Conditional Resolution Plan under the Insolvency and Bankruptcy Code: An Analysis

Introduction

Under Sections 7(5), 9(5) and10(4) of the Insolvency and Bankruptcy Code 2016 (“Act” or “IBC”) a corporate debtor (“CD”) can be admitted to the Corporate Insolvency Resolution Process (“CIRP”). Upon such admission and post the appointment of the Resolution Professional (“RP”) under Section 22 of the Act, the RP publishes a call for Expression of Interest (“EOI”) in accordance with Section 25(h) of the Act as per the prescribed format. Upon the receipt of EOIs, the RP formulates a list of prospective Resolution Applicants (“RA”). These prospective RAs, subject to satisfaction of criteria as per EOI and the Act, are invited to submit resolution plans for the resolution of the CD.

In a CIRP, the resolution plan (“Plan”) submitted to the RP by each of the RA under Section 30 of the Act is the single most important piece of document. It contains the offer made by the RAs for insolvency resolution of the CD as a going concern and contains various details apart from the details concerning the cash recovery of the creditors upon implementation of the Plan. The CIRP and the future of the CD are largely dependent on the acceptance or rejection of the submitted Plans by the Committee of Creditors (“CoC”) under Section 30(4) and subsequently by the Adjudicating Authority (“AA”) under Section 31 of the Act. The acceptance or rejection of any of the Plans determines the future of the CD and its existence as a separate legal entity.

It would not be unreasonable to state that a Plan may inevitably start looking like an elaborate contract, especially given the kind of negotiations that take place between the various stakeholders. The apex court in Ebix Singapore Pvt. Ltd. vs Committee of Creditors of Educomp Ltd. (“Ebix Singapore”) held that Plans are comprehensively regulated by the IBC and may not be enforced as contracts. Only in the event of ambiguity over the terms of a Plan, the principles of contractual construction and interpretation may be used as interpretive aids. It has also been established that the IBC as such does not allow for any withdrawals of the Plan once the same has been approved by the CoC and then submitted by the RP to the AA.

This paper attempts to explore if the IBC and subsequent judgments envisage the possibility of having conditional Plans and the extent to which the AA can intervene in relation to such conditionalities. It also attempts to understand that in case conditional Plans are acceptable, either by the CoC or the AA, then in such cases, what kind of conditions may be stipulated by the RA in their Plan.

Existing Legal Gaps

Since the inception of the IBC, there have been many instances where the courts have had to intervene in order to fill in the gaps left by the legislature while finalising the draft submitted by the Bankruptcy Law Reforms Committee (“BLRC”). It has often also been observed that despite some of these issues being highlighted by the insolvency law committees in their reports, the said issues have not been dealt with in the amendments.

For instance, in the Insolvency Law Committee Report of February 2020, the Committee emphasised the need for Plans attaining a certain degree of finality before being placed before the AA. It recommended that on approval of the Plan by the CoC, the Plan should be shared with authorities/ regulators to seek approvals that are mandatory to run the business of the CD. If no objections are raised within forty-five days, it would be deemed that they have been granted approval. Currently, such regulatory approvals are sought after a Plan has been approved by the AA under Section 31(4) with the exception of seeking a combination approval from the Competition Commission of India prior to the Plan being approved by the CoC.

The idea behind such recommendation was to ensure that the Plan does not contain any conditionalities which would derail the time-bound process. However, the subsequent amendment to the IBC did not contain any provisions for incorporating such recommendations. Hence, a Plan that is approved by the CoC and the AA may be derailed as a result of the Plan containing conditionalities relating to such statutory approvals.

In this regard, it would be reasonable either to state that RAs include conditionalities within their Plan to retain the flexibility of being able to withdraw the Plan post submission and also to ensure that certain requirements which are essential to the functioning of the business are in place before the same is taken over by the RA. While the requirement of having conditions relating to the extinguishment of the liability of a CD for an offence committed prior to the commencement of the CIRP has been negated with the introduction of Section 32A of the IBC, this provision only deals with prosecution for offences committed prior to the approval of a Plan by the AA. If it is assumed that the RA is putting in conditions purely for commercial reasons and not for having a fallback option in case the RA no longer wants to pursue the bid, it would not be unreasonable to state that protection against prosecution may not be sufficient to satisfy the RA and that the RA will be able to run the CD as a going concern without the fulfilment of such conditions.

Judicial Interpretations

The National Company Law Appellate Tribunal (“NCLAT”) in Committee of Creditors of Metalyst Forging Ltd. vs Deccan Value Investors LP & Others had allowed the RA to withdraw its Plan post the same had been approved by the CoC in light of the fact that the CD’s business had been grossly misrepresented to the bidders. The NCLAT further held that the IBC does not provide any power to the AA to enforce specific performance of a Plan by an unwilling RA that has been accepted by the CoC. However, the Apex Court held in the Ebix Singapore decision that an AA cannot permit a RA to withdraw its Plan even by exercising its residuary jurisdiction under Section 60(5)(c) since the scope of IBC does not allow for the withdrawal of a Plan. The Court held that any conditionality included by the RA in Form H, wherein the RA would be permitted to withdraw its Plan in the event of a material adverse event, would make the Plan unviable. Hence, such conditionality is not permissible. However, the Court did not go further to establish the contours of a material adverse event.

As discussed above, while the Court has made it abundantly clear that a Plan is not a contract (as defined under the Indian Contracts Act 1872), the terms of a Plan may look very similar to a contract. Accordingly, parties adopt a liberal approach towards including material adverse and force majeure clauses in Plans. Any material adverse effect clause that is purely commercial in nature and does not give the RA the opportunity to withdraw its Plan or an opportunity to substantially renegotiate the Plan, may be allowed when the material adverse event only changes the commercial ambit of the Plan, without affecting the practicality of the Plan. This clause, like any other commercially agreed terms, must be negotiated and pre-agreed with the CoC and should ideally be fairly exhaustive. However, for all practical purposes, it is difficult to understand a CoC agreeing to such a clause in light of Ebix Singapore.

Similarly, in relation to force majeure clauses, the Apex Court in its decision in Committee of Creditors of Amtek Auto Limited through Corporation Bank vs Dinkar T. Venkatasubramanian & Others held that a RA will not be allowed to withdraw its Plan or attempt to renegotiate the commercials of the Plan with the CoC by relying on any force majeure clause mentioned in its Plan.

Conclusion

The Apex Court agrees that the Plans submitted to a CoC may contain conditionalities and commercial terms that do not strike at the root of the Plan and that the AA cannot challenge the commercial wisdom of the CoC while approving a Plan. The Court also holds that these commercial terms should not make the Plan unviable and unimplementable, but does not establish the boundaries of a material adverse event. Thus, it is clear that a Plan can have commercial conditionalities included in it and the same can be negotiated with the CoC, prior to its approval. These may include variations in payout on the occurrence of certain events. It can be argued that a Plan may only allow the RA to walk away in case of non-receipt of approvals from the regulatory authorities or the AA. However, it is abundantly clear that once the Plan has been approved by the CoC and provided that these approvals have been received, there is little to no chance that the successful RA will be allowed to walk away from the process.