Debarment of The Defaulting Resolution Applicants: A Need of The Hour

Shwetabh Sinha & Dinesh Gupta

21 Jun 2019 5:02 AM GMT

  • Debarment of The Defaulting Resolution Applicants: A Need of The Hour

    The Insolvency and Bankruptcy Code, 2016 ("Code") and the regulations made thereunder have witnessed several amendments and litigations since the date of notification of the Code. It is an admitted fact that many corporate debtors have seen resolution under the Code, yet there are number of cases which have gone into liquidation due to varied reasons. The courts and tribunals in India have been working tirelessly to implement the spirit of the Code, that is, to promote resolution of corporate debtors which are otherwise standing on the verge of liquidation.

    However, in some matters, the resolution plan(s) are yet to see the light of the day because the successful resolution applicants have either withdrawn from the resolution process before the approval of their respective resolution plan(s) by the National Company Law Tribunal ('NCLT/Adjudicating Authority") or have failed to implement the approved resolution plan for one or other reasons and as a result, the Code has been put to test the waters from time to time.

    In the corporate insolvency resolution process ("CIRP") against Amtek Auto Limited ("Amtek Auto"), the Insolvency and Bankruptcy Board of India ("IBBI") is said to have filed a criminal complaint against Liberty House Group Pte. Ltd. ("Liberty House") which failed to implement the resolution plan after it was approved by the Adjudicating Authority. As a consequence of failure of Liberty House to implement the resolution plan, the financial creditors of Amtek Auto approached the Adjudicating Authority which allowed
    members of the Committee of Creditors ("CoC") or the Resolution Professional ("RP") to file a complaint before the IBBI or the Central Government ("CG") with a prayer to file a complaint against Liberty House under Section 74
    [1] of the Code. The Adjudicating Authority also ordered reconstitution of the CoC to decide upon the resolution plan of the second bidder in order to prevent Amtek Auto from going into liquidation.

    In the CIRP of Orchid Pharma Limited ("Orchid Pharma"), Ingen Capital Group LLC ("Ingen Capital"), the successful resolution applicant, failed to make the upfront payment in terms of the resolution plan approved by the Adjudicating Authority on the pretext that Ingen Capital could not mobilise the required funds in the absence of required information about Orchid Pharma. Notably, the resolution plan submitted by Ingen Capital and approved by the Adjudicating Authority did not have any such pre-condition. The National Company Law Appellate Tribunal ("NCLAT") directed the CG to take appropriate steps against Ingen Capital and its directors as it failed to implement the approved resolution plan without any basis and ordered the Adjudicating Authority to look into the other resolution plans and approve the same.

    The resolution plan for Adhunik Metaliks Limited also faced a similar fate where Liberty House failed to make the upfront payment in terms of approved resolution plan. Liberty House contended that the resolution plan contemplated various regulatory approvals and consultation with the stock exchange and other governmental departments and therefore, the timeline given in the resolution plan was only an 'indicative timeline' for payment of upfront amount. The NCLAT did not accept this contention, though, allowed Liberty House another thirty (30) days to make upfront payment in terms of the resolution plan. The NCLAT also directed the Adjudicating Authority to pass appropriate orders in accordance with the law in case of failure by Liberty House to make payment within the said timeline.

    In addition to the above, in some cases the CoC had approved the resolution plans but the selected resolution applicants withdrew their resolution plans for different reasons before the approval of the same by the Adjudicating Authority.

    In the case of Ruchi Soya Industries Limited ("Ruchi Soya"), the resolution plan of Adani Wilmar Limited ("Adani Wilmar") was approved by the CoC but subsequently, Adani Wilmar withdrew its resolution plan before the same could be approved by the Adjudicating Authority citing the reason of inordinate delay in completion of the process.

    In the case of ARGL Limited ("ARGL"), the CoC approved the resolution plan of Liberty House. While the application was pending, Liberty House proposed to withdraw the resolution plan. The Adjudicating Authority, though, allowed the withdrawal of the resolution plan but made adverse observation against Liberty House. The NCLAT, in appeal, said that any observations made against 'Liberty House' should not be construed to be a finding of the Adjudicating Authority against Liberty House nor will it amount to holding Liberty House ineligible for filing any 'resolution plan' in future in some other case or the plan, if any, already submitted in some other case.

    Legal position under the Code

    According to the provisions of Section 31
    [2] of the Code, the resolution plan once approved by the Adjudicating Authority shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

    In case the corporate debtor, any of its officers or creditors or any person on whom the approved resolution plan is binding, knowingly and willfully contravenes any of the terms of such resolution plan or abets such contravention, then, such contravention is punishable with imprisonment or fine or both under the provisions of Section 74(3) of the Code. Such offence will be tried by the special courts established under the provisions of the Companies Act, 2013 where a complaint is made by the IBBI or the CG or any person authorised by the CG.

