The Hon’ble Supreme Court recently delivered the judgement on three (3) petitions[1] that involved questions of withdrawal or modifications after the approval of resolution plan by the Committee of Creditors and filed with NCLT for its approval. The Court held that once the resolution plan is approved by Committee of Creditors and submitted to NCLT; the successful resolution applicant cannot withdraw or modify the resolution plan. The present case analysis aims to probe the various modalities of the judgement and bring to fore the key facets of the facts, issues, and ruling. Further, the article will conclude with the author’s opinion on the legal position outlined in the judgement.

First Petition: In the matter of Ebix

The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in its judgement dated 29 July 2020 has set aside an order of the National Company Law Tribunal (“NCLT”) which had inter alia, allowed the withdrawal of a resolution plan on the grounds that an unwilling resolution applicant would not be able to effectively implement a resolution plan. This plan had been proposed by Ebix Singapore Pte. Ltd., was approved by the Committee of Creditors (“CoC”) of Educomp Solutions Ltd., and was pending approval of the NCLT.

The two main prongs of challenge before the NCLAT were on:

 (a) the permissibility of withdrawal; and

 (b) preliminary bar on the application allowed by the NCLT due to principle of Res Judicata, which bars the re-litigation of the same matter between the same parties.

With relation to withdrawal, the NCLAT’s judgement sheds light on the following:

Scope of the NCLT’s Power to allow Withdrawal

The NCLAT held that the NCLT had no jurisdiction to entertain or permit a plea of withdrawal after a resolution plan had been approved by the CoC. The NCLAT also held that the NCLT cannot encroach on the commercial wisdom of the CoC, and can only satisfy itself that the plan complies with the requirements in Section 30(2). Further, given the facts of the case where the Request for Resolution Plans (“RFRP”) had clearly provided that no change in a plan would be permitted after the submission of the resolution plan and that the same was irrevocable, the resolution applicant could not be allowed to withdraw the plan by the NCLT

Period of Validity of a Resolution Plan

The NCLAT held that while the plan would not be binding upon parties till it is approved by the NCLT, the NCLT could only assess compliance with Section 30(2). It also specifically pointed out that in the facts of the case, the Respondents had continued engagement with the CoC and the NCLT for approval of the resolution plan even after the expiry of six months, and subsequent conduct shows that the plea on validity was not well-founded.

Withdrawal on Account of Delays

The NCLAT held that withdrawal of the plan on account of delays in the approval of the application by the NCLT, cannot be allowed. Allowing for withdrawal would permit resolution applicants to take advantage of the situation, and would result in the act of Court harming the stakeholders standing to benefit from the approval of the resolution plan, that could keep the corporate debtor running as a going concern.

Withdrawal due to Subsequent Investigations

The NCLAT held that since all the assets of the debtor would be available to the resolution applicant and the corporate debtor would be granted immunity under Section 32A, subsequent investigations would not change the commercial basis of the resolution plan, and withdrawal on this ground would not be tenable.

 Res Judicata

The NCLAT held that while the relief for withdrawal was not explicitly sought earlier, the new application would be barred by principles of constructive res judicata which requires parties to claim all reliefs as available at the time of filing the first application. The NCLAT also held that the NCLT did not have the power to grant/ reserve liberty to bring a fresh application and so the application would be barred by the principle of ‘res judicata’ notwithstanding such liberty. Finally, the NCLAT also held that it would not be legally tenable to argue that the plea of withdrawal was never considered by the NCLT in its earlier order, since the fact that revaluation was not granted points to the fact that the relief of withdrawal was denied.

Second Petition: In the matter of Kundan Care

The resolution applicant, Kundan Care, approached the NCLT seeking to withdraw its resolution plan approved by the CoC but awaiting approval of AA. It did so on the ground that the resolution plan became commercially unviable and unfit for implementation on account of delay in the conclusion of CIRP. Their plea was denied by NCLT, and further came to be rejected by the NCLAT. The NCLAT emphasized on “maintaining the sanctity of the resolution process” and held that a “Resolution Applicant whose Resolution Plan has been approved by Committee of Creditors cannot be permitted to withdraw its Resolution Plan”. Similarly, the NCLAT had earlier observed in Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pvt. Ltd. that once the resolution plan is approved by the CoC, the applicant cannot take a “topsy turvy” stance, and hence, cannot withdraw the approved resolution plan. It cannot place reliance on the decision in Metalyst because “in that case, the Resolution Plan approved by the Committee of Creditors was found to be violative of Section 30(2)(e) of the I&B Code.” It held that since in the present case there is no violation under Section 30(2), therefore, it ought not to follow Metalyst as a precedent. The NCLAT held that once a Resolution Plan is approved by the Committee of Creditors, the Resolution Applicant cannot be permitted to withdraw the Plan and the NCLT has no jurisdiction to entertain such a plea of withdrawal in such cases. The Appellate Tribunal had followed its earlier decision in Educomp Solutions while holding so.

