Supreme Court: A Division Bench of Dr D.Y. Chandrachud and M.R. Shah, JJ. has held that under Insolvency and Bankruptcy Code, 2016, a Resolution Applicant is not entitled to withdraw or modify its Resolution Plan, once it has been submitted to the National Company Law Tribunal (Adjudicating Authority). The Supreme Court held:
“The existing insolvency framework in India provides no scope for effecting further modifications or withdrawals of CoC-approved Resolution Plans, at the behest of the successful Resolution Applicant, once the plan has been submitted to the Adjudicating Authority.”
The Court observed that a Resolution Applicant, after obtaining the financial information of the Corporate Debtor through the informational utilities and perusing the Information Memorandum, is assumed to have analysed the risks in the business of the Corporate Debtor and submitted a considered proposal. A submitted Resolution Plan is binding and irrevocable as between the Committee of Creditors (“CoC”) and the successful Resolution Applicant in terms of provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”).
At the same time, the Court recognised that long delays in approving the Resolution Plan by NCLT affect subsequent implementation of the plan. It was observed:
“These delays, if systemic and frequent, will have an undeniable impact on the commercial assessment that the parties undertake during the course of the negotiation. … Such inordinate delays cause commercial uncertainty, degradation in the value of the Corporate Debtor and makes the insolvency process inefficient and expensive.”
The Supreme Court urged NCLT and NCLAT to be sensitive to the effect of such delays on the insolvency resolution process and be cognizant that adjournments hamper the efficacy of the judicial process. The Court said:
“The NCLT and the NCLAT should endeavor, on a best effort basis, to strictly adhere to the timelines stipulated under the IBC and clear pending resolution plans forthwith. Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the IBC. We cannot let the present insolvency regime meet the same fate.”
The Court was deciding appeals filed against the judgments of NCLAT whereby it had upheld the orders passed by NCLT rejecting withdrawal applications filed by Resolution Applicants (appellants before the Supreme Court).
Following is a comprehensive report of Supreme Court’s legal and factual analysis.
Question of Law
In the instant case, the task before the Supreme Court was to answer the question of law: Whether a Resolution Applicant is entitled to withdraw or modify its Resolution Plan, once it has been submitted by the Resolution Professional to NCLT and before it is approved by the latter under Section 31(1) of the Insolvency and Bankruptcy Code, 2016?
Legal Analysis and Observations
Purpose of a law on insolvency
Discussing the dynamic and comprehensive nature of IBC, the Supreme Court noted that the procedure designed for the insolvency process is critical for allocating economic coordination between the parties who partake in, or are bound by the process. This procedure produces substantive rights and obligations. The Court said:
“Upholding the procedural design and sanctity of the process is critical to its functioning. The interpretative task of the Adjudicating Authority, Appellate Authority, and even this Court, must be cognizant of, and allied with that objective.”
The Court opined that any judicial creation of a procedural or substantive remedy that is not envisaged by the statute would not only violate the principle of separation of powers, but also run the risk of altering the delicate coordination that is designed by IBC framework and have grave implications on the outcome of the Corporate Insolvency Resolution Process (“CIRP”), the economy of the country and the lives of the workers and other allied parties who are statutorily bound by the impact of a resolution or liquidation of a Corporate Debtor. It was observed:
“The adjudicating mechanisms which have been specifically created by the statute, have a narrowly defined role in the process and must be circumspect in granting reliefs that may run counter to the timeliness and predictability that is central to the IBC.”
Nature of a Resolution Plan
The Supreme Court sought to determined the nature of a Resolution Plan after its approval by CoC but prior to its approval by NCLT. This would help establish the source of legal force of a Resolution Plan ─ whether it is IBC or the law of contract. It was noted that the insolvency process, as governed by IBC, does not merely structure the conduct of participants in the process after finalisation and approval of a Resolution Plan by CoC, but also the conduct stemming from the very first steps of inviting prospective Resolution Applicants. Discussing the statutory framework, the Court observed:
“[F]eatures of a Resolution Plan, where a statute extensively governs the form, mode, manner and effect of approval distinguishes it from a traditional contract, specifically in its ability to bind those who have not consented to it.”
