COVID-19 has disrupted the economy of the country. As a result, financial rating agencyMoody's has downgraded India's economy outlook to BAA3 from BAA2. Various businesses are facing the threat of insolvency due to outbreak of the Pandemic. To soften the blow and protect the businesses from insolvency, the Govt. has increased the minimum threshold under the Insolvency and Bankruptcy Code, 2016 (Code) to One crore from One Lakh. On 03.06.2020, the Union Cabinet has approved the proposal to suspend the fresh insolvency filing for Non-Performig Assets (NPA) from March 25, 2020 for a period of six months
However, one important aspect which hasn't been addressed by the Government is the implementation of an approved resolution plan post Covid19 by a Resolution Applicant who has taken all the burden of furnishing bank guarantees and arranging funds in terms of the sanctioned plans. With the Covid 19 Lockdown, earlier valuations are being substantially reduced and successful resolution applicants are already pushing for renegotiations with the lenders. Banks are now anticipating that the resolution applicant will use the Force Majuere or Material Adverse Clauses (MAE) to renogiate the approved resolution plan.
There can be three stages at which a resolution applicant can seek to withdraw/renegotiate a resolution plan which can be as follows;
Resolution Applicant can withdraw/renegotiate a resolution plan at Stage 1 or Stage 2 but the outbreak of global pandemic is forcing and has already forced some resolution applicants to renegotiate/modify a resolution plan at Stage 3. The same is unprecedented for the code and therefore needs to be addressed immediately.
Recent data by Insolvency and Bankruptcy Board of India (IBBI) indicated that since the inception of code in December 2016, 221 resolution plans have been approved by the adjudicating authority out of which 27 resolution plans were approved during the first quarter of 2020 which will be implemented in the coming times along with the doom of COVID-19. These resolution plans along with some approved earlier, may wriggle out of implementation of the Resolution Plans or move applications to renegotiate the already approved Resolution Plans. The implication of COVID-19 is more severe with regard to these 27 approved resolution plans.
The valuation of business and assets of a corporate debtor during Covid 19 has reduced significantly. There is general impairment in the value of the assets of a Corporate Debtor .The resources/funds at the disposal of successful resolution applicant are also reduced due to the pandemic. There is also a substantial reduction in demand in the market and therefore the current circumstances may warrant a modification in most of the approved resolution plans. Many successful Resolution Applicants may renegotiate with the Banks to value a Plan shade above the liquidation value of a Corporate Debtor The problem is more pertinent with regard to the real estate corporate debtor. This particular sector is labour driven. The primary obligation of a resolution plan of real estate company is to provide unit/flat to the homebuyers within a stipulated timeline. The same seems to be a mammoth task due to migration of labourers. Therefore, it seems impossible to adhere to the resolution plan. Resolution applicants may face prosecution under Section 74 of the code for not implementing the resolution plan but the other inevitable consequence of the same will be corporate death of the company leading to liquidation if the creditors are not willing to renegotiate with a Resolution Applicant .
National Company Law Tribunal (NCLT) has inherent power under Rule 11 of NCLT Rules, 2016 for meeting the end of justice. NCLT also has the power under Section 60(5) to deal with any question of law and fact arising out of the resolution process of the corporate debtor. The Supreme Court in the case of Rahul Jain v Rave Scans Pvt. Ltd. has held that an approved resolution plan attains finality and cannot be disturbed with. National Company Law Appellate Tribunal (NCLAT) followed the same in the case of QVC Exports Pvt. Ltd. VS United Tradeco FZC &Anr. and held that it is not permitted to modify the Resolution Plan under the guise of inherent powers of the Tribunal.It is also pertinent to mention that NCLAT has held in the case of R.G.G Vyapar Pvt Ltd v Arun Kumar Gupta that the Adjudicating Authority has no jurisdiction to reopen resolution process under section 31 of the Code.
