Failure to Implement Resolution Plan: A Case for Ineligibility under Section 29A

[Mayank and Kanishka are students at Hidayatullah National Law University.]

The Insolvency and Bankruptcy Code 2016 (IBC / Code) was enacted with the primary objective of timely resolution of distressed corporate entities, maximizing the value of assets, and promote entrepreneurship, and balance the interests of all stakeholders. The Supreme Court (SC) in Innoventive Industries Limited v. ICICI Bank Limited, while analyzing the objectives of the Code, highlighted that the primary goal of IBC is the revival of the corporate debtor (CD) in a time-bound manner and to avoid liquidation. However, the recent judgement of the SC in Kalyani Transco v. M/S Bhushan Power and Steel Limited (JSW Steel) has highlighted the systemic vulnerabilities that can lead to the failure of the corporate insolvency resolution plan (CIRP) – culminating in liquidation – the very outcome which the Code seeks to avoid. 

The judgement serves as a crucial point necessitating a revaluation of the roles and responsibilities of all the stakeholders, including the resolution professional (RP), committee of creditors (CoC), and particularly the successful resolution applicant (SRA). The present article dissects the SC’s ruling, while drawing parallels with its judgement in Jet Airways (cited below), in the context of conduct of various stakeholders involved the resolution process. The author while emphasizing the role of SRA in achieving the resolution of a distressed entity, argues for a legislative amendment in the Code to provide for failure to implement the resolution plan as a ground for ineligibility under Section 29A. 

Dissecting JSW Saga: SC’s Condemnation of RP, CoC, and SRA

The SC rejected the resolution plan of the SRA-JSW and ordered the liquidation of Bhushan Power and Steel Limited citing inordinate delays, non-implementation, and procedural lapses by stakeholders. The court highlighted various procedural irregularities in the conduct of the RP, CoC, and the SRA. First, the court pointed out the non-compliance with the statutory timeline provided under Section 12 for the completion of CIRP. Secondly, the court thrashed the RP for non-compliance with Section 29A, not making applications for avoidance of transactions, and contravention of Section 30(2), which provides for examination of the plan by the RP. 

Moreover, the court condemned the CoC for not exercising commercial wisdom and acting against the interests of the creditors while approving the plan of the SRA. Lastly, the court castigated the SRA for not implementing the resolution plan adopting tactics to delay the whole process for a long time without any cogent justification. The court further held that the SRA willfully contravened the provisions of the plan and did not implement it, thus defeating the whole purpose of the Code. 

Jet Airways: A Similar Eye-Opener

The SC in the case of State Bank of India Others v. The Consortium of Mr Murari Lal Jalan and Mr Florian Fristch and Another (Jet Airways) used its power under Article 142 to order the liquidation of the once leading airline, Jet Airways. The court ordered liquidation of Jet Airways because of the failure of the SRA to implement the resolution plan as approved by the National Company Law Tribunal (NCLT). The court termed the litigation an eyeopener while noting certain inefficiencies of the Code and the functioning of various stakeholders. 

Particularly expounding on the role of SRAs, the court stated that the duty of the SRA is not mere formality, but an enduring commitment and a pivotal responsibility to restore the CD. The court firmly emphasized that mere absence of explicit provisions pertaining to the implementation stage of a resolution plan does not entitle the SRA to act in a lackadaisical manner and in violation of the objectives of the Code. 

The instances in JSW Steel and Jet Airways, despite their distinct factual contexts, highlight that there is a need of increased accountability, specifically, on the part of the SRA to ensure that the resolution plans are implemented on the terms on which they are approved. The following section analyses the root of the problem regarding non-implementation and proposes certain solutions to achieve better results in the resolution plan’s implementational phase. 

Root of the Problem: A Case for Ineligibility under Section 29A

The judgement in JSW Steel and Jet Airways cases exposes a critical lacuna in the Code’s framework. The Code lacks stringent consequences for an SRA’s willful failure to implement the resolution plan. Section 31 of the Code envisages that the resolution plan once approved is binding on all stakeholders involved. Under the scheme of the Code, any willful contravention with the terms of the resolution plan is punishable with fine or imprisonment, or both on a complaint made by IBBI or the Central Government as provided under Section 74(3). Furthermore, for SRAs particularly, Regulation 36B(4A) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (CIRP Regulations) provide for forfeiture of the performance bank guarantee (PBG) in case of failure to implement the approved resolution plan. 

