Introduction
Insolvency and Bankruptcy Code, 2016 (Code) endeavours to save the life of the distressed company. It is not a mere recovery forum for creditors but also beneficial legislation that helps the distressed companies to get back on their feet. The Union Cabinet through IBC Ordinance, 2020, has announced several measures to protect the corporate entities from being dragged into insolvency because of the nationwide lockdown due to the outbreak of COVID-19. Firstly, the increase in default limit from INR 1 Lakh to INR 1 Crore. Secondly, the period of lockdown has been excluded while calculating days for any activity concerning the Corporate Insolvency Resolution Process (CIRP). Thirdly, Section 10A has been inserted to the Code, which puts a bar on the fresh filing of CIRP application under Section 7, 8 and 10 of the Code for any default arising after March 25, 2020, for the period of 6 months, which can be extended up to 12 months.
Though these steps may provide some breathing space to the companies, the implementation of the resolution plan, which culminates in the whole CIRP, remains unanswered. It is not just the distressed companies that have suffered the brunt of these unprecedented times, but also the resolution applicants who were willing to rescue and revive those companies. This article outlines the impact of COVID-19 on the approved resolution plan and discusses if the resolution plan can be modified or withdrawn owing to the current macroeconomic disruption.
The repercussions faced by resolution applicants
The nationwide lockdown has adversely affected the economic growth of the country. Therefore, it is not incorrect to say that due to such economic quandary, resolution applicants are facing a peculiar situation where they cannot carry out the resolution as planned and want to re-negotiate their bids. The reason for such re-negotiation is primarily twofold: first, the plan may no longer be commercially feasible and viable for the resolution applicant. Second, the resolution applicant may no longer be in a position to adhere to the timeline of the resolution plan. Recently, the above-mentioned situation arose in one of the cases wherein Ramakrishna Forgings (successful resolution applicant for ACIL Ltd.) wrote to the Committee of Creditors (CoC) for re-negotiating their bid for ACIL Ltd. due to their disrupted demand.
Furthermore, non-compliance with the terms of an approved resolution plan may affect both the corporate debtor as well as the resolution applicant. In case the resolution applicant erred in implementing the approved resolution plan, it can attract criminal liability under Section 74(3) of the Code, leading to the corporate death of the company.
Can the resolution plan be modified or withdrawn?
Under the Code, a resolution plan, to attain finality and to become binding, has to go through three stages. Initially, the resolution applicant submits the resolution plan to the resolution professional for an evaluation. Thereafter, the resolution plan is submitted to CoC, who subsequently scrutinizes and approves the plan with a majority. At the final stage, the approved plan is submitted before National Company Law Tribunal (NCLT) for its ratification; once ratified by the NCLT, it becomes binding on the corporate debtor as well as on all the stakeholders involved.
In a normal scenario, the plan submitted by the resolution applicant to the resolution professional for evaluation can be modified further on providing reasonable grounds. However, the problem arises when the majority of the CoC has approved the resolution plan submitted by the resolution applicant and the same has been put before the NCLT for its approval. The problem requires a separate analysis based on two periods, i.e., before the approval of the plan by NCLT and post the approval of the plan by NCLT.
- Modification or Withdrawal before the approval of the plan by NCLT
The resolution plan, which has been approved by the CoC and is waiting for the approval of NCLT, can be modified if there are reasonable grounds and circumstances for the same. NCLT Mumbai Bench in the case of Satyanarayan Malu v. SBM Paper Mills Ltd. while approving the withdrawal of Section 10 of the Code application under Section 12A of the Code, observed that the resolution plan once approved by the CoC can only be withdrawn when there are viable reasons and circumstances of the case compel for such modification or withdrawal otherwise it will thwart the rights of other resolution applicants as well as corporate debtor. In another case of Deccan Value Investor L.P v. Deutsche Bank, the NCLT Mumbai bench allowed the modification of the resolution plan after the approval of the CoC on the pretext of false and misleading information provided to the resolution applicant while formulating such plan.