    In order to attract the penal provisions of Section 74, the following are the pre-requisites which need to be satisfied:

    • the contravention of the resolution plan by the concerned person must be committed knowingly and willfully; and

    • a complaint to should be made to the special courts by the IBBI or the CG, though, there is no guideline as to on what basis such a complaint can be made by the IBBI or the CG if the IBBI or the CG is not a party to the proceedings.

    In addition to the above, a new regulation 36B(4A) was inserted in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations") to discourage the successful resolution applicants from backing out after the resolution plan has been approved by the Adjudicating Authority. The said regulation 36B(4A) requires the successful resolution applicant, whose resolution plan is approved by the CoC, to provide a performance security which shall stand forfeited in the event such successful resolution applicant fails to implement or contributes to the failure of the implementation of the resolution plan after the same has been approved by the Adjudicating Authority. However, the said regulation 36B(4A) does not contemplate a scenario like Ruchi Soya where the resolution applicant selected by the CoC withdraws from the CIRP before its resolution plan is approved by the Adjudicating Authority.

    Further, a new regulation 38(1B) was inserted in the CIRP Regulations providing that a resolution plan shall include a statement providing details of (a) failure to implement; or (b) contribution to the failure in the implementation of resolution plan; by the resolution applicant or any of its related parties at any time in the past. But how far this would impact the defaulter resolution applicants depends upon the evaluation matrix to be prepared by the CoC for the selection of preferred resolution applicant.

    Way forward

    The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 ("2017 Ordinance") added Section 29A
    [3] to the Code. The Ordinance 2017 was replaced by the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 ("2017 Amendment Bill"). The 'Statement of Objects and Reasons' of the 2017 Amendment Bill read as hereunder:

    "2. The provisions for insolvency resolution and liquidation of a corporate person in the Code did not restrict or bar any person from submitting a resolution plan or participating in the acquisition process of the assets of the company at the time of liquidation. Concerns have been raised that persons who, with their misconduct contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor. This may undermine the processes laid down in the Code as the unscrupulous person would be seen to be rewarded at the expense of the creditors. In addition, in order to check that the undesirable persons who may have submitted their resolution plans in the absence of such a provision, responsibility is also being entrusted on the committee of creditors to give a reasonable period to repay overdue amounts and become eligible." (emphasis supplied)

    From the above-mentioned statement of objects and reasons, it can be ascertained that one of the reasons behind the insertion of Section 29A was to disqualify the persons who, by their misconduct had contributed to the defaults of companies or are otherwise undesirable, from participating in the resolution or liquidation process, and gain or regain control of the corporate debtor. This provision protects creditors of the corporate debtor by preventing unscrupulous persons from rewarding themselves at the expense of creditors and undermining the processes laid down in the Code.

    While the above insertion has been a welcome step, it is pertinent to note that it does not factor in the situation wherein a resolution applicant has willingly and knowingly defaulted in the implementation of the resolution plan. In this regard, it may be noted that Section 29A(d)(i), as amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, debars a person from participating in the CIRP of a corporate debtor if such person has been convicted for any offence punishable with imprisonment for two (2) years or more under any of the specified legislations including the Code.

    However, Section 74(3) envisages that any person including the corporate debtor who has contravened any of the terms of the resolution plan approved under Section 31 of the Code or abets such contravention shall be punishable with imprisonment of not less than one year, but may extend to five years, or with fine which shall not be less than INR 100,000, but may extend to INR 10,000,000, or with both., In view thereof, Section 29A(d)(i) is unlikely to be applicable to the person who is convicted under Section 74(3) and as such, it appears that there is no embargo either under the Code or the CIRP Regulations on the person from participating as a resolution applicant in any resolution process even if the said person has defaulted in the implementation of its resolution plan.

    It may be argued that the successful resolution applicants, who have defaulted in implementation of the resolution plans, should also be classified as 'undesirable persons' under Section 29A and as such they should also be disqualified from participating in the CIRP of any corporate debtor under the Code. The non-implementation of the resolution plans frustrates the objective of the Code and adversely impacts the interest of the stakeholders.

    It is, therefore, the need of the hour to amend Section 29A suitably to prevent the defaulting resolution applicants and their connected parties from participating in any resolution process. Further, suitable provisions may be incorporated in the Code or the CIRP Regulations in order to discourage the situations similar to the ones faced in Ruchi Soya and ARGL by their respective CoCs.

    For any clarification or further information, please contact

    Shwetabh Sinha

    Dinesh Gupta
    Senior Associate

    [1] Section 74-Punishment for contravention of moratorium or the resolution plan

    [2] Section 31-Approval of resolution plan

    [3] Section 29A-Persons not eligible to be resolution applicant

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