The Court opined that a Resolution Plan cannot be construed purely as a ‘contract’ governed by the Contract Act, in the period intervening its acceptance by CoC and the approval of NCLT.
Further, the Court opined that a Resolution Plan cannot be classified even as a ‘statutory contract’. There is no provision under IBC referring to a Resolution Plan as a contract. The legal force of a Resolution Plan arises due to the framework provided under IBC. Reiterating that IBC is a self-contained Code, the Court concluded:
“Principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan. However, remedies that are specific to the Contract Act cannot be applied, de hors the overriding principles of the IBC.”
Statutory framework governing CIRP
IBC and regulations framed thereunder provide a detailed procedure for completion of CIRP. The Supreme Court noted that CIRP is a time bound process with a specific aim of maximising the value of assets. IBC and the regulations made under it lay down strict timelines which need to be adhered to by all the parties, at all stages of CIRP. The second proviso to Section 12(3) of IBC read with the judicial dictum in Essar Steel (India) Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 prescribes that CIRP in its entirety must be completed within 330 days from the insolvency commencement date, including the time taken in legal proceedings, with a short extension to be granted only in exceptional cases. This is indicative of the strong emphasis of IBC on its timelines and its attempt to thwart the prospect of stakeholders engaging in multiple litigations solely with the intent of causing undue delay. The Court observed:
“Delays are also a cause of concern because the liquidation value depletes rapidly, irrespective of the imposition of a moratorium, and a delayed liquidation is harmful to the value of the Corporate Debtor, the recovery rate of the CoC and consequentially, the economy at large.”
The evolution of IBC framework, through an interplay of legislative amendments, regulations and judicial interpretation, consistently emphasises the predictability and timeliness of IBC. If CIRP is not completed within the prescribed timeline, the Corporate Debtor is sent into liquidation. Relying on Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, 2021 SCC OnLine SC 194, the Court said:
“The stipulation of timelines and a detailed procedure under the IBC ensures a timely completion of CIRP and introduces transparency, certainty and predictability in the insolvency resolution process. … This Court should proceed with caution in introducing any element in the insolvency process that may lead to unpredictability, delay and complexity not contemplated by the legislature.”
Withdrawal of Resolution Plan by a successful Resolution Applicant under IBC
Absence of legislative hook or regulatory tether to enable withdrawal
Analysing the statutory framework governing CIRP and periodic reports of the Insolvency Law Committee, the Supreme Court observed that it is a creditor-driven process. It was noted that IBC is silent on whether a successful Resolution Applicant can withdraw its Resolution Plan. However, the statutory framework laid down under IBC and the CIRP Regulations provide a step-by-step procedure which is to be followed from the initiation of CIRP to the approval by NCLT. It was observed:
“The absence of any exit routes being stipulated under the statute for a successful Resolution Applicant is indicative of the IBC’s proscription of any attempts at withdrawal at its behest.”
The Court took note of the fact that Section 12-A was inserted in IBC by an amendment whereby the Corporate Debtor and CoC have been empowered to withdraw from CIRP, but the Parliament chose not to introduce any explicit provision for allowing any amendment of the Resolution Plan after approval of creditors, let alone a power to withdraw the Resolution Plan at that stage. Keeping in mind the principles for interpretation of economic statutes, the Court opined:
“In the absence of any provision under the IBC allowing for withdrawal of the Resolution Plan by a successful Resolution Applicant, vesting the Resolution Applicant with such a relief through a process of judicial interpretation would be impermissible. Such a judicial exercise would bring in the evils which the IBC sought to obviate through the back-door.”
