The courts perform the herculean task of interpreting and ascertaining the true meaning of the statutes and other legal texts. Intentionalism is one of the most accepted theories of statutory interpretation where primacy is accorded to the legislative intent of the lawmakers, even when it runs contrary to the text of the statute. It must be noted that the Insolvency and Bankruptcy Code 2016 (Hereinafter referred to as “The Code”) is a novel legislation and suffered multiple legislative errors which became increasingly evident from the string of Ordinances that were promulgated to plug the loopholes in the Code. To comprehend these loopholes as and when such circumstances or cases arose, Indian Judiciary relied on the rule of intentionalism. The Bankruptcy Law Reform Committee (BLRC) noted that the Code was enacted with the intent to frame a viable mechanism to restructure the debt of a company and maintain it as a “Going concern” in place of taking it to liquidation in the event of default. In an arrangement like this two factors become indispensable: viability and value of time. However, despite the stress on time being an essence, CIRP takes 433 days on an average which is unfavourable to 330 days envisaged by the Code. These judicial delays often render the Resolution Plans (RP) commercially unviable and the Code does not provide for withdrawal or modification of RP after the Committee of Creditors (CoC) approves it after employing its commercial wisdom. This Blog shall answer the question of whether the Code requires a Provision that provides for the same. Through the course of the Blog, the Authors will endeavour to outline the current plight at the instance of no room for withdrawal or modification of the Resolution Plan and how the same is in stark contrast with the legislative intent behind the enactment of the Code. The Authors shall further attempt to answer whether the finality accorded by the CoC can condone the non-viability of a RP. Lastly, the feasibility of inclusion of date till which the RP shall be valid and binding by the Resolution Applicant would be analysed, in an attempt to offset and reduce judicial delays that have hollowed the essence of the Code.
The Insolvency Law Committee affirmatively held that the success of the resolution process can be determined by the ability to resolve distress in a value-maximising manner. The emphasis and significance of value maximisation is made apparent from Section 30(4) of The Code which mandates the requirement of feasibility and viability of the RP before the CoC approves it. The UNCITRAL Guide on Insolvency made an important consideration by recording that while approving the Resolution Plan, the Court cannot be asked to make complex economic justifications and calculations and therefore the commercial acumen of the creditors must be given supremacy. In K. Sashidhar v. Indian Overseas Bank, it was underlined that in order to meet the stated timelines in the Code, the commercial wisdom of CoC cannot be afforded by judicial intervention. However, a question that has recently surfaced is whether a Resolution Plan can be withdrawn after the CoC has approved it but before the AA approves it. Section 12A provides for withdrawal of Resolution Application however, there is no provision in the Code for modifications or withdrawal of the Resolution Plan. The implications of the same can be seen in a positive as well as a negative light. The Supreme Court in Ebix Singapore v. Committee of Creditors of Educomp acknowledged that the omission of the provision that laid down the law for the same was a case of Casus Omissus. However, it is a well-settled principle of law that Casus Omissus cannot be provided for by judicial intervention. Alternatively in Padmausundara Rao v. State of Tamil Nadu it was held that Casus Omissus can be provided for in cases of clear necessity and where the purpose can be found within the contours of the impugned legislation. The Authors shall now analyze whether the Casus Omissus must be provided for or not in light of the legislative scheme of the Code.
JUDICIAL DELAYS: A CASE AGAINST IMPOSITION OF RESOLUTION PLANS
In the above-mentioned Ebix case, the Corporate Debtor (CD) filed for resolution under Section 10 of The Code. The RP of Ebix Singapore was approved by the CoC. Along the same timeline, certain Financial Creditors raised questions about the grave governance issues pertaining to CD and NCLT ordered the Serious Fraud Investigation Office (SFIO) to intervene. This intervention caused a massive delay and the Resolution Applicant contended that the approval of the Plan was pending before the AA for 17 months. The CIRP had to be wound up expeditiously as the Resolution Applicant had to get control of the management before the new academic session commenced as contracts with educational institutions at this point form an important stream of revenue. It has been stressed that it is of utmost significance to maintain the CD as a “Going Concern” and halting operations goes against the essence of the Code.
It is common knowledge that Resolution Applicants infuse capital in any of the three given ways: External borrowing, Deep pockets or assets of the CD. The legislative scheme of the Code is such that assets of the CD are utilised to restructure the debt and operations of the CD. Therefore, since the approval did not take place and the assets of the CD could not be utilised for kick-starting the Resolution Plan and preserving the value of the assets, there was a material change in the position of the Resolution Applicant. The impugned material change pertains to the ability of the Resolution Applicant to carry out the obligations that are present in the RP. For instance, due to non-approval of the RP in an expedient manner, the CD lost hold of the potential contracts that were material in restructuring the finances of the CD. In such a case, the Resolution Applicant bears the brunt for judicial delays. This not only offsets the idea of value-maximisation but additionally also threatens the financial matrix of the successful Resolution Applicant. The current framework is CD centric and barely focuses on the financial health of the Resolution Applicant. It has to be understood that the Resolution Applicant frames the Resolution Plan in light of the current circumstances and possible contingencies. However, if due to unforeseen circumstances like the Pandemic or judicial delays the Plan becomes unfeasible or unviable, it would be uneconomic to impose the same on the Resolution Applicant.