However,the plan doesn't attain finality as an approved resolution plan is subject to statutory appeal under Section 61of the code. So, the plans which are pending for approval before NCLAT such as the Jaypee Infratech, there is a scope for modifying those resolution plans in light of COVID-19. Also, approved resolution plan can also be challenged before Supreme Court under Section 62 of the code and Supreme Court has wide powers under Article 142 of the Constitution to modify the resolution plan to accocodate changes due to COVID-19. Supreme Court has earlier in the case of Amtek Auto Limited Vs. Dinkar T. Venkatsubramanian (Civil Appeal 6707 of 2019) reversed a liquidation order and ordered for fresh offer of resolution plan. So if a Plan can be modified by a superior court, it might well stand to reason if the NCLT also is given the power to entertain an application for modification of the Approved Plan.
Furthermore, a Resolution Plan may include provision for restructuring for the corporate debtor in the form of merger, amalgamation or demerger. Now under the Companies Act, 2013 the role of the tribunal is supervisiory and the scheme of the merger or amalgamation can be modified once approved under Section 231. It is specifically provided that the tribunal (NCLT) may modify a scheme of merger or amalgamation if it is necessary for the proper implementation the merger and arrangement. Supreme Court in the case of S.K. Gupta v. K.P. Jain, (1979) 3 SCC 54, held that;
"When a scheme is being considered by the Court, in all its ramifications, for according to its sanction, it would not be possible to comprehend all situations, eventualities and exigencies that may arise while implementing the scheme. … The purpose underlying Section 392 is to provide for the effective working of the compromise and/or arrangement once sanctioned and over which the Court must exercise continuous supervision [see Section 392(1)], and if over a period there may arise obstacles, difficulties or impediments, to remove them, again, not for any other purpose but for the proper working of the compromise and/or arrangement."
The Supreme Court in another case of Meghal Homes (P) Ltd. v. Shree Niwas Girni K.K. Samiti, (2007) 7 SCC 753 held that;
"As we read Section 392 of the Act, it only gives power to the court to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement."
As there is no statutory bar upon the NCLT to revise its order, can the NCLT use the Power under section 60(5) of the IBC to entertain an application for modification of the Approved Plans on the grounds of impossibility of performance owing to Covid 19. In our view a strong case can be made for the modification of the approved resolution plan by invoking the jurisdiction of NCLT. The NCLT though on its own cannot modify a plan but can at best refer the same to the Committee of Creditors (COC) for reconsideration in the light of COVID-19. COC may not remain into existence after approval of resolution plan but the same can be reconvened owing to current circumstances.Hence, an application can be filed under Section 60(5) of the Code read with Rule 11 of the NCLT rules.
A peculiar situation may arise at this juncture i.e. if the revised offer of the successful resolution applicant is less than the unsuccessful resolution applicant. Whether an oppourtunity shall be provided to the unsuccessful resolution Applicant say who was L-2 , to present its plan before the COC to be taken into consideration.
The problem can be looked from a different aspect as well. An approved resolution plan attains the force of law and thereby becomes a statutory obligation. Completion of corpororate insolvency resolution process (CIRP) within a period of 330 days under Section 12 of the code is also a statutory obligation. NCLAT has taken a suo motu cognizance and held that the period of lockdown will be excluded from 330 days. Similarily, compliance under Real Estate Regulation Act, 2016 (RERA) is also a statutory obligation but the same is also being extended by government for a period of six months. Therefore, the period of lockdown ideally should also be excluded from the implementation schedule of an approved resolution. It will not be as beneficial as modification of an approved resolution plan but will provide some respite to the successful resolution applicant.
Supreme Court held in the case of Maharashtra Seamless v. Padmanabhan Venkatesh(2020 SCC OnLine SC 67) that an approved resolution plan cannot be withdrawn by the resolution applicant. Therefore, in such a situation modification of the approved resolution plan or exclusion of lockdown period from implementation schedule is the only viable solution. The legislature is required to take steps in this direction otherwise the same will cause huge hardship to all the stakeholders.
Views are personal only
(P. Nagesh,Advocate &Akshay Sharma, law student, National University of Study and Research in Law.)