The Inviolability of a Resolution Plan: Analysis by the Apex Court
The Supreme Court, on 13 September 2021, ruled in a rather contentious matter that once a resolution plan has been approved by the committee of creditors (CoC), it shall neither be withdrawn nor be modified pending the approval of Adjudicating Authority (AA) on application by the resolution applicant (RA). In the case of Ebix Singapore Private Limited v Committee of Creditors of Educomp Solutions Limited and Another, the apex court observed that in absence of any explicit provisions regarding withdrawal of a resolution plan, the same cannot be done based on judicial interpretation. This judgment would possibly raise a plethora of ramifications which the author would try to address in this article while understanding the verdict of the court and the ratio behind it.
The origins of the case can be traced back to 5 May 2017 when Educomp Solution Limited (Educomp) filed a petition under Section 10 of the Insolvency and Bankruptcy Code 2016 (Code) in the National Company Law Tribunal (NCLT) to initiate a corporate insolvency resolution process (CIRP). In furtherance of the petition, a resolution professional was appointed who then invited proposals through bidding. Out of the applicants, Ebix Singapore Private Limited (Ebix) was declared as the successful bidder by the CoC, and accordingly voting on the RP was done where CoC approved the same with a 75.35% majority.
Consequently, following Section 31 of the Code, Educomp applied for the approval of the resolution plan before the NCLT. While the matter was pending in the tribunal, investigations were initiated by SFIO and CBI against Educomp due to some media reports citing mismanagement. Pending the proceedings, Ebix filed for withdrawal of the resolution plan under Section 60(5) of the Code citing its pendency with the NCLT for 17 months, cumulative pendency for 26 months, possible discontinuance of government contracts and the media reports.
View of the Tribunals
Even though The NCLT denied the first two applications, it admitted the third one, observing that the limitation of res judicata did not exist as it had failed to adjudicate the matter on merits in previous attempts while also observing that the resolution plan becomes binding only after NCLT’s approval and its enforceability depends upon the AA.
Against this decision, an appeal was filed in NCLAT which, while setting aside the order, held that since the first application was rejected by NCLT, it would come under the scope of res judicata. Further, on the issue of merits, the NCLAT was of the opinion that once a resolution plan has been voted on by CoC, the NCLT cannot allow its withdrawal at the behest of an RA while undermining the commercial judgment of the CoC. In the absence of an unequivocal binding precedent, the issue was then brought before the apex court to settle the dust which had also been raised in numerous similar cases like Panama Petrochem Limited v. Aryavart Chemicals Private Limited where the lower tribunals failed to put forward a stable judicial position.
The court, while simultaneously hearing three similar petitions (Kundan Care Products Limited v. Mr. Amit Gupta and Seroco Lighting Industries Private Limited v. Ravi Kapoor RP for Arya Filaments Limited & Others), following the principle of casus omissus and considering the UNCITRAL guide, rightly observed that the code did not explicitly contain any provision regarding withdrawal of resolution plan on the application of an RA i.e. Ebix in this case, and in the absence of a clear provision, court could not allow such activity. It was also acknowledged that no such ground of withdrawal was mentioned in the resolution plan which was submitted by Ebix itself. On the issue of res judicata, the apex court, while comparing the three applications filed before the NCLT for withdrawal and the respective orders given, observed that the tribunal failed to adjudicate the matter on its merits in the first application which is essential for the application of the principle.
The Ratio Decidendi and its Analysis
On the issue of withdrawal, the court firmly upheld the sanctity of the code and the time limitations given for the completion of the CIRP to avoid insolvency and help in realizing maximum value for CoC. While rejecting the assertion of the applicant which cited terms of the RP and its validity of six months as mentioned in the terms, the court observed that permission of such withdrawal may cause unpredictability in the process and hamper adherence to the timelines. While urging the tribunals and courts to adhere to the 330-day deadline, the court acknowledged the objectives of the code and its intention to seemly conduct CIRP within statutory time, absence of which may cause commercial distress to all parties and chided the applicant in its attempt to bind the tribunal by inserting clauses in the plan. The court also examined the nature of the resolution plans which was one of the contentions raised by both the parties to be a contract. However, the specific nature of the contract itself was argued by the appellant to be an absolute, unqualified contract as per Section 7 of the Indian Contract Act 1872 (ICA) while the respondent asserted that it was a contract under Section 32 of the ICA contingent upon approval of the AA.
To answer this conundrum, the court referred to the similar issues raised across different jurisdictions like the US, UK, Singapore, and Australia and while interpreting the code widely, analysing the BLRC Report and considering the precedent established in SK Gupta v. KP Jain, the court discerned the resolution plan to be a result of a statutory process as mentioned in the code and thus differentiated it from any sort of contract and excluded it from the ambit of the ICA and subsequently from the force majeure clause of Section 56 of the ICA and other reliefs which could be demanded under the ICA while still recognizing the resolution plan to have a binding effect on the concerned parties post-CoC-approval but pending AA’s Approval.
While prioritizing the code and interest of CoC (following the superintendence of CoC established in Essar Steel Limited v. Satish Kumar Gupta), the court also rejected the concerns of the applicant which depending upon Form H of CIRP Regulations, requested the insertion of contingencies in the RP to allow them to withdraw the plan under specified situations. The court, on the issue of withdrawal due to delay in AA’s approval, observed that the acts of the court should not jeopardize the CIRP process and interests of CoC while failing to take into consideration the increased burden on RA due to delay in the process. The court also rejected the ground of investigations raised by the applicant citing the defence of Section 32A of the Code and duty of due diligence on part of the applicant while ignoring the potential misgivings on the side of the respondent, the inability of the resolution professional to communicate the developments and established precedents such as Committee of Creditors of Metalyst Forging Limited v. Deccan Value Investors LP wherein the withdrawal of resolution plan was allowed on account of improper information.
The decision of the apex court places resolution plans at a platform from where there is no going back putting a lot of burden on the RA who cannot renege on resolution plan even when the circumstances change drastically against it while the tribunal is not able to approve in time. This unfavourable and irreversible status of the resolution plan would certainly discourage the applicants who wished to undertake the CIRP while decreasing the commercial feasibility of the process for RA which could further cause impediments in the process and may lead to insolvency following Section 33 of the Code. The clarity of the nature and binding effect of the plan does clear the air around the legal issue and would reduce the chances of future litigation but adhering strictly to timelines, which are often stretched as per the comfort and interest of creditors, while completely ignoring the concerns of the applicant who wishes to divert the corporate debtor from the path of insolvency provides a scale which may not be entirely balanced and may not be fruitful enough for the applicants to undertake the process leaving the companies spiralling into the tunnel of insolvency.
The court's verdict has fairly interpreted the provisions while considering the established principles and has rightly emphasized the intent, objective, and sanctity of the Code which does not permit such withdrawal while shifting the burden on the legislature to alleviate the concerns of the RA. Even though the code does not provide for withdrawal, it cannot be accepted without exceptions or some kind of relief for RA. It is hoped that the legislature while balancing the rights of CoC and the given time framework, would try to bring some attractiveness in the process for RA which could be in the form of certain specified conditions wherein such withdrawal may be permitted or stipulation of clear limits for approval of the resolution plan by AA and issuance of guidelines for adherence to the same.