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Issues Arising from Non- Implementation of a Resolution Plan

August 23, 2019

[Shubham Kumar is a student at Hidayatullah National Law University, Raipur.]

 

The Insolvency and Bankruptcy Code, 2016 (IBC) has, within 2.5 years of its enactment, passed many litmus tests and is yet to get through the storms. The problem of runaway bidders has plagued the Corporate Insolvency Resolution Process (CIRP) of Amtek Auto Limited, Castex Technologies Limited, ARGL Limited, Orchid Pharmaceuticals Limited, Ruchi Soya Limited, Adhunik Metaliks Limited, and Metalyst Forgings Limited. These cases have seen the successful resolution applicant backtracking from implementing the Resolution Plan (RP), the undesired consequence of which is the chopper of death falling on the corporate debtor. Recently, the National Company Law Appellate Tribunal (NCLAT) has also passed an order liquidating the corporate debtor, on failure of the resolution applicant to implement the RP.

 

Control by the Regulator

 

The Insolvency and Bankruptcy Board of India (IBBI) has, vide amendments in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, mandated furnishing of performance security and disclosure of past non-implementation, to keep a check on resolution applicants. The National Company Law Tribunal (NCLT) has also imposed costs on the successful resolution applicants of Orchid Pharma, ARGL Limited and Castex Technologies Limited for non-implementation of the RP. However, these measures have failed to cause deterrence amongst the resolution applicants.

 

To take stern steps against the defaulting resolution applicants, the Hon’ble NCLAT, in the case of Liberty House Group v. Mr. Dinkar T Venkatasubramaniam and Another (Liberty House) has decided on certain issues with a view to causing deterrence among the resolution applicants. The tribunal has decided on the following:

  • Whether action on part of Liberty House Group Private Limited attracts “Offences and Penalties” under Part II, Chapter VII of the IBC?

  • Whether the adjudicating authority, having a dual role, can initiate contempt proceedings against the successful resolution applicant under Section 425 of the Companies Act, 2013?

  • Whether, in such cases, the adjudicating authority is required to pass a liquidation order under Section 33(3) of the IBC?

 

Commission of an Offence by a Successful Resolution Applicant

 

An offence is committed under Section 74(3) of the IBC where the corporate debtor or any of its officers or creditors or any person, on whom the RP is binding under Section 31 of the IBC, knowingly and wilfully contravenes any of its terms or abets such contravention. Therefore, to constitute an offence by the resolution applicant, the RP needs to be binding on the resolution applicant.

 

Section 31(1) states that an RP is binding on the corporate debtor, its employees and other stakeholders involved in the resolution process, and Section 3(8) defines corporate debtor as a “corporate person who owes a debt to any person”.

 

Thus, the provision does not directly state whether the RP is binding on the successful resolution applicant. The Hon’ble Supreme Court of India (SC), in Reserve Bank of India v. Peerless General Finance and Investment Company Limited, has held that to derive the true meaning of a statute, it must be read in a whole; regard must not only be given to the text but also to the context, as it is the context which gives the text its colours. Thus, the court must compare the clause with the other parts of the law, and the setting in which the clause to be interpreted occurs.

 

Therefore, looking through the glasses of the drafter of the statute, the term “corporate debtor” under Section 3(8) of IBC encompasses within its definition two different entities. At the beginning of the insolvency proceedings, the original promoters and the key managerial personnel of the corporate debtor are the ones who owe debt to the creditors. Once the RP gets approved, it is the successful resolution applicant who now owes a debt to other creditors and undertakes to pay them. Thus, the successful resolution applicant becomes the new corporate debtor to the creditors and the RP becomes binding on the new corporate debtor as per Section 31(1). Hence, a contravention of the terms of the RP would constitute an offence under Section 74(3), and the NCLAT, in the Liberty House case, has rightly held that the non-implementation of RP constitutes an offence under the IBC.

 

Contempt as per Contempt of Courts Act, 1971, on the part of a Successful Resolution Applicant

 

The NCLT and the NCLAT, under the Companies Act, 2013, has the power to initiate civil contempt for wilful disobedience to any judgement or wilful breach of an undertaking given to them. Under the IBC, the resolution applicant gives an undertaking to implement the RP. Therefore, a question arises whether breach of the terms of an RP will constitute contempt of court.

 

The establishment of the NCLT and the NCLAT for the adjudication of company law matters was first proposed by the Eradi Committee. The Companies (Second) Amendment Act, 2002 proposed the dissolution of CLB, BIFR, AAIFR and the constitution of NCLTs for the adjudication of company law matters. The amendment was challenged before the SC in Union of India v. R. Gandhi, President, Madras Bar Association (R Gandhi), which declared the same partly unconstitutional.

 

Thereafter, in 2013, the Companies Act went through a complete overhaul and on the lines of the SC’s ruling in R Gandhi, Section 408 provided:

 

"The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force."

