[By Mohd. Fahad Ansari and Tejanshu Vashishtha]
The authors are students of National University of Study and Research in Law (NUSRL), Ranchi.
Introduction
Under the Insolvency and Bankruptcy Code, 2016 (Code), every Corporate Insolvency Resolution Process (CIRP) necessitates the evaluation of a resolution plan, which can be a rehabilitation or restructuring proposal put forth by the resolution applicants for debt restructuring of the Corporate Debtor (CD) and its continued operation. Once the applicants submit a plan, the Committee of Creditors (COC) examines its feasibility and viability. Upon reaching an agreement on one of the proposed plans through the required majority under the Code, it is declared as an accepted resolution plan. This plan is then presented to the Adjudicating Authority for consideration.
However, there have been instances when the COC has chosen to review or reconsider its acceptance of a resolution plan while awaiting Adjudicating Authority’s acceptance. The courts in India have expressed conflicting opinions on this matter, creating a dilemma that hinders future resolution plans and poses a threat to the objectives of the Code. Through this article, the authors analyze the authority of the COC to reconsider or review its acceptance based on commercial wisdom, particularly in cases where a successful plan is pending for Adjudicating Authority’s acceptance, taking into account the provisions of the Code, fundamentals of the Law of Contracts and relevant judicial decisions.
Inconsistent Judicial Opinions
Not long ago, the National Company Appellate Tribunal (NCLAT), Delhi in Hem Singh Bharana v. M/S Pawan Doot Estate Private Limited and Others (Pawan Doot) ruled that post the acceptance of a resolution plan by the COC, the resolution plan becomes binding on COC and the accepted resolution plan cannot be reconsidered by the COC. While pronouncing the judgement, the NCLAT relied upon the Apex Court’s Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another (Ebix Singapore), where the court held that once a resolution plan gets the acceptance of COC and the same is pending for acceptance before the Adjudicating Authority, the plan cannot be withdrawn since an accepted plan becomes a legally binding agreement between the CD, the creditors and the resolution applicant. Going on the same lines, in Maharashtra Seamless Limited (MSL) v. Padmanabhan Venkatesh the Apex Court again did not give the permission for reconsideration of an accepted resolution plan, which was waiting to get the acceptance of the Adjudicating Authority.
These judgements deny reconsideration of an accepted resolution plan when they are laid before the Adjudicating Authority to get further acceptance on the basis that as soon as a resolution plan gets an acceptance, it becomes contractually binding since both the creditors and the resolution applicants agreed on the terms of such a plan. Therefore, in Pawan Doot judgement, the NCLAT took note of the “nature” of an accepted resolution plan, which is prohibited from reconsideration by the COC by virtue of its binding nature in the opinion of the NCLAT.
It is pertinent to note that the Pawan Doot judgement stands in sharp contradiction to the NCLAT’s previous Bank of Maharashtra v. Videocon Industries (Bank of Maharashtra) ruling, wherein the tribunal allowed the reconsideration of an accepted plan by the COC, when the plan was pending to get the acceptance of the Adjudicating Authority. The tribunal allowed the reconsideration on the basis that since the COC made a 95% haircut in the plan, the same was commercially unviable, and the reconsideration would protect the interest of the public exchequer.
These judgements generate a conundrum situation in the nascent history of the Code which aims to settle the position over reconsideration of an accepted plan by the COC.
In the Ebix Singapore case, the Apex Court considered 3 phases for the withdrawal of a resolution plan by the applicant. Firstly, before the COC give its acceptance, secondly post the acceptance by the COC but before getting the acceptance of the Adjudicating Authority and lastly, when both the COC and Adjudicating Authority accepted the plan. In Pawan Doot case, the problem arose in the second phase. Interestingly, the Ebix Singapore judgement only discussed the prospect of withdrawal of an accepted resolution plan during the second phase that too by the successful resolution applicant and not by the COC. The question is whether COC can also be prohibited from reconsideration of an accepted resolution plan by applying the same logic.
