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AN UNANSWERED CONUNDRUM FOR RESOLUTION APPLICANTS DUE TO THE
COVID-19 PANDEMIC
- Aditya Sharma^1
I. INTRODUCTION
The Insolvency & Bankruptcy Code (hereinafter referred to as ‘the Code’) was enacted in the year
- The fundamental object of the Code is to revive the defaulting corporate debtors and to ensure that they efficiently run as going concerns.^2 For the purpose of fulfillment of the object, the code provides for a mechanism in Chapter II of Part II called as the “Corporate Insolvency Resolution Processs” (CIRP). CIRP begins on the date on which an application filed by a financial creditor, operational creditor or a corporate applicant is admitted by an Adjudicating Authority i.e. NCLT. However, the same application can also be withdrawn, even after admission, by filing a separate application under Section 12A of the Code after gaining approval of 90% voting share of the Committee of Creditors (CoC).^3 CIRP ends either by way of an approval of a resolution plan by the Adjudicating Authority under Section 31 (1) or by way of a liquidation order passed by the Adjudicating Authority under Section 33 of the Code. The former concept of approval of resolution plan supplements the object of the code whereas the later does not. Liquidation is mostly seen as a last resort under the Code.
Since its inception, the code has faced several changes from time to time by way of notifications, amendments, etc. to meet the dynamic requirements of all the stakeholders. On the same line, Government of India has pushed for certain changes to serve the concerns of corporate debtors and lenders caused by the prevalent COVID-19 pandemic. Ministry of Corporate Affairs through its notification dated 24th^ March, 2020 increased the threshold limit provided under Section 4 from 1 lakh rupees to 1 crore rupees.^4 Further, the Union Cabinet has now decided to put the Code in abeyance by suspending the admission of new cases into insolvency for the next year to mainly cater the needs of distressed and small companies such as MSMEs.^5 However, there still remain certain issues which are yet to be answered by the relevant authorities. In this article, we shall discuss one such problem i.e. the problem of resolution applicants whereby they are constantly finding it tough to implement and abide by their already approved resolution plans on the ground of non-viability and non-feasibility caused due to the pandemic. Non-compliance with the terms of the resolution plan attracts criminal penalties under the code which makes the road even tougher for resolution applicants.
II. THE PROBLEM BEING FACED BY RESOLUTION APPLICANTS
India has been on a nation-wide lockdown for almost 2 months. As per the World Economic Situation and Prospects, India’s economic growth for the current fiscal year has been slashed to 1.2%. Meaning thereby, corporate entities will be facing even more financial distress in the near future. In the backdrop of such an economic quandary, resolution applicants under the Code are facing a unique problem. Recently, Ramkrishna Forgings, the winning resolution applicant in the Acil Ltd. insolvency proceedings, wrote down to the creditors seeking renegotiations of its bid citing demand disruptions caused by the COVID-19 and the lockdown.^6 It cannot be denied that there is a great probability that those resolution applicants who have already submitted the bids and received approval from the Committee of Creditors, will be now looking to re-negotiate the pricing on account of COVID-19.^7 It is also being speculated that the problem is more severe for those resolution applicants who have received a further approval from NCLT under Section 31 of the Code as such a resolution plan becomes a statutory contract for all the concerned stakeholders.
Resolution plans are approved only if they are feasible and viable. The viability of a resolution plan is based upon an accurate and sound valuation of the assets of the corporate debtor. However, on account of an unprecedented crisis like COVID-19 various assumptions underlying the valuations which were conducted prior to the breakout may now stand doubtful to the concerned stakeholders. Resolution plans which were earlier approved as being feasible and viable, might not be feasible and viable now and may go back to the drawing board i.e. CoC.^8 Absence of any government regulation addressing this problem might lead to unnecessary litigation and delay in the completion of insolvency proceedings, thereby contravening the quintessential object of the Code.
III. IMPORTANCE OF VIABILITY OF A RESOLUTION PLAN
Section 30 (4) of the Code states that the committee of creditors may approve a resolution plan by a vote of not less than 66 % of voting share of the financial creditors, after considering its feasibility and viability , and such other requirements as may be specified by the Board.
Regulation 38 (3) (b) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations provide that a resolution plan shall mandatorily demonstrate that it is feasible and viable.