Most recently, the NCLT Ahmedabad Bench in the case of Sunil Kumar Agrawal RP of Digjam Ltd v. Suspended Board of Director of Digjam Ltd. while observing that relaxation pertaining to the timeline of the resolution plan will have no material change and will align with the objective of the Code. Thus, the Tribunal allowed the modification in a resolution plan concerning the payment timeline to the creditor and other stakeholders. Therefore, in a situation where the plan has been approved by the CoC, the applicant can be allowed to modify or withdraw the same if they have suffered material adverse effect because of the fault of the Corporate Debtor.
- Modification or Withdrawal post the approval of resolution plan by NCLT
The resolution plan, which has been approved by the NCLT, is binding on the stakeholders under Section 31 of the Code. The Apex Court in Rahul Jain v. Rave Scans Pvt. Ltd. observed that once the adjudicating authority approves the resolution plan, it attains finality and cannot be revisited. Additionally, the NCLAT in QVC Exports Pvt. Ltd. v. United Tradeco FZC held that the approved resolution plan is binding on the stakeholders and cannot be reviewed under the inherent power of the NCLT under Section 60(5) of the Code. In another occasion, NCLAT, while dealing with the inherent power of the NCLT in the case of Santosh Wasantrao Walokar v. Vijay Kumar V. Iyer, observed that jurisdiction of the NCLT while using its inherent power under Section 60(5) of the Code is limited to an only clerical and arithmetical error in the resolution plan and cannot be extended to modify the approved plan under Section 31 of the Code.
Henceforth, it is a well-established law that the resolution plan, once approved by the NCLT, cannot be altered or modify. However, in the recent case of Maharashtra Seamless Limited v. Padmanabhan Venkatesh, the successful resolution applicant filed an application under Section 12A of the Code for the withdrawal of the approved resolution plan. The Supreme Court while pointing out the rationale behind the incorporation of Section 12A of the Code, outrightly rejected the application and while conferring to the established law, held that the successful resolution applicant cannot use the exit route under Section 12A of the Code for withdrawing the approved resolution plan.
Therefore, the adjudicating authority does not have the jurisdiction to alter an already approved resolution plan. But the NCLT can still use its inherent power to refer the matter to CoC for reconsideration.
Way Out for Resolution Applicants
Generally, while preparing the resolution plan, the resolution applicants to safeguard their interests and rights and to cope up with such unprecedented times ensures that there is a Material Adverse Change Clause (MAC) in the resolution plan. At this juncture, it is pertinent to note that the MAC clause should specifically deal with situations of the pandemic within the force majeure clause otherwise, a resolution applicant cannot invoke the MAC clause in the present COVID-19 situation.
However, in a situation where the resolution plan does not contain any MAC clause, the resolution applicant can fall back upon Section 56 of the Indian Contract Act 1872, by claiming frustration of the contract, to safeguard their interest. As has been observed above, the resolution applicants are facing hardships because of the non-viability and infeasibility of the resolution plan owing to the current pandemic situation. The Supreme Court, in the case of Energy Watchdog v. Central Electricity Regulatory Commission, has observed that the law of frustration of contract can only be invoked when the obligation of the contract becomes impossible to perform and cannot be invoked on the pretext of commercial feasibility and viability.
Henceforth, in such a situation where the law of frustration explicitly excludes the grounds of financial hardship, the onus is upon the resolution applicant to prove the impossibility of performance of a contract to make his way through the doctrine of frustration.
Conclusion
The intent behind the Code was to complete the resolution of distressed companies in a time-bound manner. And to further this, the Code stipulates certain stringent manners in which the insolvency process can be completed in a timely manner. However, these unpropitious times are a call for us to think differently. In such a situation, the requirement to quench answers for this issue has grown multifold and subsequently calls for legislative intervention. The legislature should bring in certain viable amendments in the Code, which will help the resolution applicants to cope up with the distress caused by the pandemic and at the same time does not allow them to escape their obligation under the resolution plan maliciously.
[Vishesh Jain is a Fourth-Year BBA.LLB (Hons.) student from National Law University, Odisha. He can be reached at 17bba060@nluo.ac.in.]
NUALS Restructuring and Insolvency Law Journal 