Submission of Revised Plan after Adoption of SCM: Permitted?

[By Yashila Bansal]

The author is a student of Chanakya National Law University.

 

SWISS CHALLENGE METHOD AND ITS LEGALITY IN INDIA

On the sixth anniversary of the Insolvency and Bankruptcy Board of India, Nirmala Sitharaman said, “We must do whatever it takes to keep IBC as sparkling as it was when it was introduced in 2016.” She had made these comments at a time when 100 out of 500 enterprises that had to deal with proper resolution under the IBC had to take haircuts that were higher than 90%, which was completely unacceptable.

The Swiss Challenge Method (SCM) is one of the many auction techniques and is potentially one of the finest solutions to resolve the issue of large haircuts and might result in the assets of the corporate debtors being valued at their maximum. The same has also been addressed by the Insolvency and Bankruptcy Board of India (IBBI) in its discussion paper which was published on August 27, 2021. The discussion paper has defined the Swiss Challenge Method as “a bidding process, wherein a bidder (the original bidder) makes an unsolicited bid to the auctioneer. Once approved, the auctioneer then seeks counter proposals against the original bidder’s proposal and chooses the best amongst all options (including the original bid). The original bidder in most cases is granted the “right to first refusal”. If the original bidder agrees to match its offer to the challenging proposal, the bid is awarded to him, else it is awarded to the challenging bidder.” The Committee of Creditors (CoC) primarily decides to use the swiss challenge method in Corporate Insolvency Resolution Process (CIRP) to maximise the value of assets because of the competitive bidding involved in it.

Although there isn’t a definitive explanation for the name of this bidding process, it could be related to the neutral stance that the Swiss national policy took throughout the World Wars and how this method would likewise provide a neutral position between the corporate debtors and the CoC.

Before the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, there was no express provision regarding either the use or prohibition of the Swiss Challenge Method in CIRP. As a result, the courts formed diverse viewpoints. In the case of Saket Tex Dye Pvt. Ltd. v. Kailash T. Shah, the bench of NCLT Mumbai ruled that SCM cannot be used during CIRP as there is no specific provision regarding the same. Furthermore, in the case of MRG Estates LLP v M/s Amira Pure Foods Pvt. Ltd., Delhi High Court also did not permit the use of SCM and it also simultaneously issued directions to IBBI to make necessary amendments to include SCM in CIRP. However, in the case of Bank of Baroda v. Mandhana Industries, NCLT Mumbai had expressly ordered directions to use SCM in CIRP as no express bar had been provided on the same.

However, after the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, SCM has now been expressly recognised under regulation 39(1-A)(b) which has brought an end to the confusion that existed before.

BRIEF FACTS OF THE CASE AT HAND

The Mumbai Bench of the National Company Law Tribunal (NCLT) had initiated CIRP proceedings against Mittal Corp. Ltd. and other corporate debtors vide its order dated 10.11.2021. For the same, Mr. Shailendra Ajmera was appointed as the resolution professional. The resolution professional issued a Request for Resolution Plan (RFRP) on April 11, 2022, and by May 31, 2022, he had received a total of six plans, including those submitted by the appellant, Jindal Stainless Limited, and respondent no. 2, Shyam Sel and Power Limited.

The CoC convened its twelfth meeting on July 4, 2022, during which it was agreed to initiate a Challenge procedure to provide the Resolution Applicants a chance to enhance their plans. The guidelines for the Challenge procedure were communicated to all Resolution Applicants, and following the receipt of their unconditional acceptance, the same was conducted in the 13th CoC meeting which was held on July 15, 2022. Seven rounds of this procedure were conducted until there was just one competing Resolution Applicant left.

