[By Ankit Sharma]
The author is a student at the Jindal Global Law School, Sonipat.
Introduction
The withdrawal of resolution plans under The Insolvency and Bankruptcy Code 2016 (“Code”), had always been a contentious issue, with the NCLTs and NCLAT taking conflicting positions in the past. In the recent case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited (“Ebix Singapore”), the Supreme Court settled the conundrum and held that if a resolution plan had been approved by the Committee of Creditors (“CoC”), then modifying or withdrawing it would not be permissible. While a time-bound insolvency process is certainly an objective of the Code, to disregard certain circumstances which may warrant a successful resolution applicant to backtrack from his commitment, would not be prudent. This article seeks to analyse the Supreme Court’s judgement, in view of the precedents set and contends that the legislature must provide for certain exceptions wherein the withdrawal of a resolution plan may be permitted.
Background
Interestingly, no provision in the Code explicitly permits the withdrawal or modification of the resolution plan. Yet in Panama Petrochem Ltd. v. Aryavart Chemicals Private Limited (“Panama Petrochem”), the NCLT remarked that although such withdrawals must not be encouraged, they may be accepted due to the “totality of the circumstances.” In the case, the same included another resolution plan being approved by the CoC and the backing out of the resolution applicant’s joint investor, who had agreed to invest in the corporate debtor. Further, in Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP (“Metalyst Forging”), the NCLAT noted that the resolution applicant had been provided with misleading information about the production capacity and the feasibility of the corporate debtor, when the plan was approved by the CoC. It was observed that the Code did not offer the NCLT any means to compel the specific performance of a resolution plan by an unwilling resolution applicant. Since the resolution professional was required to present the true and updated information, the plan itself contravened Section 30(2)(e) of the Code. Accordingly, the resolution plan was allowed to be withdrawn. In Suraksha Asset Reconstruction Ltd. v. Shailen Shah(“Suraksha Asset”), the NCLT held that if a resolution plan was not approved by the Adjudicating Authority within a reasonable period, then the resolution applicant could withdraw the resolution plan under Section 60(5)(c) of the Code. This would have balanced the interests of all the stakeholders and mitigated their difficulties. However, the judgement was soon overturned in Committee of Creditors of Wind World (India) Ltd. v. Suraksha Asset Reconstruction Ltd., in view of the Ebix Singapore case.
Notably, contrasting views had been taken by the tribunals as well. In Kundan Care Products Ltd. v. Amit Gupta, the NCLAT opined that the Code did not have any provision that could enable a successful resolution applicant to take a “U-turn” and thwart the entire exercise of the CIRP. The move could have devastating consequences, as the CIRP period may be nearing its end, which could push the corporate debtor into liquidation. In the case of Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd, the NCLAT noted that the resolution plan, once approved by the CoC, cannot be withdrawn. Further, the Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh, stated that the NCLT cannot withdraw a CoC approved resolution plan and can only assess it under Section 31(1) of the Code.
The Ebix Singapore Case
The Apex Court was hearing a batch of three appeals, wherein the resolution plans submitted to the NCLT in three different Corporate Insolvency Resolution Processes (“CIRP”), were sought to be withdrawn. On a careful analysis, it was held that when the CoC approves a resolution plan, it cannot be modified or withdrawn by the successful resolution applicant, even though it may be pending for approval before the Adjudicating Authority.
In its verdict, the court delved into several aspects of the Code. With regards to the purpose of the insolvency law, the Supreme Court observed that it could not create a substantive or procedural remedy that the Statute had not specified, for it would not only be encroaching upon the legislature’s domain but also harming the delicate co-ordination under the Code. On the aspect of the nature of resolution plans, the Supreme Court held that it was not the same as traditional contracts. This was on the grounds that the Code governed to a great extent, the insolvency process, the mode, and effect of approval, and the fact that it could bind such parties who had not consented to it. Since the resolution plans were brought into existence by the framework provided under the Code and were not described as contracts therein, they also did not qualify as statutory contracts.
With respect to the withdrawal of resolution plans, the Supreme Court noted that the Code only provided for the withdrawal of applications to initiate the CIRP under Section 7, 9 and 10 of the Code, through its Section 12A. As such, the lack of any exit route for a successful resolution applicant under the Code indicated that the same should not be permitted. Further, the language of Section 31(1) of the Code could not be interpreted to signify that a resolution plan can be withdrawn or modified prior to its approval by the NCLT. The Court held that by submitting a resolution plan, a resolution applicant is assumed to have gone through the information memorandum and understood the financial risks. A withdrawal or modification of the resolution plan cannot happen later, as it would disrupt the timeline for the insolvency process under the Code and represent a remedy, which the legislature had not provided for. Consequently, resolution plans with clauses for re-negotiations or walk-away rights cannot be implemented. Even the residuary power under Section 60(5)(c) of the Code cannot be utilised for withdrawing or modifying a CoC approved resolution plan.
Analysis
The Parliament’s Standing Committee on Finance in its recent report observed that 71% of the cases remained pending for more than 180 days, underscoring a deviation from the Code’s objectives. Covid-19 subsequently, has exacerbated such delays. Since a corporate debtor’s valuation only deteriorates when the insolvency process drags on, it is understandable why at times, a successful resolution applicant may want to withdraw his resolution plan. Despite any errors on their part, they would be stuck with a bad deal. Moreover, the pandemic could have worsened the corporate debtor’s financials and adversely impacted the applicant itself. In such cases of undue delay, coupled with a material change in the financial position of either the resolution applicant or the corporate debtor, it would be unreasonable to hold that the information memorandum could predict such a risk. To then not give an option of backing out to the resolution applicant, appears to be unfair on a normative scale.
While the aim of the Code is to conduct the resolution process expediently, it is not to burden unwilling parties with the task of reviving a firm, especially so when the entire economy is reeling under the effect of the pandemic. Some circumstances may not be in the control of the resolution applicants and letting them withdraw their resolution plans, would be just and fair. If no withdrawal is granted at all, not many would participate in the resolution process, considering the possibility of delay or value erosion of the corporate debtor. The CoC is likely to receive fewer and undesirable bids, pushing the corporate debtor into liquidation. This would go against the primary purpose of the Code which is to provide an insolvency regime that values the interests of the stakeholders and ensures the survival of the insolvent party. As such, permitting the withdrawal of CoC approved resolution plans in exceptional cases, even though they may be pending approval before the Adjudicating Authority, seems pragmatic. The cases of Metalyst Forging, Panama Petrochem and Suraksha Asset offer an approach in this direction, which the legislature can incorporate into the Code, to alleviate the concerns of the prospective resolution applicants.
Conclusion
While the Ebix Singapore case settles the dispute over the withdrawal of resolution plans under the Code, a blanket prohibition is not the best recourse. Given the covid exigencies and the likely delay in the resolution process, it would be prudent to permit the withdrawal of the resolution plans in certain cases, notwithstanding their approval by the CoC or NCLT. These may include instances wherein the successful resolution applicant was provided with false information about the corporate debtor, or when the resolution plan was not approved within a reasonable period. Material changes in the financial position of the corporate debtor or the resolution applicant due to Covid may justify a withdrawal of the resolution plan too. The legislature must then rise to the occasion and formulate a mechanism for the same. In the meantime, the Supreme Court’s judgement would hold, and a resolution applicant must anticipate all the possible risks, even if far-fetched before he submits his resolution plan.