The Swiss Ribbons case clearly outlined that extensions and exclusions that are given by the AA to the parties further diminish the value of the assets. In the said Ebix judgment, the Court held that after a Resolution Plan is approved by the CoC after compliance with all the procedural formalities, then withdrawal or modification would create a new tier of negotiations which would adversely affect the Corporate Debtor. It has been contended that the successful Resolution Applicant is presumed to be cognisant of the risks that can ensue based on the Information Memorandum and other financial information that is made available by the Information Utilities. This presumption could be considered pragmatic but is definitely not the case of “One size fits all”. Post-pandemic financial pressures have amplified and those pressures have not isolated Resolution Applicants. In Kundan Care v. Amit Gupta, the Plan of the Resolution Applicant was approved by the CoC after employing commercial wisdom. However, in light of the drastic ramifications caused by the delay in CIRP, the Plan was rendered commercially unviable. Therefore, despite the ratio in the Swiss Ribbons case, it must be acknowledged that the Resolution Applicant was a struggling business and imposition of the Plan would only transfer serious governance issues and cast doubts upon the success of resolution process.
CONCLUSION
It has been observed that owing to the financial and credit discipline that the Code instills in the debtors and creditors, the recovery rate under the Code has been superior. Despite this the systemic miscarriages have disbanded the potential of the Code.
The CoC has the power to decide the magnitude of haircut it can offer and hair-cut to an extent of 95% was also offered to the creditors and such Plans were approved by CoC. The NCLT has rejected such Plans and that has raised several questions about whether the CoC must have such unbridled power. In light of this, a Discussion Paper also pointed out that the CoC must be regulated. Therefore, in circumstances where material changes have occurred and the Resolution Applicant is not in a position to carry out what it sought to offer under the RP, then the same must not be imposed upon it solely because the CoC exercised its commercial wisdom.
The Authors strongly support the inclusion of a Provision that allows withdrawal or modification of RP in the Code in order to offset the judicial delays that have become the part and parcel of the system or any other unforeseeable events that render the Plan commercially unviable. However, it must be borne in mind that such a Provision has the capability of being a double-edged sword as it could be used by successful Resolution Applicants in a move to abuse law and further case delays. Therefore, legislative safeguards have to be provided. The withdrawal or modification must be allowed only in cases where despite due diligence it was not possible to foresee the future commercial unviability of the Plan.
The Authors are cognisant of the fact that such a Provision has the propensity of burdening the AA with fresh proceedings. For such circumstances, the Authors recommend that matters under this Provision are listed on a priority basis and any adjournment and extension is given on the rarest of occasions. It is known that NCLT is composed of judicial and technical members and therefore the technical members would be in a position to scrutinise whether the Resolution Applicant could indeed not foresee future unviability. Any Appeal to NCLAT or submission to NCLT must be accompanied with an Affidavit that lucidly reflects the financial matrix and contentions pertaining to the same. The Supreme Court pointed out that lengthy written submissions and oral arguments are one of the prime reasons behind judicial delay. For instance, the United States Courts of Ninth Circuit clearly specify the word and page limit that must be followed by the Counsels.
Additionally, while submitting the RP, the Resolution Applicants must mention the timeline till when the Plan can be validly enforced and beyond such timeline, it must be optional for the Resolution Applicant to continue with the same Plan and modification must be allowed without seeking an approval from AA. However, such modification must be approved by the AA and the same must be accompanied with lucid reasons and timeline. In case the CoC refuses to approve such modification or withdrawal, a cogent reasoning must be provided. It is already established that the commercial wisdom and the conduct of CoC must be regulated and if such refusal is not in the best interests of the stakeholders including the Resolution Applicant and the CD, then it must not be accorded with supremacy.
Any new set-up or infrastructural addition must be in a position to answer the crucial question of “Why”. The above-mentioned set-up ensures that the Code does not merely provide for mechanical and procedural formalities that are reflected by the rigid timelines. This set-up ensures that the ultimate goal of preserving the value of assets and restructuring the CD materialises in the most optimal manner possible.
(This article is authored by Reema Jain and Krishna Sridhar, law students at Symbiosis Law School, Hyderabad. The authors can be contacted at: reema.jain@student.slsh.edu.in; krishna.sridhar@student.slsh.edu.in)
NUALS Restructuring and Insolvency Law Journal 