Further, Hon’ble bench of NCLT Mumbai, in the case of Deccan Value Investors L.P v. Deutsche Bank,^9 pointed out the relevance of a viable resolution plan by stating that “the letter and spirit of the I&B Code mandate the acceptance of only a viable and lawful resolution plan being implemented at the hands of a willing resolution applicant.”
v. United Tradeco,^12 where it held that the order which has attained finality cannot be reviewed under the inherent powers of the tribunal provided under Section 60(5)(c) of the Code. Inherent power can only be exercised to correct clerical errors or arithmetical mistakes in the judgment. Therefore, Adjudicating Authority has not been vested with power to review and modify its own order.^13 NCLAT on one more occasion in the matter of RGG Vyappar Pvt. Ltd v. Arun Kumar Gupta,^14 held that the Adjudicating Authority has no jurisdiction to reopen the resolution process under Section 31 of the Code.
Henceforth, it is an established law that a resolution plan which has once been approved by the Adjudicating Authority cannot be altered or reviewed at a later stage by invoking the jurisdiction provided under Section 60(5)(c). However recently in the matter of Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh & Ors.^15 , a different approach was adopted by the successful resolution applicant to withdraw an already approved resolution plan by using Section 12A of the Code but the Hon’ble Supreme Court very rightly refuted the usage of Section 12A to withdraw an already approved plan. It held that an already approved plan cannot be withdrawn by a successful resolution applicant utilizing the exit route prescribed under Section 12A.
Therefore, Adjudicating Authority cannot make an alteration or modification in the resolution plan by reopening the resolution process once it has been approved by an order under Section 31. Now a question arises that can an appeal be filed for the purpose of modification of an approved resolution plan. Answer to this is yes, however the appeal will be maintainable only if it satisfies the grounds provided in Sec. 61(3) of the Code.^16 Moreover, the Appellate Tribunal would not modify the plan unless there is a presence of any discrimination or perverse decision.^17
ii. Modification or Withdrawal of the Resolution Plan post approval of CoC but before
the approval of NCLT
Any resolution plan which has been approved by the CoC but is still pending to pass the muster of NCLT can still be modified or withdrawn. In Satyanarayan Malu v. SBM Paper Mills Ltd,^18 a resolution plan was pending before NCLT Mumbai. However, two applications were filed before the bench. One application was filed by the “corporate applicant” under Section 12A along with a onetime settlement. Second application was filed by the resolution applicant itself to withdraw the resolution plan. The tribunal while allowing the application filed by the “corporate applicant” stated that due to the admission of the application filed by “corporate applicant” the second application automatically becomes otiose. However, the tribunal went further and condemned the act of resolution applicants as it thwarted the CIRP. It further made a very important observation
that such attempts may not be allowed, until and unless circumstances of a case compel to do so. NCLT Mumbai on one more occasion allowed the application for withdrawal of the resolution plan even after the approval of the CoC as the information provided to the resolution applicant was found to be wrong.^19
Therefore, in a situation where a resolution plan has been approved by the CoC but not by the NCLT, the resolution applicant may seek to avoid the plan if it is found that certain material information has not been disclosed by the resolution professional to the resolution applicant.
iii. Use of Force Majeure Clause
Applicability of a force majeure clause totally depends on the question that whether the plan which has been approved by the Adjudicating Authority includes the force majeure clause or not. If the plan includes such a clause, then the resolution applicant might be able to avoid the implementation of the resolution plan. At this juncture, it is also important to note that a situation of a pandemic must be specifically mentioned within the force majeure clause, otherwise a resolution applicant will not be able to invoke the force majeure clause in the present pandemic of COVID-19.
However, to the contrary, if a resolution plan does not include a force majeure clause then the resolution applicants might have to approach the tribunal and use Section 56 of the Indian Contract Act, 1872 to invoke frustration of the contract. As per the reasoning laid down in Energy Watchdog v. Central Electricity Regulatory Commission,^20 resolution applicants in order to invoke frustration will have to prove the impossibility of performance of obligations under the plan. It is of utmost importance to note that commercial feasibility or viability cannot be used to invoke frustration of a contract. As per the discussion in previous sections, it can be observed that the major concern of resolution applicants due to pandemic is regarding the commercial non-viability of the resolution plan. Henceforth, in such circumstances, where the law of frustration itself excludes the ground of commercial hardship, it will be an onerous task for resolution applicants to prove frustration of the resolution plan as the only way through which they will be able to apply the doctrine of frustration would be by proving the impossibility of performance of obligations.
An even bigger question which arises is that should the tribunals be even allowed to strictly apply the principles of doctrine of frustration in a matter pertaining to the Insolvency and Bankruptcy Code as on one side, the Code highly safeguards the commercial viability of a resolution plan whereas on the other side doctrine of frustration is totally ignorant of the commercial viability of
