Reconsideration of an Approved Resolution Plan by CoC: A Conundrum?
[Kumar and Divyansh are students at National Law University Odisha.]
The Insolvency and Bankruptcy Code 2016 (IBC) was enacted with an aim of providing a speedy resolution to the creditors and the corporate debtor (CD). The corporate insolvency resolution process (CIRP) under the IBC is a time-bound process which aims for asset value maximization and revival of the CD.
Every CIRP needs consideration of a resolution plan, the nature of which is a rehabilitation or a restructuring plan proposed by the resolution applicants for the debt restructuring of the CD, and to continue the same as a going concern. Once a plan is submitted by the applicants, the committee of creditors (CoC) assesses the feasibility and viability of such plans, post which upon agreement on one of such proposed plans through requisite majority under IBC, is declared as the successful resolution plan. This approved plan is then presented in front of the Adjudicating Authority (AA) for its consideration.
However, in some cases, the CoC has decided to review or reconsider its decision of approving a resolution plan, while it was pending the approval of the AA. The jurisprudence on this topic has been subject to conflicting opinions by Indian courts, resulting in a conundrum while hampering the future resolution plans and possessing a threat to the objectives of IBC. The authors in this article have analyzed the power of CoC to reconsider or review its approval under its commercial wisdom in a case where the successful plan is pending the approval of AA, in light of IBC provisions and judicial pronouncements.
Conflicting Judicial Pronouncements
Recently, the National Company Law Appellate Tribunal (NCLAT), Delhi in Hem Singh Bharana v. M/s Pawan Doot Estate Private Limited and Others (Hem Singh Bharana Case) held that once the CoC has approved a resolution plan, such decision is binding upon them and the approval cannot be subjected to any reconsideration. The tribunal, while deciding the case, relied on the landmark judgment of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another (Ebix Singpore Case), wherein the Supreme Court of India opined that a resolution plan cannot be withdrawn while it is pending the approval of the AA, since the approval of CoC culminates into a binding agreement between the creditors, the resolution applicant, and the CD. Similarly, in a previous instance, the Supreme Court in Maharashtra Seamless Limited (MSL) v. Padmanabhan Venkatesh had denied the withdrawal of an approved resolution plan, while it was pending approval of the AA.
The settled precedences restrict withdrawal of approved plans during their pendency before AA, basing themselves on the rationale that an approved plan becomes contractually binding in nature, the terms of which are agreed by both creditors as well as the applicants. Therefore, the NCLAT, Delhi, in the Hem Singh Bharana Case, has relied itself on the nature of an approved resolution plan, i.e. a binding agreement, which cannot be allowed to be reconsidered by the CoC upon their prior approval.
However, through this judgment, the NCLAT Delhi has contradicted its previous reasoning in Bank of Maharashtra v. Videocon Industries (Videocon Industries Case), where the CoC was allowed to reconsider its approval, while the plan was pending the approval of the AA, where the approved plan observed a 95% haircut. The reconsideration was allowed upon the reasoning that the haircut proposed in the approved plan was commercially unviable in nature, and the CoC was duty bound to do the same, since the interest of public exchequer was involved.
Moreover, the decision in Videocon Industries Case continues to be in effect which creates a prima facie conundrum in the evolved jurisprudence aiming to settle the dilemma over the reconsideration of an approved resolution plan by the CoC.
To obtain a clearer picture of the conundrum, the Ebix Singapore Case discussed three phases where a resolution plan may be withdrawn by the applicant, which are, firstly, before the approval by CoC, secondly, when the plan has been approved by CoC and is pending consideration of the AA, and lastly, when the plan has been approved by the AA. In the present case, the conundrum discussed lies in the second stage. It is pertinent to note that the Ebix Singapore case only discussed the prospects of withdrawal of the approved resolution plans in the second phase by the successful resolution applicant, and not the CoC. However, the question existing is that whether the CoC can be restrained from reconsidering the resolution plan on the same rationale.