Critical Analysis
In the opinion of the authors, it is submitted that the Pawan Doot judgement stands in defiance of the Code and in sharp contradiction with the very objective of the Code which seeks to maximize the value of the assets of a CD.
COC is empowered to take any financial decision during the CIRP concerning a CD. Post the submission of a plan by an applicant, a duty exists on the COC to check and verify the “viability and feasibility” of the submitted plan, and a discretion lies on the COC to either accept or reject the plan by obtaining 66% votes. After acceptance of a resolution plan, the courts have opined the same to become a legally binding agreement. However, if the same becomes a contract, then it must also be allowed to get terminated once parties mutually agree to do so.
There is no dispute that the Adjudicating Authority upon getting a request from the COC can send back a plan to the COC for reconsideration. After getting the acceptance of a plan by the COC, the Adjudicating Authority confirms that the plan meets the requirements of Section 30. Moreover, at this stage, if in the opinion of the Adjudicating Authority, the plan needs some modifications or alterations, then it can send back the plan to the COC for their consideration. Only after getting an acceptance by the Adjudicating Authority under Section 31 of the Code, a resolution plan becomes binding. Henceforth, it is a logical corollary that the Code itself provides an option for the COC to reconsider a resolution plan. This reconsideration promotes the commercial wisdom of the COC.
Additionally, changed circumstances are another situation where an accepted resolution plan can be given back to the COC for reconsideration. Perhaps the Bank of Maharashtra judgement has correctly noted that if the COC at some later point in time concludes that the public exchequer will bear an extraordinary haircut in a large fund employment, then it would be better to return the plan to the COC to promote the larger public interest. Therefore, if the COC gets a superior settlement agreement which offers a smaller haircut, it will amount to changed circumstances and the superior agreement should be allowed to promote the larger public interest.
The Code confer paramountcy to the consent of the COC, and the COC has full discretion to contemplate the terms of a resolution plan. Moreover, any action taken by the COC in furtherance of its commercial wisdom cannot be challenged. Modification of payment is also a commercial aspect which comes under the purview of commercial wisdom of the COC. Furthermore, it should also be kept in mind that a body which has the authority to make a decision, also has the authority to alter, repeal, or change the same decision.
Another aspect which needs consideration is the nature of an accepted plan. A contract becomes binding on the parties who gave their consent for the T&Cs of the same. It is submitted that not only the financial creditors and the resolution applicant are bound by a resolution plan, but the employees and the operational creditors of a CD are also bound by the plan even though their consent is never taken into consideration. Therefore, it would be a fallacy to equate a resolution plan with a contract since it involves entities that were never parties to the contract. Hence, the COC must be allowed to reconsider its accepted plan, if such review promotes the interest of the CD.
Lastly and perhaps most tellingly, even if we assume a resolution plan to be a contractual agreement, then another area pertinent to the contractual nature of a resolution plan is the free consent. For example, if a plan offers a 70% haircut which is pending to get the acceptance of the Adjudicating Authority and in the meantime, a settlement agreement is proposed which offers a 50% haircut. In these types of cases, prohibiting the reconsideration of such settlement agreements would conflict with the free consent of the COC that would result into enforcing of the contract by the tribunals in opposition to the principles of the contract law which necessitates the presence of free consent.
Conclusion
Though timely completion of CIRP is important, but the same should not put the CD in trouble. One of the major objectives of the Code is the resuscitation of the CD. In today’s scenario where the fluctuation of the market is unpredictable, an accepted resolution plan can become non-feasible because of changes in circumstances. In such a scenario, reconsideration of the plan by the COC must be allowed since it would be in the best interest of the CD. Undoubtedly, the COC should exercise greater caution when assessing the potential outcomes of resolution plans before casting their votes. However, it is essential to prioritize the creditor’s advantage in terms of commercial uncertainty. Additionally, considering the evolving nature of the Code, the contradictory judicial opinions on this matter could adversely impact both the creditors and the CD.