In the backdrop of the pandemic, much discussion on the Insolvency and Bankruptcy Code, 2016 (the Code) has revolved around whether creditors should continue to have a right to commence insolvency proceedings. However, the pandemic induced lockdowns and the recession that has followed have also raised important questions pertaining to the rights of resolution applicants (RA). The scheme of the Code is such that when insolvency resolution proceedings are initiated against a corporate debtor (CD), a committee of its creditors (CoC) calls for bids from parties who may be interested in taking over or purchasing the assets or business of that company. The party whose bid is accepted is the successful RA under the Code.
Expectedly, after the pandemic, financial pressures have mounted not only on companies who have debts due to banks and other lenders, but also on such RAs. To successfully buy the assets and businesses of CDs, an RA would have to infuse sizable sums of money. Generally, this money is arranged for in two to three different ways. One source of funds is the cash in hand that the RA may have. A second is the revenues that can be generated from the business and assets of the CD. A third is fresh debt raised from the market to pay off the institutional lenders of the CD. In the present recession-hit economy, it is only natural that all these sources of funds would be under some stress. Therefore, it is likely that RAs may no longer want to purchase companies that they were interested in before the lockdown. To cut the long story short, RAs may want to withdraw from the corporate insolvency resolution process (CIRP). Pertinently though, the question of withdrawal from the CIRP is not relevant only in the context of a recession-hit economy. It is an independent question of law that needs to be answered sooner rather than later.
It is in this context that a recent decision of the National Company Law Appellate Tribunal (NCLAT) in Kundan Care Products v. Amit Gupta assumes significance. The NCLAT held that a successful RA is not entitled to withdraw a resolution plan (the plan). The appellant, Kundan Care, had emerged as the successful RA in the CIRP of Astonfield Solar (Gujarat) Pvt. Ltd. (Astonfield). Although Kundan Care’s plan had been accepted by the CoC on, it was yet to be approved by the NCLT. In the meantime, Kundan Care approached the NCLT to withdraw its plan, on the grounds that the plan had been rendered commercially unviable due to delay in concluding the CIRP. The NCLT rejected this application, prompting Kundan Care to prefer an appeal.
Before the NCLAT, Kundan Care argued that the Code does not contain any provision to compel specific performance of the plan. As a corollary, an application to withdraw a plan found to be unviable had to be permitted.
The NCLAT not only declined to grant permission to withdraw, but also held that “the argument advanced on behalf of the appellant that there is no provision in the Insolvency and Bankruptcy Code compelling specific performance of resolution plan by the successful resolution applicant has to be repelled”. The NCLAT provided four distinct reasons for the same:
(a) First, that the Code had no specific provision permitting withdrawal of accepted plans.
(b) Second, once the plan was approved, it became a binding contract between the parties, which “is not a contract of personal service which may be legally unenforceable”.
(c) Third, the RA would be estopped from “wiggling out” of the liabilities flowing from the resolution plan.
(d) Fourth, the assets of the CD were bound to deplete during the time consumed by the CIRP process, and if this were accepted as a ground for withdrawal, every RA would “walk out with impunity”.
The overarching rationale behind the decision was that any withdrawal by the RA could bring about “disastrous consequences” for the CD, and push the CD into liquidation. The NCLAT also observed that by permitting withdrawal, it would be interfering with the commercial wisdom of the CoC. This decision was then carried in appeal before the Supreme Court, which was pleased to grant an ad interim stay on the judgment.
Necessarily, this question will now be resolved by the Supreme Court. However, there are several legal issues that subliminally undercut the decision of the NCLAT, and which we believe merit a widespread discussion..
No specific provision permitting withdrawal
The absence of a specific provision in the Code permitting withdrawal only means that the NCLT lacks the jurisdiction to entertain an application for withdrawal. This is borne out by the decision in Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd., where the NCLAT held that the adjudicating authority had no jurisdiction to entertain an application for the withdrawal of a plan after it had been approved.
However, this does not mean the withdrawal of a resolution plan is always prohibited by the Code. Let us consider a scenario, as in the present case, where the plan is yet to be approved by the NCLT. Section 31 of the Code needs the adjudicating authority to assess whether a plan may be implemented efficiently, before approving the plan. An RA who at the outset suggests that it may no longer be in a position to abide by the plan on account of a downturn in the economy or otherwise, would be a prime indicator of the fact that the plan may not be successfully implemented. In such cases, the plan ought to be rejected by the NCLT. In effect, even without considering a separate application for withdrawal, the NCLT can indirectly permit the RA to withdraw.
A separate application for withdrawal is not needed because the Code envisages liquidation as the solution in such situations. Sections 33(3) and (4) clearly stipulate that where a plan has been contravened, the adjudicating authority “shall pass a liquidation order”, upon application by an aggrieved party. Thus, instead of compelling an unwilling RA to perform a plan, the Code rightly considers liquidation as an efficacious alternative to the CIRP. Liquidation also follows when CIRP fails.
The NCLAT’s suggestion that liquidation would necessarily be a worse outcome, that has to be avoided at all costs, is not borne out by the Code. In fact, sale of assets in liquidation in a time-bound fashion may be more effective than protracted litigation to compel an RA to abide by the plan.