Third Petition: In the matter of Seroco Lighting

A Resolution Plan was provided by the Promoters of the Corporate Debtor (an MSME sector) was approved by the CoC, therefore, an Application was filed by the resolution professional u/s 30(6) of IBC, with a prayer to approve the CoC approved Resolution Plan submitted by the Resolution Applicant (Promoters), u/s 31 of the IBC. Subsequently the Resolution Applicant (Promoters) filed an IA seeking the Hon’ble NCLT to permit them to revise their CoC approved Resolution Plan stating reasons that their Resolution Plan was filed based on the Information Memorandum which was published 2 years ago and they were unaware of the corporate debtor’s current financial condition pursuant to Lockdown situation due to Covid-19. The Application filed by the resolution plan was allowed by the Hon’ble NCLT approving the Resolution Plan and the IA filed by the Resolution Applicant (Promoters) to modify/ withdraw their Resolution Plan, was disallowed with cost, by a common order. The IA was disallowed on the basis of Kundan care products vs. Amit Gupta, RP & Ors. The Resolution Applicant (Promoters) filed an Appeal against the order of the Hon’ble NCLT disallowing their prayer to revise their Resolution Plan. The Hon’ble NCLAT upheld the order of the Hon’ble NCLT stating that Successful Resolution Applicant cannot be permitted to withdraw the approved Resolution Plan coupled with the fact that the RA is a Promoter and is well aware of the financial health of the CD.

Submissions Before the Supreme Court

To summarize the arguments of the parties, the contended that Resolution Plans are in the nature of an offer, which becomes binding as a concluded contract only once the Adjudicating Authority has approved the Resolution Plan. Section 7 of the Contract Act,1872 requires the acceptance of offer to be absolute, unconditional and unqualified. Since the approval by the CoC is effectively conditional upon the confirmation of the Plan by the Adjudicating Authority, it cannot be said that there is absolute acceptance of the Resolution Plan. Alternatively, it has been argued that Resolution Plans approved by the CoC are contingent contracts, whose enforceability is conditional upon the approval of the Adjudicating Authority in accordance with Section 32 of the Contract Act.

The Respondents (RPs and the CoCs) have argued that a concluded contract comes into being when the Resolution Plan is approved by the CoC and a successful Resolution Applicant cannot renege from their contractual obligation to implement the Resolution Plan.

Order of the Supreme Court

Resolution Plans are not in a nature of a traditional contract per se, and the process leading up to their formulation and acceptance by the CoC is comprehensively regulated by the insolvency framework. The IBC framework, does not enable withdrawals or modifications of Resolution Plans, once they have been submitted by the RP to the Adjudicating Authority after their approval by the CoC. In any event, and without affecting the legal position formulated above, the Supreme Court dealt with the submissions of the parties that the contractual terms of respective Resolution Plans enabled withdrawal or re-negotiation of terms. The Supreme Court analysed as to whether the individual Resolution Applicants had specifically negotiated with the respective CoCs for a right of modification or withdrawal and are contractually entitled to the same.

The Ebix Appeal

On Res judicata:

Res judicata cannot apply solely because the issue has previously come up before the court. The doctrine will apply where the issue has been “heard and finally decided” on merits through a conscious adjudication by the court. In the present case, the NLCT’s order dismissing the First Withdrawal Application makes it clear that it had only considered only that part of prayer (iv) which related to re-evaluation of the Resolution Plan, possibly because Ebix had hoped to re-evaluate the Resolution Plan on the basis of the information received as a consequence of prayers (i) and (ii) and those prayers were rejected since such information was not available. The finding of the NCLAT on this issue was reversed and held that Ebix’s Third Withdrawal Application was not barred by res judicata.

Analysis of the Resolution Plan of Ebix:

Ebix has alleged that it is entitled to withdraw its Resolution Plan by relying on:

(i) the terms of the RFRP, which indicates that the Resolution Plan is binding on the Resolution Applicant only after approval by the Adjudicating Authority under Section 31;

(ii) the terms of the Resolution Plan which indicate that the Plan was valid for six months; and

(iii) the principles of contract law to urge frustration on account of fraud and erosion of the commercial substratum.

Ebix has also tried to argue that its position has changed manifestly because of new allegations which have come up in relation to the financial conduct of Educomp. Ebix was responsible for conducting their own due diligence of Educomp and could not use that as a reason to revise/ modify their approved Resolution Plan. In any event, Section 32A of the IBC grants immunity to the Corporate Debtor for offences committed prior to the commencement of CRIP and it cannot be prosecuted for such offences from the date the Resolution Plan has been approved by the Adjudicating Authority under Section 31, if the Resolution Plan results in a change of management or control of the Corporate Debtor subject to certain conditions.

