The Supreme Court on Monday held that CoC approved resolution plan submitted to the National Company Law Tribunal (NCLT) cannot be modified or withdrawn as it would create another tier of negotiations, which will be wholly unregulated by the statute.
The top court said that a submitted Resolution Plan is binding and irrevocable as between the Committee of Creditors (CoC) and the successful Resolution applicant in terms of the provisions of the IBC and the CIRP Regulations.
It quoted a report of the Parliamentary standing committee on finance which stated that 71 per cent cases are pending for more than 180 days before NCLT and added this is in deviation from the original objective and timeline of Corporate Insolvency Resolution Proceedings (CIRP) envisaged by IBC.
Urging the NCLT and NCLAT to be sensitive to the effect of such delays on the insolvency resolution process, the top court said, “Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the Insolvency and Bankruptcy Code (IBC). We cannot let the present insolvency regime meet the same fate”.
A bench of Justices DY Chandrachud and M R Shah said that 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 this context, we hold that 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 bench said.
It added that 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 (NCLT) after due compliance with the procedural requirements and timelines, would create another tier of negotiations which will be wholly unregulated by the statute.
It said that this Court is cognizant that the extraordinary circumstance of the COVID-9 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 residual powers of the Adjudicating Authority under the IBC cannot be exercised to create procedural remedies which have substantive outcomes on the process of insolvency,” it said, adding that the framework, as it stands, only enables withdrawals from the CIRP by following the procedure of the IBC.
The top court said that since the 330 days outer limit of the CIRP under provisions 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.
It added that a failed negotiation for modification after submission, or a withdrawal after approval by the Committee of Creditors and submission to the NCLT, irrespective of the content of the terms envisaged by the Resolution Plan, when unregulated by statutory timelines could occur after a lapse of time, as is the case in the present three appeals before us.
In a 190-page verdict, the top court dismissed the appeal of Ebix Singapore Private Limited challenging the decision of NCLAT passed on the plea of committee of creditors of Educomp, setting aside the order of NCLT allowing Ebix to withdraw the resolution plan.
The top court’s verdict also came on the plea of two other companies on the same question of law of power to withdraw or modify the resolution plan under the IBC.
The bench said, “permitting such a course of action would either result in a down-graded resolution amount of the Corporate Debtor and/or a delayed liquidation with depreciated assets which frustrates the core aim of the IBC”.
It said that 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 NCLT, it must specifically provide for a tether under the IBC and/or the Regulations.
“This tether must be coupled with directions on narrowly defined grounds on which such actions are permissible and procedural directions, which may include the timelines in which they can be proposed, voting requirements and threshold for approval by the CoC (as the case may be)”, it said.
These are matters for legislative policy, the bench said, adding that the legislature must also contemplate at which stage the corporate debtor may be sent into liquidation by the adjudicating authority or otherwise, in the event of a failed negotiation for modification and/or withdrawal.
“In the present framework, even if an impermissible understanding of equity is imported through the route of residual powers or the terms of the resolution plan are interpreted in a manner that enables the appellants’ desired course of action, it is wholly unclear on whether a withdrawal of a CoC-approved Resolution Plan at a later stage of the process would result in the Adjudicating Authority directing mandatory liquidation of the Corporate Debtor,” it added.
