[Armaan and Ritu are students at SVKM'S NMIMS Kirit P Mehta School of Law, Mumbai.]
One of the underlining objectives of the Insolvency and Bankruptcy Code 2016 (IBC) is to restructure and reorganise the financially sick and viable companies in order to keep them a going concern in a time bound manner. Initially, under Section 12 of IBC, the corporate insolvency resolution process (CIRP) was to be completed within a period of 180 days, which could be further extended to 90 days i.e. 270 days from the date of admission of the application for CIRP.
However, the filing of multiple legal proceedings by stakeholders and resolution applicants at different stages of the insolvency process made it difficult to adhere to the timeframe provided under the CIRP. In the case of Ericsson India Private Limited v. Reliance Communications Limited, the National Company Law Tribunal (NCLT), Mumbai admitted Reliance Communications and its two subsidiaries for CIRP on 15 May 2018 which was later stayed on appeal by the National Company Law Appellate Tribunal (NCLAT) on 30 May 2018. This stay was, however, lifted on 30 April 2019 (after nearly 335 days) as being far beyond the maximum timeframe for completion of CIRP i.e. 270 days. Also, the task of the committee of creditors (CoC) in examining the feasibility and viability of prospective resolution plans generally consumed a lot of time and ultimately resulted in exceeding the CIRP timeline.
Ultimately, in the case of Committee of Creditors v. Satish Kumar Gupta and Others (Essar Steel case), the Supreme Court struck down the word ‘mandatorily’ from Section 12(3) of the IBC and Section 4 of the Amendment Act of 2019 as being arbitrary and replaced the same with ‘overall limit’, thereby providing for a scope of extension post 330 days in exceptional cases only.
This article talks about the recent case of Panna Pragati v. Amit Pareek (which deals with the timeframe within which CIRP has to be completed) (Panna Pragati) and also analyses the circumstances which call for an extension of the timeline stipulated under Section 12 of IBC. Taking a cue from the Essar Steel case, the article further deals with the vital role played by a resolution professional (RP) in administering CIRP.
Judgment Analysis
In the case of Panna Pragati, an appeal was filed by the resolution applicant before NCLAT challenging the order of the NCLT Guwahati bench, which rejected the revised plan submitted by the resolution applicant on the ground of delay in submitting the said resolution plan in view of the impending expiry of 180 days of CIRP. The contention of the resolution applicant was that it submitted the revised resolution plan within the timeframe of 180 days of the CIRP period, which was rejected by the RP without presenting it to the CoC, although the revised plan provided a higher upfront payment than that of the successful resolution applicant’s plan. The issue before the NCLAT was whether the timeframe stipulated under the IBC can be relaxed under exceptional circumstances to allow a prospective resolution applicant to submit a revised resolution plan, more so when it involves a small period of time.
The NCLAT set aside the orders of the NCLT and held that the acts of the RP in excluding the resolution applicant’s plan merely on the ground of the forthcoming expiry of CIRP was unwarranted and arbitrary. The RP, according to the appellate tribunal, contravened Sections 25(2) and 30(3) of the IBC by not placing the revised plan before the CoC even when the revised plan provided a higher upfront payment.
The NCLAT clarified that it was a clear case of material irregularity in conducting the CIRP by the RP, which rendered the successful resolution applicant’s plan flawed. Hence, the revised plan submitted by the resolution applicant deserved to be considered on merit basis. The NCLAT, while upholding the judgement of the Supreme Court in the Essar Steel case, held that the timeframe provided under the IBC for CIRP can be relaxed in exceptional cases for the completion of the insolvency process.
Timeframe Provided under Section 12: Extendable in What Cases?
The IBC does not specifically provide an exhaustive list of circumstances under which the timeframe of CIRP can be extended beyond 330 days. Nonetheless, the same can be construed from the recent amendments in the IBC regulations and the judgments passed by the NCLT, the NCLAT and the Supreme Court in various cases.
The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 witnessed the insertion of Regulation 40C in view of the COVID-19-induced lockdown, which provides for exclusion of the months of lockdown from the CIRP timeframe. The intent behind the same is to safeguard the interest of resolution applicants who are unable to complete CIRP in a time-bound manner owing to the current unprecedented times. The provisions of Regulation 40C have been emphasised in the NCLAT’s recent order in Company Appeal (Insolvency) Number 1 of 2020.
In Essar Steel case, the Supreme Court observed that, as a general rule, the CIRP must be completed within the outer limit of 330 days. However, certain parameters were laid down wherein the 330 day-timeframe can be further extended - cases where it can be shown to the NCLT or to the NCLAT that the timeline would be exceeded in a particular case and that it would be in the interest of all stakeholders involved that the corporate debtor be reorganized rather than pushing it for liquidation, and also that the delay in such proceedings is largely ascribed to the factors which are outside the control of the resolution applicants.
The NCLAT in Panna Pragati relied on this reasoning of the Supreme Court and held that the revised plan submitted by Panna Pragati provided a higher upfront payment as compared to the successful resolution applicant’s plan and since the revised plan was submitted merely 2 days after the original plan, it stands a chance to be examined by the CoC besides the plan of other applicants.
After examining the newly inserted regulation along with the above-mentioned cases, it can be safely deciphered that the timeframe may be extended in cases where, owing to the externalities, the procedures under CIRP cannot be carried out smoothly and in a time-bound manner and where it is in the interest of the applicants that the corporate debtor remain as a going concern. However, the adjudicating authority, while dealing with such a scenario, needs to be scrupulous and should also take into consideration the parameters laid down in the Essar Steel case for determining the same.
Vital Role of Resolution Professional in CIRP
The RP serves as a focal point for the tentative acceptance or rejection of a resolution plan. In the Essar Steel case, the Supreme Court held that once the resolution plan is turned down by the RP, the same cannot be challenged in the NCLT. The RP thereby serves a distinct duty, which is to present the resolution plan to the CoC.
It is imperative to note that in the fitness of things, the RP must provide a due diligence report on distinct reasons as to whether the resolution plan presented by the resolution applicant is to be accepted or not.
However, the IBC restricts the RP in stepping into the shoes of the CoC and decide as to whether the resolution plan is to be accepted. He merely has to voice the decision of the CoC to the resolution applicants, the intent behind the same being that a resolution plan has the potential of reviving the corporate debtor and therefore should be meticulously dealt with. It is crucial for the RP to act within his designated role as provided under IBC, which is to administer the CIRP swiftly.
Key Takeaways
The spirit of the IBC is born out of its ability to resolve and reorganize stressed assets. The IBC’s biggest USP is the time-bound resolution of bankrupt entities thereby allowing them to remain as a going concern.
A relaxation in the acceptance of a resolution plan assists heavily in the CIRP, where the resolution plans are on the verge of being accepted. With the addition of Regulation 40C, the IBC has proved that it is a favorable piece of legislation, which is constantly updating itself with the changing environment.
The NCLAT’s ruling in the present case has clearly set out the role of the RP in the CIRP, while also reinstating the very object of the IBC. A practical approach taken by the Supreme Court along with beneficial amendments in the IBC have thereby paved the way for the positive functioning of the CIRP while also upholding its very spirit in catering to the acquisition of distressed companies in the industrial sector.