Withdrawal of resolution plans: Analyzing their legal sustainability in light of the objectives of the Insolvency and Bankruptcy Code, 2016

Introduction

With the advent of the Insolvency and Bankruptcy Code, 2016, [hereinafter IBC] the perspective from which insolvent companies are viewed has changed to a great extent. Prior to the introduction of this code, there were significant inconsistencies and complexities with respect to the withdrawal mechanism of insolvent corporations.
The existing legislation at that time was unable to provide a proper rescue mechanism to such corporations that were unable to resolve their monetary liabilities properly.

In the existing legal regime, a corporation that becomes insolvent [also known as a ‘corporate debtor’] can resort to a proper resolution mechanism, known as the Corporate Insolvency Resolution Process [hereinafter ‘CIRP’]. This process mainly incorporates two methodologies. The first objective is resolution.

However, if the corporation’s debts cannot be resolved adequately, another process known as liquidation is brought into the picture. This mainly involves a sale of the corporate debtor’s assets, and the proceeds of such sales are used to realize the relevant debts.

In the first phase which involves resolution, there is a provision of a document known as a resolution plan, which, in a layman sense, is a plan proposed by a corporation who is willing to run the corporate debtor as a going concern.
This article will analyze the nuances of the resolution plan, and specifically its withdrawal from the resolution process in light of its validity from the perspective of the objectives of the IBC.

Resolution plan under the IBC

A resolution plan is a plan that seeks to address the issue of the corporate debtor’s insolvency and subsequent inability to repay debts. This term is defined under the IBC, within the confines of Section 5(26).
The section specifies that “Resolution plan” means a plan proposed by the resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II.

In order to better ascertain the meaning of this definition, it becomes expedient to talk about the general meaning of the term “resolution applicant”. This is an entity which is interested to participate in the CIRP of the Corporate Debtor, and more specifically, to resolve its status as an insolvent entity via a commercially prudent document [which is the resolution plan, in this case].

The code defines a resolution applicant in the following manner: “a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25”. After the submission of a resolution plan, it requires the approval of multiple entities.

The Committee of Creditors [which is formed after the resolution professional ascertains the creditors whose claims have to be satisfied] has to approve the resolution plan submitted by any prospective resolution applicant. The required percentage of financial creditors which shall approve a proposed resolution plan is 75% under the IBC.

After such approval by the committee of creditors and the adjudicating authority, the plan is binding on all the concerned stakeholders, including the government entities.

As far as a perusal of the contents and substance of the resolution plans is concerned, the Corporate Insolvency Regulation Process Regulations become relevant. The necessary measures which shall be present under a resolution plan are provided for under Regulation 37.

It requires a proper resolution plan to have provisions pertaining to transfer of assets, sale of assets, pertinent nuances of merger, acquisition, modification of shares etc.; amongst a number of other things.

Regulation 38 specifies the mandatory contents of a resolution plan, which can be mainly clubbed under the following headings: sources of funds and the pertinent financial nuances, terms of the plan, implementation schedule, feasibility of the plan and capability of the resolution applicant to effect the plan.

Objectives of the IBC

The Statement of Object and Reasons of the IBC states the following:

“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto”.

Therefore, one can easily ascertain that the act was brought with certain concrete objectives in mind. Some prominent ones of these are:

(i) timely completion of the process.
(ii) balancing of the interests of all the stakeholders.
(iii) promote entrepreneurship.

Owing to the very nature of the process and the law concerned, the IBC has to involve itself in the resolution of monetary difficulties in a quick, definite, and unambiguous manner. The precise requirements of the contents of the resolution plan, and the definite adjoining resolution process are evidence of the quick and time-bound nature of the IBC.

In this context, there is not really a lot of scope for such actions which can create the danger of keeping the resolution process in limbo or negatively impact the prospective interests of the concerned stakeholders. Although judicial involvement is not predominant in the resolution process, but the tribunals have usually looked down upon practices that interfere with a definite, time-bound resolution.

Analysing the legal sustainability of the withdrawal of resolution plans

There have been instances under the Indian insolvency regime wherein some resolution applicants have sought to withdraw their resolution plans after their approval by the adjudicating authorities.

Various reasons have been cited to justify these withdrawal requests, such as the absence of sufficient information at the time of drafting and preparation of the plan, fraudulent behaviour on part of the resolution professionals etc, subsequent deterioration of the financial condition of the resolution applicant, etc. However, the courts have often not shown a favourable attitude in this regard.

The IBC prescribes a definite time limit within which the CIRP shall be completed i.e. 180 days. Furthermore, the Supreme Court has observed in the case of Essar Steel (India) Ltd. v. Satish Kumar Gupta [Essar Steel] that the CIRP shall be finished within a definite time period as prescribed under the IBC, and the extensions shall be granted only in exceptional cases, and even then, they should be short.

In essence, if we consider the IBC as a whole, withdrawal of approved resolution plans would not only interfere with the proper completion of the process but would also negatively impinge upon the interests of the stakeholders. This is more so in light of the fact that the resolution process often involves volatile monetary assets, whose value might rapidly change over time.

A withdrawal of the plan would require the Resolution Professional to initiate the CIRP process all over again, thereby going again the very intent of timely resolution under the IBC. It has often been observed that such elements should not be introduced in the insolvency process which may lead to “unpredictability, delay, and complexity not contemplated by the legislature”.

In this context, it is pertinent to note that the IBC does not statutorily contemplate a withdrawal of the resolution plan, thereby leading to a strong inference that the legislature had intended against such an action.

Allowing a withdrawal amounts to allowing an action not envisaged expressly by the legislation. This goes against the well-established rule of cassus ominus i.e. “an omission in a statute cannot be supplied by judicial construction”.

Furthermore, allowing the withdrawal of the resolution plan goes against certain other objectives of the IBC as well. The resolution process shall be conducive to the interests of all the concerned stakeholders.

It shall be kept in mind that the resolution applicant is only one of the concerned stakeholders, amongst several others such as the resolution professional, the corporate debtor, the creditors, etc. Allowing a withdrawal at the whims of the resolution applicant, and allowing it to be vague and unspecific goes against the fundamental tenets of the resolution process.

Furthermore, interfering with the resolution process by allowing the withdrawal of resolution plans goes against the commercial wisdom of the committee of creditors. This is a factor that shall be given prime consideration since it is substantially pertinent to the objectives of balancing the interests of the stakeholders and the promotion of entrepreneurship. The Supreme Court has reaffirmed the supremacy of commercial wisdom in the cases of K Sashidhar v. India Overseas Bank and Essar Steel.

Conclusion

Therefore, it can be safely concluded that the withdrawal of a resolution plan is not a legally sustainable step. This is in light of not only the crystal clear mandates of the Insolvency and Bankruptcy Code, 2016; but also the concrete judicial pronouncements which strongly emphasise the aspects of a timely resolution and supremacy of commercial wisdom.

The courts shall continue to follow this judicial position unless extremely exceptional circumstances arise that seem strong enough to subvert the dominant considerations prevalent under the Indian insolvency regime.

This article has been authored by Avikalp Mishra, a student at National Law Institute University, Bhopal.