Terms of Resolution Plan not sufficient to effect withdrawals or modifications after submission to NCLT
The appellant−Resolution Applicants submitted that a Resolution Plan only becomes binding when it is approved by NCLT under Section 31(1) of IBC. Examining the contention that the terms of a Resolution Plan can reserve the right to modify or withdraw its contents after submission to NCLT, the Supreme Court observed:
“The language of Section 31(1) cannot be construed to mean that a Resolution Plan is indeterminate or open to withdrawal or modification until it is approved by the Adjudicating Authority or that it is not binding between the CoC and the successful Resolution Applicant.”
The Court noted that the procedure envisages a 15-day window between submission of Resolution Plan and its approval or rejection by NCLT which clearly indicates that the statute envisages a certain level of finality before the Resolution Plan is submitted for approval to NCLT. It was observed:
“Even the CoC is not permitted to approve multiple Resolution Plans or solicit [Expressions of Interest] after submission of a Resolution Plan to the Adjudicating Authority, which would possibly be in contemplation if the Resolution Applicant was permitted to withdraw from, or modify, the Plan after acceptance by the CoC.”
Following the decision in AMTEK Auto Ltd. v. Dinkar T. Venkatasubramanian, (2021) 4 SCC 457 which thwarted similar attempt of successful Resolution Applicant relying on certain open-ended clauses in its Resolution Plan to seek a direction compelling CoC to negotiate a modification to its Resolution Plan, the Court opined:
“A Resolution Plan whose implementation can be withdrawn at the behest of the successful Resolution Applicant, is inherently unviable, since open-ended clauses on modifications/withdrawal would mean that the Plan could fail at an undefined stage, be uncertain, including after approval by the Adjudicating Authority”
The Court further explained that the negotiations between the Resolution Applicant and CoC are brought to an end after CoC’s approval. The only conditionality that remains is the approval of NCLT, which has a limited jurisdiction to confirm or deny the legal validity of the Resolution Plan in terms of Section 30(2) of IBC.
Noting that various mandatory timelines have been imposed for undertaking specific actions under CIRP and if the legislature intended to allow withdrawals or subsequent negotiations by successful Resolution Applicants, it would have prescribed specific timelines for the exercise of such an option, the Court said:
“The recognition of a power of withdrawal or modification after submission of a CoC-approved Resolution Plan, by judicial interpretation, will have the effect of disturbing the statutory timelines and delaying the CIRP, leading to a depletion in the value of the assets of a Corporate Debtor in the event of a potential liquidation.”
Based on plain terms of the statute, the Court concluded that NCLT lacks authority to allow withdrawal or modification of Resolution Plan by a successful Resolution Applicant or to give effect to any such clauses in the Resolution Plan. Further, no such power can be vested with NCLT even under its residuary jurisdiction in terms of Section 60(5)(c) as it cannot do what IBC consciously did not provide it the power to do.
Factual Analysis and Observation
Without affecting the legal position formulated, the Supreme Court undertook an analysis on whether the individual Resolution Applicants in the instant appeal had specifically negotiated with the respective CoCs for a right of modification or withdrawal and were contractually entitled to the same.
Ebix Singapore (P) Ltd.
CIRP of Educomp Solutions Ltd. commenced in 2017, in which Ebix Singapore (P) Ltd. emerged as successful Resolution Applicant. Ebix submitted a Resolution Plan which was approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. However, subsequently, owing to investigations into accounts of Educomp, Ebix filed withdrawal application on account of delay in approval. It relied on inter alia the terms of the Resolution Plan that it was valid for six months only.
The Supreme Court rejected the submission since the terms related to the validity of the Resolution Plan for the period of negotiation with CoC and not for a period after the Resolution Plan was submitted for approval of NCLT. It was observed:
“The time which may be taken before the Adjudicating Authority is an imponderable which none of the parties can predict. … Parties cannot indirectly impose a condition on a judicial authority to accept or reject its Plan within a specified time period, failing which the CIRP process will inevitably come to an end.”
