawn at the behest of the successful resolution applicant is inherently unviable, since clauses effecting modifications or withdrawal would mean that the plan could fail at any undefined stage, even after approval by the adjudicating authority. Besides, the adjudicating authority cannot direct an unwilling CoC, that would have approved the plan in its commercial wisdom, to renegotiate the plan solely at the behest of the resolution applicant, as was held in the Essar Steel case. This is given that the power of judicial review of the adjudicating authority under section 30(2) of the IBC is limited and can be used to direct the CoC to reconsider only certain elements of the plan.
Repercussions and Conclusion
The Code was conceived as a comprehensive and time-bound framework, with a procedure designed to appreciate the critical nature of an insolvency process by enabling timely allocation of economic coordination between the parties whose substantive rights and obligations are determined by the procedure. Accordingly, the interpretative task of the adjudicating authority, appellate authority, and even the Supreme Court, must be cognizant of, and allied with that objective. In this regard, the Supreme Court’s ruling that rejected the withdrawal of an approved plan preserves the IBC’s underlying objective of timely resolution.
The Court here has concisely, coherently, and conclusively laid down that no withdrawals or modifications shall be permitted after a resolution plan has been approved by the CoC. While the decision is a welcome one, as it finally dispels the ambiguity surrounding this subject, it has also raised concerns in the minds of many because RAs now ought to tread carefully while negotiating terms with CoC as they no longer have the option to exit. Additionally, the object of getting the plan approved is to save the corporate debtor and help maximise value addition, and the same cannot be done by an unwilling RA whose plan has become unviable and who is not permitted to withdraw said plan. This situation may discourage prospective applicants from coming forward with their plans. However, at the same time, if withdrawal is permitted following the approval, it could have the cascading effect on the ongoing CIRP of decreasing the value of corporate debtor’s assets and affecting the projections of the RA due to the inordinate delay that follows. Such withdrawal would render the entire resolution process futile, and this gaping lacuna has been sought to be exploited by many. Furthermore, this stance would now ensure that due care is exercised in the formulation of resolution plans by RAs. Thus, it seems that the decision of the Court represents a double-edged sword, and it is undeniably bound to be intriguing to witness how the insolvency practice will incorporate the import of this decision.
– Aadya Bansal & Navya Saxena