[By Soham Chakraborty & Aaryan Wasnik]
The authors are students at the NALSAR University of Law, Hyderabad.
The 32nd Report by the Standing Committee on Finance submitted to the Parliament, has made many pertinent observations and recommendations with respect to the functioning of the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”). In the Section titled “Performance Review of the NCLT System,” the Standing Committee pointed out various reasons for delays in the resolution of insolvencies. In one such observation, the Standing Committee found that many times, prospective resolution applicants wait for the details of the highest bid to become public and only then come forward with better bids, often at the cost of adhering to the timelines provided for the submission of resolution plans. Following this observation, it made a recommendation that the Code should be amended so that no post hoc bids are allowed during the resolution process. This article first looks at the provisions under the Code which provide for a time-bound process with respect to submission of resolution plans and at judgments that have laid down authoritative points of law. Following this, the article engages with the observations made by the report of the Standing Committee and tries to offer some suggestions of its own.
Sanctity of a Time-Bound Process under the Code
Time-Bound Approval of a Resolution Plan: Provisions & Case Laws
Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter “CIRP Regulations”) provides a model timeline for the corporate insolvency resolution process. According to the table provided in the regulation, the timeline for submission of the Committee of Creditors (hereinafter COC) approved resolution plan to the Adjudicating Authority is within 165 days from the commencement of CIRP.
Resolution plans which are submitted to the Resolution Professional ( hereinafter RP) and which fulfil the requirements under Section 30(2) are required to be placed by the RP before the CoC for consideration. The CoC upon consideration of the resolution plans can further negotiate with the resolution applicants for better bids and can also authorize the RP to extend the deadline for submission of resolution plans in order to allow new resolution applicants to submit their resolution plans. Despite the entire process being a time-bound process, adherence to the deadlines has not been very strictly enforced under the Code.
In the matter of RICOH India Limited, the RP on the authorization of the CoC had accepted two resolution plans after the expiry of the deadline for submission. Finally, the resolution plan of the consortium of Kalpraj Dharamshi & Rekha Jhunjhunwala, which was submitted after the deadline, was approved by the CoC.
The NCLT allowing the actions of the RP held that the most attractive resolution plan was selected only after all the resolution applicants were granted the due opportunity by the CoC. The CoC had exercised its commercial wisdom judicially in this case and hence it did not warrant any interference by the Adjudicating Authority.
Upon appeal the NCLAT, New Delhi held that the “alleged act of the Resolution Professional in accepting the Resolution Plan after the expiry of the deadline for submission of Resolution Plan is arbitrary, illegal and against the principle of natural justice and cannot be treated as an act within the commercial wisdom of the CoC.” It directed the CoC to consider the resolution plans submitted within the deadline and take a decision within 10 days from the date of the order.
On further appeal, the Supreme Court held in Kalpraj Dharamshi v. Kotak Investment Advisors Limited (hereinafter “Kalpraj Dharamshi”), that the actions of the RP in accepting the resolution plans after the expiry of the deadline had the stamp of approval of the CoC. Following this observation, it went on to hold that “…that in view of the paramount importance given to the decision of CoC, which is to be taken on the basis of ‘commercial wisdom’, NCLAT was not correct in law in interfering with the commercial decision taken by CoC…”. In other words, the Supreme Court found that the decision of the CoC to accept resolution plans submitted beyond the deadline was an exercise of its commercial wisdom.
After the Supreme Court judgment in the Kalpraj Dharamshi case, the NCLAT, New Delhi was faced with a similar fact scenario in Dwarkadhish Sakhar Karkhana Limited v. Pankaj Joshi. In this case, the CoC had in its 7th meeting refused to allow the resolution applicant from filing its expression of interest (hereinafter “EoI”) and resolution plan after the deadline. Following a change in the RP, the CoC in its 9th meeting decided to revisit its decision taken in the 7th meeting and allowed the resolution applicant to file its resolution plan. The NCLAT finding that the RP had misguided the CoC by suppressing material facts declined to hold that the decision of the CoC to revisit its decision taken in the 9th meeting was in the exercise of its commercial wisdom. Further, the NCLAT, differentiating this case with the decision of the Supreme Court in the Kalpraj Dharamshi, held that the actions of the RP in the latter had the required authorization of the CoC while in the present case, the RP had acted without any authorization from the CoC in allowing the resolution applicant to submit its EoI after the deadline.