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.

Finally, it is also important to note that no clause of Ebix’s own Resolution Plans provides them with a right to revise/ withdraw their Resolution Plan after its approval by the E-CoC, but before its confirmation by the Adjudication Authority. Clause 9.1 permits withdrawal in the event the Resolution Plan is not approved in its entirety by the NCLT, while Clause 9.7 allows for an amendment for the purposes of implementation of the Resolution Plan but only when the E-CoC approves it with a seventy-five per cent vote. Hence, Ebix did not have any right under their own Resolution Plan to revise/ withdraw it. Even if the submitted Resolution Plan was considered as a conditional offer the terms did not enable a withdrawal of the Resolution Plan in the event that the Adjudicating Authority does not approve it under Section 31 within six months of its submission.

Duties of the RP:

Section 29 of the IBC places a duty upon the RP to provide an IM to the Resolution Applicant, containing such information which may be relevant to the Resolution Applicant to draft its Resolution Plan.

Under the IBC, there is a duty upon the RP to collect as much information about the Corporate Debtor as is accurately possible to do. When such information is communicated through an IM to the Resolution Applicant, the RP must be careful to clarify when its information is not comprehensive and what factors may cause a change.

In the present case, Ebix has alleged that the E-RP did not inform it of the financial investigations into the conduct of Educomp in a timely fashion. Ebix cannot dispute that E-RP had provided it the relevant information required under Section 29 to formulate its Resolution Plan. The issues in relation to financial investigations into the conduct of Educomp arose when the two articles were published by The Wire, both of which were after the Approval Application had been filed by the E-RP. Further, Ebix was aware of all the proceedings before the NCLT since the various applications were often listed along with the Approval Application, in which it continued to appear.

The Kundan Care Appeal 

The CIRP of Astonfield commenced on 27 November 2018. On 1 May 2019, GUVNL issued a default notice under Article 9.3.1(e) of the PPA, taking the initiation of the CIRP as an event of default for the termination of the PPA. The validity of the default notice was adjudicated upon by the NCLT in a judgement dated 29 August 2019. The NCLT set aside the default notice on the ground that the termination of the PPA would adversely affect the “going concern” status of Astonfield. On 15 October 2019, the NCLAT dismissed an appeal filed by GUVNL. On 29 October 2019, Kundan Care submitted a Resolution Plan for being considered by the A-CoC, which was followed by a final version on 12 November 2019. On 14 November 2019, the Resolution Plan submitted by Kundan Care was approved by the A-CoC with a vote of 99.28 per cent. On 15 November 2019, a Letter of Award was issued by the A-RP to Kundan Care, and the Resolution Plan was submitted to the NCLT for approval to under Section 31 of the IBC.

On 27 November 2019, GUVNL moved to the Apex Court in appeal against the order of the NCLAT dated 15 October 2019 (which was eventually dismissed). During the pendency of the appeal, the appellant moved an application before the NCLT for withdrawal of its Resolution Plan and for return of its PBG. In view of the pendency of the appeal before this Court, NCLT deferred consideration of the Resolution Plan till the disposal of the appeal. On the request of Kundan Care, their application was listed for hearing and dismissed on 3 July 2020 for want of jurisdiction to enable withdrawals. This decision of the NCLT was confirmed by the NCLAT on 30 September 2020. While Kundan Care’s appeal against this decision of the NCLAT was pending before this Court, Gujarat Urja (supra) was decided by the Apex Court on 8 March 2021.

In view of the above agreement which has been arrived at, the Apex Court exercised jurisdiction under Article 142 of the Constitution of India for a one-time relief and direct that:

• The A-CoC shall convene and take a decision on the proposal submitted by Kundan Care on 5 July 2021, and the response by EXIM Bank and PFCL dated 12 July 2021;
• In the event, that a revised Resolution Plan is agreed upon by the A-CoC, it shall be submitted through the A-RP for the approval of the NCLT within a week thereafter. In the event that a revised Resolution Plan is not agreed upon, the original Resolution Plan, as submitted before the NCLT on 15 November 2019, shall prevail; and
• The NCLT shall dispose of the application with the revised Resolution Plan expeditiously, and preferably within a period of two weeks from the date of receipt of an application from the A-RP for the approval of the revised Resolution Plan.

The Seroco Appeal  

The CIRP of Arya Filaments, an MSME, was instituted on 17 August 2018. Seroco submitted a draft Resolution Plan on 13 March 2019 for an amount of Rs 6.79 crores (approx.). Subsequent to meetings with the Arya-CoC and revisions to the Resolution Plan, Seroco’s plan was approved by the Arya-CoC on 10 May 2019. On 15 May 2019, the Arya-RP filed the Resolution Plan for approval before the NCLT. Form H was filed by Arya-RP on 5 June 2020.