Next, Ebix argued that its position changed manifestly because of new allegations which came up in relation to the financial conduct of Educomp. However, in this regard, the Court noted that the Request For Resolution Plan (“RFRP”) directed prospective Resolution Applicants to conduct their own due diligence and independent investigations. Further noting the provisions of Section 32-A of IBC (liability for prior offences, etc.), the Court observed:
“Thus, in any case even if it is found that there was any misconduct in the affairs of Educomp prior the commencement of the CIRP, Ebix will be immune from any prosecution or punishment in relation to the same. The submission that Ebix has been placed in a prejudicial position due to the initiation of investigation into the affairs of Educomp by the CBI and SFIO is nothing but a red herring since such investigations have no bearing on Ebix.”
Lastly, the Court noted that no clause of Ebix’s own Resolution Plans provided them with a right to revise/withdraw their Resolution Plan after its approval by CoC, but before its confirmation by the Adjudication Authority. Also, Ebix did not stop pursuing their Resolution Plan after the expiry of six months, if the true import of the commercial bargain was a withdrawal of the Resolution Plan after six months of its submission.
Kundan Care Products Ltd.
CIRP of Astonfield Renewables (P) Ltd. commenced in 2018. Kundan Care Products Ltd. submitted a Resolution Plan which was approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. Subsequently, Kundan Care moved an application for withdrawal of its Resolution Plan because of uncertainty over the sole Power Purchase Agreement with Gujarat Urja Vikas Nigam Ltd. which formed the entirety of Astonfield’s business. However, the withdrawal application was dismissed by NCLT.
Kundan Care initially relied on terms of their Resolution Plan to argue that it had reserved the right to modify or withdraw the Plan in event of a ‘material adverse change’ which affects Astonfield. However, the Resolution Professional pointed out that the Letter of Intent awarded to Kundan Care clearly stipulated that the submitted Resolution Plan was irrevocable. This was reaffirmed by the terms of RFRP, which indicated that the condition of a ‘material adverse event’ could be exercised only until CoC was considering the Resolution Plan, and not after it had been submitted to NCLT.
Notably, in July 2021, Kundan Care addressed a communication to EXIM Bank and PFCL (lenders) seeking a revision/renegotiation of the resolution amount/financial proposal of Kundan Care for the resolution of Astonfield. Responding to Kundan Care’s request lenders were prima facie agreeable to deliberate the financial proposal seeking revision on resolution plan amount. Pursuant to this, a joint application was filed by the parties for liberty to submit a revised plan before NCLT.
Noting that EXIM Bank and PFCL represent 98% of financial creditors of Astonfield, the Supreme Court allowed the request with directions, deeming it appropriate to exercise its jurisdiction under Article 142 of the Constitution for a one-time relief.
Seroco Lighting Industries (P) Ltd.
CIRP of Arya Filaments (P) Ltd. commenced in 2018. Seroco Lighting Industries (P) Ltd. submitted a Resolution Plan which was ultimately approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. In June 2020, Seroco sought modification of Resolution Plan and the amount on account of economic slowdown caused by COVID-19 pandemic, and subsequently filed applications before NCLT seeking modification of the Resolution Plan on account of the original being filed over eighteen months ago. However, NCLT rejected the application. Seroco relied on terms of their Resolution Plan, but the Supreme Court found there were no such terms in the Plan that could provide such a benefit to Seroco. Concluding, the Court observed:
“This Court is cognizant that the extraordinary circumstance of the COVID-19 pandemic would have had a significant impact on the businesses of Corporate Debtors and upon successful Resolution Applicants whose Plans may not have been sanctioned by the Adjudicating Authority in time, for myriad reasons. But the legislative intent of the statute cannot be overridden by the Court to render outcomes that can have grave economic implications which will impact the viability of the IBC.”
In such view of the matter, the appeals filed by Ebix and Seroco were dismissed, and parties to the appeal preferred by Kundan Care were directed to abide by the directions issued by the Court in exercise of powers under Article 142 as a one-time relief. [Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (Committee of Creditors), 2021 SCC OnLine SC 707, decided on 13-9-2021]