 

Thus, the structural framework of the NCLT lies within the Companies Act, 2013, though presently, it exercises powers and jurisdiction under the Companies Act, 2013, the IBC as well as the Competition Act, 2002. The powers available to the NCLT under these statutes are cognate. This view finds support from the ruling of the SC in B.K. Education Services Private Limited v. Parag Gupta and Associates, where the applicability of the Limitation Act, 1963, to the IBC was challenged. The question before the court was whether Section 433 of the Companies Act, 2013, which provides for the applicability of the Limitation Act, 1963, to all proceedings before the tribunal, would also be applicable to proceedings carried on by the NCLT under the IBC.

 

The SC accepted the argument that if one reads the definition of “adjudicating authority” as per Section 5(1) of the IBC, it becomes clear that the proceedings arising before the NCLT under the IBC are covered by the Companies Act, 2013, from the very inception. Based on this argument, the SC declared Section 238A of the IBC as clarificatory, and the provisions of the Limitation Act, 1963, to be applicable since the inception of IBC.

 

This meant that the adjudicating authority under the IBC is not a separate forum. The powers conferred and limitations imposed upon NCLT under any other statute is in addition to the powers and limitations under the Companies Act, 2013. Therefore, the power to issue contempt orders under Section 425 of the Companies Act, 2013, is an inherent power of the NCLT, irrespective of the jurisdiction exercised by it under any statute, and this power can be exercised by the NCLT to ensure discipline and obedience amongst the successful resolution applicants on non-implementation of the RP. This issue would have been resolved in the Liberty House case, as it had initially been framed by the NCLAT; however, in the final judgement, there was no observation on the same. However, in the author's opinion, the NCLAT can initiate contempt proceedings against the defaulting resolution applicants.

 

Strict timeline versus Resolution: A Clash of Objectives?

 

The IBC initially proposed a strict timeline of 270 days for the completion of CIRP, which has now been extended for a maximum of 330 days.  Section 33(3) of IBC states that where the RP approved by the adjudicating authority is contravened by the corporate debtor, any person whose interests are prejudicially affected by such contravention may make an application for liquidating the company. Since the successful resolution applicant becomes the corporate debtor, after the approval of RP, a liquidation order can be passed if a successful resolution applicant contravenes its terms.

 

One argument which favours the adjudicating authorities’ decision to liquidate the corporate debtor is that time is the essence of the IBC. In Innoventive Industries v. ICICI Bank and Another, the SC observed that the time period prescribed under the IBC is the essence of the resolution process. The NCLT Kolkata Bench, in Surendar Kumar Joshi v. Rei Agro Limited, has held that in case no RP gets approved within 180 days, the court should pass an order for liquidation. Therefore, the IBC prescribes a time-bound resolution process. If the CIRP cannot be completed within the strict time frame, a liquidation order can be passed.

 

However, this stands in sharp contrast to another objective of IBC, which is to promote resolution rather than liquidation. The courts have innumerable times held that where the corporate debtor is a going concern, all efforts should be taken to promote resolution of such companies. Liquidating the companies on failure to implement the RP by a successful resolution applicant will stand contrary to the aforesaid objective. However, the NCLAT, in the Liberty House case, has failed to maintain this balance, and ordered liquidation of the corporate debtor on the failure of resolution applicant in implementing the RP.

 

In the author’s opinion, however, in such a case, there arises a need to maintain a harmonious balance between two conflicting objectives. In this regard, reference may be made to the ruling of the NCLAT in Quinn Logistic India Private Limited v. Mack Soft Tech Private Limited, where the NCLAT held that in any situation where the court finds it justifiable, it can order for exclusion of a certain period from the computation of such limit. However, after the Insolvency and Bankruptcy (Amendment) Act, 2019, the legislature has now mandated that the CIRP cannot be extended beyond 330 days, including any extension of the period of CIRP granted under Section 12 and the exclusion of any time period from the CIRP.

 

Despite the statutory mandate, it would be in the interest of both the corporate debtor as well as the creditors to exclude the time period after the approval of an RP by the Committee of Creditors (CoC). This will give an opportunity to the adjudicating authority for restarting the CIRP clock and allowing the CoC to consider any other RP. It will also be in consonance with both the objectives of the IBC, as the maximum effort for revival of corporate debtor could be taken in a time-bound manner. If the CIRP clock is not restarted, it would mean pushing the corporate debtor into liquidation, which goes against the objective of the IBC.

 

Conclusion

 

Only one out of four cases admitted for CIRP ends up in a successful resolution process. Though, in some cases, liquidation in inevitable because of the fact that the company does not carry on any operations, or because there are no prospective resolution applicants, corporate debtors like Amtek Auto are ending up in forced liquidations only due to the fault of an unrelated party. The influence of these external entities on the CIRP needs to be controlled. The Liberty House case was an opportunity for the NCLAT to fix the holes in the resolution process and restore the faith of the stakeholders in the objectives of the IBC, but it failed to uphold the objective of the IBC. Moreover, its lead was followed by the Parliament in order to settle the issue, for once and for all.   

 

 

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