In an email sent to the Resolution Professional on July 19, 2022, Shyam Sel and Power Ltd. expressed its readiness to submit the entire NPV proposed as an upfront payment within 30 days.  Further, Shyam Sel and Power Ltd. also filed an application before the Adjudicating Authority, seeking direction to the Resolution Professional to consider the offer dated 19.07.2022 and place the same before the CoC. The CoC was instructed by the adjudicating authority to review the amended resolution plan of Shyam Sel and Power Ltd. and make an informed conclusion as per an order dated 8 November 2022.  The Resolution Professional halted the voting process in accordance with the aforementioned order. Jindal Stainless Ltd. appealed against the order dated 8 November 2022 to the NCLAT in the matter of Jindal Stainless Ltd. Vs. Mr. Shailendra Ajmera & Another.

ISSUES RAISED

The Appellant was represented by Shri Ramji Srinivasan, a learned senior counsel, and Shri Bishwajit Dubey, an advocate. They argued that the Adjudicating Authority has committed an error in issuing the contested order where it has been directed to consider the revised plan of Respondent 2 where Respondent 2 had no right or jurisdiction to further revise his plan after going through the challenge process. It was further asserted that the Swiss Challenge Method was adopted by the CoC as per Regulation 39(1-A)(b) which had been substituted w.e.f. September 30, 2021. This legislation explicitly enshrines the Swiss challenge method within the IB Code’s resolution process. Additionally, the CoC is prohibited from taking resolution plans that have been submitted after a certain time under the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021. However, the Adjudicating Authority’s order will inevitably cause the process to drag out, which is contrary to the IBC’s desired objectives.

Regulation 39(1-A) states that:

(1-A) The resolution professional may, if envisaged in the request for resolution plan—

(a) allow modification of the resolution plan received under sub-regulation (1), but not more than once; or

(b) use a challenge mechanism to enable resolution applicants to improve their plans.

Furthermore, regulation 39(1-B) states that:

(1-B) The committee shall not consider any resolution plan—

(a) received after the time as specified by the committee under Regulation 36-B; or

(b) received from a person who does not appear in the final list of prospective resolution applicants; or

(c) does not comply with the provisions of sub-section (2) of Section 30 and sub-regulation (1).]

The committee of creditors, represented by the learned counsel, Shri Gaurav Mitra, argued that since the goal of the Code is to maximise the value of the corporate debtor’s assets, the CoC has the authority to accept revised resolution plans. They further stressed that Regulation 39(1A) is simply directory in nature. Shri Abhijit Sinha, Learned Counsel appearing for Respondent no. 2 argued that the decision of the adjudicating authority was not flawed because the revised plan merely seeks to maximise the value of the assets which is the ultimate object of the Code.

Therefore, the question raised in this Appeal was whether the updated plan presented by Respondent No. 2 should be taken into consideration after the Challenge Process was closed on July 15, 2022, and Resolution Plan was subsequently received on July 18, 2022.

THE COURT’S VERDICT

The Bench placed reliance on a judgment passed by the Supreme Court in the case of Ngaitlang Dhar vs. Panna Pragati Infrastructure Private Limited & Others. In this case, it was held that a Resolution Applicant cannot be allowed to submit a revised plan after the adoption of the Swiss Challenge Method to find out the best plan. Furthermore, the Hon’ble Court had also placed emphasis on the completion of the process within the timeline as prescribed by the IB Code.

The bench in the present case held that “it is well settled that the timeline in the IBC has its salutary value and it was the wisdom of the CoC which decided to vote on the Resolution Plan after completion of Challenge Process and not to proceed to take any further negotiation or further modification of the plan, that decision ought not to have been interfered with”.

Hence, after taking inference from the above two judgments, it can be concluded that after the adoption of the Swiss Challenge Method, the Resolution Applicant is not permitted to further submit revised plans.

This judgement is a leading light that will spur further development of the Insolvency and Bankruptcy Code. The cogent stand taken in this judgement will assist in the completion of the resolution process in a time-bound manner, which has been set out as one of the objectives of this code in its preamble. It will eventually expedite the cumbersome process of insolvency and help reduce the huge backlog of bankruptcy cases in India.

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