Resolution Plan is a binding contract capable of specific performance
By holding that withdrawal cannot be permitted, the NCLAT in Kundan Care effectively holds that the NCLT has the power to compel an RA to specifically perform a plan. This is directly contrary to the NCLAT’s own decision in Metalyst Forging Ltd. v. Deccan Value Investors LP, where the NCLAT observed as follows:
“In the aforesaid background, the adjudicating authority (National Company Law Tribunal), Mumbai Bench rightly observed that the Insolvency and Bankruptcy Code do(es) not confer any power and jurisdiction on the adjudicating authority to compel specific performance of a plan by an unwilling resolution applicant ”.
It is now a well-settled position in law that specific performance may only be awarded of a contract. Whether a plan is a contract is itself ambiguous. The scheme of the Code is such that various RAs who may be interested in the assets of a CD submit their plans to the resolution professional of the CD, who in turn places them before the CoC. By an internally decided mechanism, this Committee then selects one of the plans as the successful plan.
Following this logic, the two parties to the contract would have to be the CoC and the RA. Were the plan a “contract”, it would only bind the parties thereto. However, Section 31 makes it clear that the plan is a document in rem – it binds every stakeholder of the CD, including those who may not have consented to the plan. Moreover, for there to be a concluded contract there must be an offer and an acceptance. In a CIRP though, the mere acceptance of one of a plan, does not amount to an acceptance of the offer. This is simply because a plan comes into force and becomes legally binding only if it is approved by the NCLT. No concluded contract comes to be only on the CoC selecting a plan.
Further, the transaction covered under the plan indicates that it is not truly a “contract” at all. Under a plan, the consideration that flows to the RA is control over the CD. However, the CD does not belong to the CoC – under company law, the CD is owned by its shareholders. It is a settled position in law that a party cannot pass a better title than what she possesses. Therefore, conventionally the CoC would have no authority to transfer the CD. Ownership and control would have to be passed by shareholders themselves, either as parties to the contract or at the behest of the CoC. However, this is evidently not the case in a plan. Therefore, the power given to the CoC to “transfer” the Company is only statutory and not contractual in nature.
In any case, even if a plan is assumed to be a concluded contract, it is not one of which specific performance can be awarded. Under Section 14(b) of the Specific Relief Act, a resolution plan would be a contract which needs constant supervision by the court and is thus, not capable of specific performance. Suppose, for a moment, that the CD operated a restaurant chain and was taken over by an RA in the CIRP. The plan submitted by the RA envisioned that 30% of the revenues earned through the restaurant business every year would be used to pay off the debts of the CD. In the current climate, the RA no longer wants to proceed with adding a restaurant chain to its line of businesses. To compel the RA to specifically perform this contract would mean that he would necessarily have to operate a chain of restaurants, do business and garner revenues. These are obligations that no court can constantly supervise. Similarly, when a plan envisages that an RA will raise fresh debt to finance the older debts of the CD, a court cannot compel him to take a loan. Therefore, we say that even if a plan were assumed to be a contract, it is not one of which specific performance can be readily awarded by a civil court.
The other prominent reason provided by the NCLAT to repel Kundan Care’s submissions was that it was barred by estoppel from withdrawing the plan. At the outset, it is seen that the decision is internally inconsistent on this point. As we have seen above, the NCLAT considers the plan to be a concluded contract. Once that is so, it is doubtful whether a question of estoppel can arise –– estoppel is a doctrine which enforces promises when there is no contract, on the basis that the other party has relied upon the promise and acted to his detriment. When there is a contractual relationship, remedies would presumably exist under the contract and estoppel would not coexist.
In any case, there are other reasons why estoppel cannot apply here. First, the courts have previously had the occasion to observe that the highest bidder in an auction is not estopped from retracting his bid. Rightly so, because this is not a scenario where an equitable intervention is warranted. When an auction fails, property may be reauctioned or the bidder may be sued for damages or, as in the present case, the company may be liquidated. This, as stated, is also the scheme of the Code, which provides for liquidation of companies where plans cannot be successfully implemented. Second, injuncting an RA from withdrawing on the grounds of estoppel, would be tantamount to indirectly awarding specific performance of a contract that is not capable of specific performance.
Based on our opinion on the issues that arise in this context, we contend that the decision of the NCLAT in Kundan Care is incorrect and deserves to be revisited. Otherwise, we might find ourselves in a situation where struggling businesses are handed over to unwilling RAs, who are looking for every opportunity to exit. These outcomes may well be counterproductive. Moreover, there is also the associated question of refund of performance guarantees and/or earnest money deposits usually provided by RAs along with the plan. This is an independent question, which too will have to be considered by the SC when it revisits Kundan Care. For the paucity of space though, we have not examined it in this piece.
†Advocate, Bombay High Court. Graduated from National Law School of India University, Bangalore, BCL from University of Oxford. Works in the chambers of Mr Shyam Kapadia.
‡ Advocate, Bombay High Court. Graduated from National Law School of India University, Bangalore. Works in the chambers of Sr. Advocate Mr Venkatesh Dhond.