Striking a Balance: Time-Bound Resolution v. Value Maximisation
From the case laws cited above, it is clear that the action of the RP, with the approval of the CoC, to accept resolution plans beyond the deadline for submission cannot be questioned in a Court of law as it falls within the ambit of the commercial wisdom of the Court. Considering the objective of Code of value maximization the CoC should be provided with the discretion to consider plans which are much better in comparison to existing resolution plans.
However, extending the deadline of the Code indefinitely in order to consider newly submitted resolution plans, in the hope that they would provide better value to the stakeholders, would run counter to the other objective of the Code -to resolve insolvency of the corporate debtor in a time-bound process. The greater the time that is taken for resolving insolvency, the greater is the value erosion of the assets of the corporate debtor. Additionally, while the financial creditors in the CoC may have the ability to ignore the deadlines under the Code in the hope of a better recovery the same is often not the case with respect to operational creditors like workers, micro and small enterprises. For these stakeholders, delays in receiving their dues may push them towards financial difficulties. Thus, it is imperative that the process has to end somewhere.
One possible suggestion can be to draw a line when the timeline provided under the Code for submission of the resolution plan, approved by the CoC, to the Adjudicating Authority has expired. Making such a provision would also address the concerns of the Standing Committee – non-adherence to the deadlines under the Code and consequent delays running into months if not years. Further, the Supreme Court in the Kalpraj Dharamshi judgment seemed to point towards having such a timeline when it held in Para 156 that, “However, it has been the consistent stand of RP as well as CoC, that all actions of RP, including acceptance of resolution plans of Kalpraj after the due date, albeit before the expiry of timeline specified by the I&B Code for completion of the process, have been consciously approved by CoC.”
If the above mechanism is to be adopted then after a particular timeline the CoC will not be allowed to accept any further resolution plans. Before this timeline is over and after the issue of the invitation of the EoI by the RP under Regulation 36A of the CIRP Regulations, it will be completely left to the commercial wisdom of the CoC, through the RP, to accept EoIs and resolution plans under the Code. As for the timeline after which no resolution plan can be accepted by the CoC, Regulation 39(4) of the Code provides that the “resolution professional shall endeavour to submit the resolution plan approved by the committee to the Adjudicating Authority at least fifteen days before the maximum period for completion of corporate insolvency resolution process under section 12…”. In addition to this, the Code must be amended to include an express provision disallowing any acceptance of resolution plans after the expiry of the time stated in Regulation 39(4).
Conclusion
The government in 2019 considered establishing an online bidding mechanism with a limited time period for resolution applicants to make their bids. In this process, resolution applicants who fulfil some eligibility criteria will be allowed to bid online for a limited period, thereby resulting in strict adherence to timelines. However, one has to take into consideration the fact that submission of resolution plans cannot be equated to submitting bids. There are various facets to a resolution plan and each resolution plan would differ in these aspects. Some plans may offer a greater return to the creditors on their admitted claims while others may offer a greater infusion of funds into the corporate debtor. Each resolution plan requires significant discussions with the members of the CoC who are tasked with selecting the plan which would be best suited to take the corporate debtor out of insolvency. Further, such a mechanism, while resulting in strict adherence to timelines, would tie the hands of the CoC in case a better plan is available after a resolution plan has been selected through online bidding. The suggestions made in this article would provide sufficient time for the CoC to explore different resolution plans that may be offered- resulting in value maximization while also ensuring that the process remains time-bound.