It is clear that there are certain safeguards in place to ensure proper implementation of the resolution plan. However, the safeguards are not enough to discourage the SRAs from backing out from implementing the resolution plan. The PBGs are generally a fraction of the high-value resolution plans. For instance, in Jet Airways, the SRA was supposed to submit a PBG of INR 150 crores against a plan package of INR 4,783 crores. Thus, in large scale resolutions, the forfeited amount would be negligible compared to the potential gains from non-implementation. Moreover, the SRAs would challenge the forfeiture of PBGs leading to further delays in the resolution process as evident from Jet Airways and Sharon Bio (cited below). 

Furthermore, the enforcement of penalties under Section 74(3) is not strict as is evident in Committee of Creditors of Amtek Auto v. Dinkar T Subramanian and Peter Beck Und Partners v. M/S Sharon Bio Limited (Sharon Bio), wherein the court did not find sufficient reason to proceed against the SRA under Section 74(3) even though the SRA failed to implement the terms of the approved resolution plan. It is stated that strict enforcement of penal provisions would not be in the best interests of the insolvency regime as serious resolution applicants would become apprehensive about participating in the bid process on account of coercive measures in place. Thus, coercive penal action would lead to punishment even for failure in implementation due to genuine reasons.

Section 29A of the Code was inserted with a view to disqualify the persons who have willfully contributed to the default of the companies, and are otherwise undesirable to participate in the resolution or liquidation process of the CD. In its present structure and the form, Section 29A does not provide for a situation wherein the SRA willfully defaults in the implementation of the resolution plan. 

The NCLAT had the occasion to consider whether failure to implement the approved resolution plan in respect of one corporate debtor would disqualify a person from submitting a plan for another corporate debtor in the case of Nivaya Resources Private Limited v. Asset Reconstruction Company (India) Limited. In this case, it was alleged that since the PRA failed to implement the resolution plan in respect of two other corporate debtors, it had no credibility to implement the plan. The NCLAT opined that the resolution applicant was liable to disclose the reasons leading to the failure in implementation of the plan as mandated under the proviso to Regulation 38(1B) of the CIRP Regulations. The NCLAT stated that giving reasons for such failure is not akin to Section 29A, which imparts ineligibility under Section 29A. Thus, the resolution applicant was not held ineligible under Section 29A to submit the resolution plan. The NCLAT’s reasoning is correct as per the strict interpretation of the Code. While this view emphasizes on the eligibility criteria at the initial stage of submission of resolution plan as per the literal reading of Section 29A, the JSW Steel and the Jet Airways cases highlights that the conduct of SRA during post-approval stage is equally crucial, and a failure at that stage could negate the whole resolution effort. This highlights a gap in the current framework concerning the accountability of the SRA at the post-approval stage. 

At this juncture, it becomes pertinent to reiterate that timely resolution of the distressed entity is the primary objective of the Code, and such willful contravention related to non-implementation of the resolution plan must be addressed by the legislature. In this regard, it is argued that SRAs who have willfully contravened or failed to implement the plan as approved should also be classified as ineligible persons under Section 29A of the Code. This would require amendment of Section 29A to include “willful failure to implement approved resolution plan” as one of the grounds for disqualification, and would thus prevent the SRAs to submit a resolution plan in respect of other prospective CDs. Such a disqualification would act as a deterrence for such SRAs since the ineligibility would not let them participate in the CIRP of other entities, in respect of which they might otherwise be interested to submit a resolution plan. This would ensure that only serious resolution applicants participate in the bid process, ensuring successful implementation of resolution plans. This would enhance the efficiency of the Code and would further promote the objective of time-bound resolution. While such a disqualification may raise concerns about deterring genuine resolution applicants, this risk can be mitigated by restricting the bar to only willful and unexplained failures, as may be determined by the adjudicating authority on a case-to-case basis.

Conclusion

The JSW Steel judgement has highlighted certain inefficiencies in the Code, calling for a revaluation of its provisions. Failure to implement a resolution plan causes inordinate delay in the successful resolution of an entity, thereby defeating the objectives of IBC. Amending Section 29A to provide for willful non-implementation of resolution plan as a ground for ineligibility might prove useful in ensuring successful implementation of resolution plans by SRAs, deterring non-serious resolution applicants, and ultimately enhancing the efficiency of the Code.