With due respect to the observations of NCLAT, it is submitted that the decision of the tribunal in Hem Singh Bharana Case does not find a congruence with the law enshrined under IBC, and defies the objective of maximizing the value of the assets of the CD.
IBC empowers the CoC to take all the financial decisions of the CD during the CIRP. After a resolution plan is submitted by an applicant, the CoC is under an obligation to assess the “viability and feasibility” of the plan, post which it may accept or reject the plan by the requisite percentage of votes, i.e., 66%. The commercial wisdom of the CoC is observed by the culmination of the proceedings into a legally binding agreement between the parties. However, if the courts have observed the resolution plan to be of a contractual nature, it becomes upon the will of the parties to either terminate or continue such agreement.
It is a settled position that the AA can return the plan for reconsideration to the CoC on a request made by the CoC under its commercial wisdom. Once the plan has been approved by the CoC, the statutory mandate of the AA under Section 31(1) is to ascertain that the plan obliges the requirements of subsections (2) and (4) of Section 30. Furthermore, while considering the resolution plan, if the AA feels that there is some reason to alter the plan, or where the relevant parameters are not addressed, they have a right to return the resolution plan back to the CoC for their consideration. A resolution plan attains finality and becomes binding only after the approval by the AA, under Section 31 of IBC. Therefore, it can be derived that the code does provides for reconsideration of the resolution plan by the CoC. Such reconsideration is based upon the commercial wisdom, and if the same can be allowed upon findings of AA, in a situation where the CoC has enough information or options available, reconsideration of the plan shall only aid to the objective of speedy resolution of the process i.e. reducing the time of such consideration by AA upon any alteration or findings.
Moreover, it has been observed that an approved resolution plan can be returned for reconsideration to the CoC, in case of changed circumstances. Perhaps the Videocon Industries Case has rightly observed that where the CoC at a later stage finds that the public exchequer is to bear an unprecedented haircut in a large fund employment, then the proposal can be remanded back to the CoC in larger public interest. Considering the same ratio, in case where the CoC receives a better settlement agreement offering them a lesser haircut, it shall constitute as changed circumstances and must be allowed in the light of larger public interest.
The consent of CoC is paramount in IBC, and that it has the sole right to decide the terms of the resolution plan. The exercise of commercial wisdom by the CoC is also nonjusticiable and cannot be subjected to any judicial review. Furthermore, modification of payment is a commercial aspect and falls within the scope of commercial wisdom of CoC. Additionally, it has been held that a body that has the power to make a decision, also has the power to add to, amend, vary or rescind the same decision.
It is also contended that an approved plan does not become contractually binding. A contract is binding on the contracting parties who consent to the terms enumerated in the same. However, a resolution plan becomes binding not only on the creditors and the resolution applicant, but also on the employees and other creditors of the CD. Hence it ceases to be a contract since it involves entities who are not party to the contract. Therefore, the CoC is well within its right to reconsider or review its approval, if such reconsideration is in better interest of the CD.
Lastly, another aspect to the contractual nature of the resolution plan is the free consent. For example, where a plan so pending before the AA offers an 80% haircut while during such proceedings a settlement agreement is proposed in front of the AA offering a 50% haircut. In such a situation, the disallowing of reconsideration of the settlement agreement would not only violate the commercial wisdom of the CoC, but the same would be against the free consent of the CoC amounting to imposition of contract by the court against the principles of both the IBC as well as the contract law.
Though CIRP is a time bound process, the CD should not be allowed to suffer in the garb of the same. The major objective of IBC is the maximization and revitalization of the CD. In the present fluctuating market, it is very much possible that an approved resolution plan becomes unfeasible due to changed circumstance. In such case, the CoC must be allowed to reconsider its approval since it will only benefit the corporate debtor. Indeed, the CoC needs to be more careful while analyzing the future prospects of the resolution plans before voting on the same, but the benefit of commercial uncertainty must be given to the creditors. Moreover, since the IBC landscape in India is still evolving, the conflicting stance of the courts on this jurisprudence may harm the interests of the creditors as well as the corporate debtors.