Seroco addressed a letter to Arya-RP and Arya-CoC on 9 June 2020 seeking a modification of the Resolution Plan and the resolution amount to Rs 5.29 crores (approx.) on account of the economic slowdown caused by the COVID-19 pandemic, and subsequently filed applications before the NCLT and an appeal before the NCLAT seeking a modification of the Resolution Plan on account of the original being filed over eighteen months ago.

Seroco has relied on the terms of its Resolution Plan which envisage payment to the Arya-CoC by sale of land and building, and old/ unusable/ spare plant and machineries to urge that there has been a frustration of the contract because of the economic slowdown which must have impacted the value of these assets. The proposed revised solution envisages a further haircut to the Arya-CoC where Rs 1.5 crores less would be paid, over an extended timeline. There are no terms in the Resolution Plan or the Form H submitted by Arya-RP that could provide such a benefit to Seroco. To the contrary, Clause 19(vii) of the Resolution Plan provides that the preliminary approval of the Resolution Plan by the Arya-CoC is binding on Seroco.

Therefore, there is no scope to grant reliefs even on the terms of the Resolution Plan. As held in Section H of the current judgement, common law remedies available under the Contract Act are not available to the parties since a submitted Resolution Plan is not a contract which can be otherwise voidable on account of frustration, force majeure or other such instances. Hence, parties can only seek reliefs that are specifically envisaged in the IBC.

Other Findings:

• 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.
• 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.
• The framework, as it stands, only enables withdrawals from the CIRP process by following the procedure detailed in Section 12A of the IBC and Regulation 30A of the CIRP Regulations and in the situations recognized in those provisions.
• Enabling withdrawals or modifications of the Resolution Plan at the behest of the successful Resolution Applicant, once it has been submitted to the Adjudicating Authority after due compliance with the procedural requirements and timelines, would create another tier of negotiations which will be wholly unregulated by the statute.
• Since the 330 days outer limit of the CIRP under Section 12(3) of the IBC, including judicial proceedings, can be extended only in exceptional circumstances, this open-ended process for further negotiations or a withdrawal, would have a deleterious impact on the Corporate Debtor, its creditors, and the economy at large as the liquidation value depletes with the passage of time.
• If the legislature in its wisdom, were to recognize the concept of withdrawals or modifications to a Resolution Plan after it has been submitted to the Adjudicating Authority, it must specifically provide for a tether under the IBC and/ or the Regulations.
• The Supreme Court also took note of thirty-second report of the Ministry of Corporate Affairs’ Standing Committee on Finance (2020-2021) on the ‘Implementation of Insolvency and Bankruptcy Code – Pitfalls and Solutions’ wherein the Committee felt that more than seventy-one per cent cases are pending for more than 180 days and the delays were attributable to: (i) the NCLT taking considerable time in admitting CIRPs; (ii) late and unsolicited bids by Resolution Applicants after the original bidder becomes public upon passage of the deadline for submission of the Plan; and (iii) multiplicity of litigation and the appellate process to the NCLAT and the Supreme Court. Such inordinate delays cause commercial uncertainty, degradation in the value of the Corporate Debtor and makes the insolvency process inefficient and expensive.
• The Apex Court observed that pending resolution plans have to be cleared keeping in view the timelines prescribed.
• Importing principles of any other law or a statute like the Contract Act into IBC regime would introduce unnecessary complexity into the working of IBC and may lead to unprotracted litigation.

Conclusion:

The judgement of Apex Court is noteworthy as it reemphasized that the speed of resolution as contemplated in the IBC is sacrosanct. Further, resolution by itself is not the goal of the IBC but resolution within the specific timeframe is in the essence of the IBC. These are two wheels of a chariot and one aspect cannot be ignored while considering another. Both of these aspects have to go together for a successful resolution. Therefore, endeavour should be made to complete the CIRP within a period of 330 days and the timeline should be treated as a norm and not the exception. The IPs, CoC, Resolution Applicant, NCLT, NCLAT should be sensitive to the effect of such delays and endeavour should be made on a best effort basis to adhere to the timelines stipulated under the IBC. The Apex Court has taken conspectus of the complete law on the aspect and explicitly clarified by the Apex Court that upon the approval of the resolution plan by the COC, the same cannot be withdrawn and hence, it inflicts a mandatory character on the implementation of the approved plan. The judgement once again propounded ‘creditor in control’ regime.

We conclude with the following observations of the Apex Court:

“We urge the 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 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”.

Author:

Ravi Charan Pentapati is a Partner at Link Legal. (Views are personal)

[1] COMMITTEE OF CREDITORS OF EDUCOMP SOLUTIONS LTD. VS. EBIX SINGAPORE PTE. LTD. OTHERS (Civil Appeal No. 3224 of 2020 & others)