The COVID-19 instigated financial slump is likely to drive down the valuation of corporate debtors and the forecasts in relation to businesses could become awry. In this backdrop, it would certainly be unfair to tie down resolution applicants to their resolution plans that were approved prior to the lockdown. The approved resolution plans, not having accounted for current realities, may be unfeasible and economically unviable for resolution applicants to abide by, in the current economic climate.
To resolve this predicament, there is an impending need for allowing revision of resolution plans approved by the Adjudicating Authority, pending implementation.
Structure of the Code
As per Section 12(3) of the Insolvency and Bankruptcy Code (“Code”), the resolution process has to be concluded within a period of 270 days from the date of commencement of insolvency. However, in light of the pandemic, by way of an amendment, Regulation 40C of the CIRP Regulations provides for exclusion of the time period under lockdown from the calculation of time period for the completion of resolution process. There is however no clarity as to whether this exclusion covers the period of implementation of resolution plan.
Section 30(4) of the Code confers the Committee of Creditors (“CoC”) with the power to determine the most commercially viable resolution plan submitted by various resolution applicants. The Supreme Court in Sashidar v. Indian Overseas Bank and Essar Steel v. Satish Kumar Gupta, accorded primacy to the “commercial wisdom” of the CoC. Therefore, judicial interference with the “commercial wisdom” is minimal and restricted to the grounds enumerated under Section 30(2) and 61(3) of the Code.
Furthermore, the Code draws heavily from the UNCITRAL Legislative guide on Insolvency Law (“Model Law”). The Model Law permits modifications to a resolution plan well after the same has been confirmed by a court of law. Therefore, in a system which depends on the commercial wisdom of the CoC to approve a resolution plan and with least judicial interference being the norm, it is crucial that modifications to a resolution plan be permitted, especially when drastic changes in market scenario make the resolution plan unworkable. It now remains to be examined whether such revision is permitted as on date.
The case for revisions to a resolution plan
At the outset, it is necessary to state that there is nothing in the Code which specifically bars the revision of the resolution plan once approved. Considering a system dependent on commercial wisdom of the CoC for approval of a resolution plan, two situations for revision of a resolution plan could arise. First, where the CoC is not amenable to any modifications to the approved resolution plan. Second, where the CoC in its commercial wisdom may consider the revision of a resolution plan.
Scenario I - CoC is un-amenable to revisions in the resolution plan
If the resolution applicant expresses buyer’s remorse on account of COVID-19 and is unable to implement the approved resolution plan, and if the CoC is not amenable for any modification, then the CoC may opt to exercise its options for non-implementation of a resolution plan. This entails criminal action that could be initiated under Section 74(3) of the Code, along with invocation of the performance guarantee given by the successful resolution applicant.
The other consequence of non-implementation of a resolution plan would be initiation of liquidation of the corporate debtor under Section 33(3) of the Code by a party affected by non-implementation.
The Hon’ble Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh, had observed that it was not open for a successful resolution applicant to withdraw a resolution plan once the same has been approved by the Adjudicating Authority. This judgement however refers only to unilateral withdrawal by the resolution applicant and not modification/revision of a resolution plan, with the consensus of the CoC.
Similarly, the NCLAT in R.G.G. Vyapaar v. Arun Kumar Gupta , observed that once the resolution plan has been approved by the Adjudicating Authority, the Adjudicating Authority does not have the power to reopen the “resolution process” under Section 31 of the Code. Again, in this case, it was only an appeal preferred by a financial creditor against rejection of claims and not a request for modification/revision to a resolution plan. Therefore, it is clear that when the CoC does not desire a revision, such a revision is not possible within the contours of the Code.
However, this option of CoC being un-amenable to the revision of a resolution plan, may not be advisable in the current scenario and might result in non-implementation of a resolution plan. As stated above, if it goes into liquidation, under Section 33(3) of the Code, the resolution applicant will bear the blackmark of not having implemented a resolution plan and will no longer be in an advantageous position to bid for other companies. In an already shrunken options of prospective resolution applicants, the last thing this economy needs are for lower number of resolution plans. Liquidation will also certainly be disadvantageous to the corporate debtor and creditors in general.
Scenario II - CoC is amenable to revisions in the resolution plan
This would result in a successful implementation of the resolution plan and would not only benefit the creditors and the resolution applicant but would also be in tune with the objective of the Code, which is resolution of the corporate debtor and not liquidation.
The Code is not alien to the concept of restarting of the resolution process in relation to calling of resolution plan after approval by the CoC.The NCLAT in Committee of Creditors of Metalyst Forging Ltd v. Deccan Value Investors LP , upheld the Adjudicating Authority’s order permitting re-submission a fresh resolution plan in light of derailment of the resolution process on account of misleading information supplied to the resolution applicant by the resolution professional. The NCLAT, while observing that the Adjudicating Authority cannot compel specific performance of a resolution plan by an unwilling resolution applicant, directed the resolution professional to call for fresh resolution plans.
Similarly, the Supreme Court in Chitra Sharma . v. Union of India had directed re-commencement of a resolution process despite the completion of 270-day period as the same was in the best interests of the corporate debtor and its stakeholders. Furthermore, NCLAT in Committee of Creditors of Amtek Auto Limited v. Mr. Dinkar T. Venkatasubramanian observed that on non-implementation of a plan, there can be fresh calling of resolution plans in the event the resolution plan was approved well within the 270-day period and there is no application filed under section 33(3) of the Code.
It is therefore necessary for the Adjudicating Authority to exercise inherent powers under Rule 11 of the NCLT Rules to allow amendment of the resolution plans. At this juncture, NCLAT’s decision in QVC Exports Pvt. Ltd. v. United Tradeco FZC . may operate against the exercise of inherent powers for revision of resolution plan. This decision is distinguishable for the following reasons: a) request for revision was made much after the implementation of resolution plan, i.e. after a lapse of 13 months; b) despite resolution plan being submitted by conjoint resolution applicants, rectification was sought by one of the resolution applications, without seeking permission of the other applicant; c) substantial changes were sought to be made by styling it as an instance of rectification of a resolution plan, and it was not revision per se. Moreover, it involved an exercise of inherent powers for review jurisdiction, which is not available under the Code. Allowing revision of a resolution plan, especially in light of the current economic situation, would not qualify as an exercise of inherent powers for review jurisdiction, since the same would be made with the consent of CoC.
With Regulation 40C of CIRP Regulations providing for exclusion of time period under lockdown, it is highly recommended that such exclusion of time period be extended to instances of revisions to a resolution plan, especially considering the benefits brought about by revisions.
Some may argue that permitting resolution applicants to modify an approved resolution plan is opening a pandora’s box and several applicants may take undue advantage of such a scenario. However, this is where consent of the CoC will prove to be pertinent. The CoC in its commercial wisdom can have the last word on the modification. It is certainly far more beneficial than a blanket liquidation scenario.
Therefore, on a conspectus of the above decisions and on a perusal of the Code, it seems that a revision/modification should be permitted to an approved resolution plan, provided the same stands approved by the CoC in its “commercial wisdom” and the revision does not contravene Section 30(2). It is certainly beneficial not only for the resolution applicant but also for the creditors and the corporate debtor, which will otherwise face liquidation.
Authors are advocates practicing at the Madras High Court.