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Reworking Approved Resolution Plans Under the IBC

Harini Subramani & Saamir Raketla
18 May 2020 6:06 AM GMT
Reworking Approved Resolution Plans Under the IBC

In light of the lockdown implementation due to the COVID19 pandemic, it is imperative to re-examine resolution plans approved prior to the lockdown, mainly for two reasons: (i) the timelines approved in the resolution plan may no longer be practical and (ii) the commercial viability i.e. the underlying feasibility of implementing the resolution plan, given the present economic situation...

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In light of the lockdown implementation due to the COVID19 pandemic, it is imperative to re-examine resolution plans approved prior to the lockdown, mainly for two reasons: (i) the timelines approved in the resolution plan may no longer be practical and (ii) the commercial viability i.e. the underlying feasibility of implementing the resolution plan, given the present economic situation may have changed. This article explores the legal provisions within the framework of the Insolvency and Bankruptcy Code, 2016 ("Code") to see if such resolution plans may be amended whether or not such plans have within it the construct of a force majeure clause.

Under the Code, the following are the possible consequences for failure to implement or rescinding an approved resolution plan: (i) the corporate debtor may go in for liquidation; or (ii) penal and criminal liability (per section 74 of the Code). Earlier, there have been instances where approved resolution plans have been either withdrawn either under S.12A of the Code or where information supplied to the successful resolution applicant has been incomplete or (rescinded) where the time limit under the Code has elapsed or modified because of discrimination against different types of creditors.

In the present situation due to the unprecedented effects of COVID19 pandemic, is it feasible or fair to send companies into liquidation for non-performance by the successful resolution applicant on account of frustration and/or (apparent) force majeure? Until the period of December 2019, reportedly the adjudicating authorities have approved 190 resolution plans. The need to find appropriate solutions has never been more pressing.

The Code read with the Insolvency Resolution Regulations, mandates that the resolution plan must specifically demonstrate that it is inter alia 'feasible and viable' but does not specify the requirement of a force majeure clause. In its present framework, the Code does not carve out any options in case the approved resolution plan becomes impossible (read frustrated) to perform or is no longer commercially viable due to extenuating circumstances.

To be sure, prior to its approval, the National Company Law Tribunal ("NCLT") is the final authority on ensuring that the resolution plan contains provisions required for effective implementation of the resolution plan and the NCLT could determine that force majeure provisions are necessary for effective implementation. So, what when there is no force majeure envisaged under the resolution plan?

Inherent Powers of the NCLT

The inherent powers of NCLT have been laid down in section 60(5)(c) of the Code according to which NCLT "shall have jurisdiction to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code". Further, rule 11 of NCLT Rules, 2016, provides: "nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal".

NCLT used this power in rule 11 in the case of NUI Pulp and Paper Industries v. Ms. Roxcel Trading GMBH Company Appeal (AT) (Insolvency) No. 664 of 2019 whereby it had held it was empowered to pass ad-interim order (a remedy that is not spelt in the Code) before admitting any application filed under sections 7, 9 or 10 of the Code.

NCLAT in the instance of RGG Vyappar Pvt Ltd v. Arun Kumar Gupta, has ordered that NCLT has no jurisdiction to reopen the resolution plan upon approval. In January this year, in the matter of QVC Exports Private Limited vs RP Deloitte Touche Tohmatsu India LLP, NCLAT opined that NCLT would not be permitted to alter a resolution plan in the guise of inherent powers where the change does not involve "the question of priorities or any question of law or facts..". It reiterated the observations of the Supreme Court in Rahul Jain vs Rave Scans Private Limited that an order that has attained finality cannot be reviewed under the inherent powers of the Court unless to correct clerical or arithmetical errors. However, there have been certain instances where NCLTs while approving resolution plans have suo-motu granted liberty to approach the NCLT in case of any difficulties in implementation of resolution plans.

Drawing from the above, it would not be wrong to assume that NCLT has inherent powers to reopen the resolution plan or for the purposes of amendments/extension of timelines in the resolution plan or for discharge of the resolution applicant.

Relationship of the Code with Indian Contract Act, 1872

In the absence of a force majeure clause in the resolution plan, can the resolution application argue for a frustration to absolve itself from the responsibility?

The relationship of the Code with other legislations is governed by section 238 of the Code. As per section 238, "the provisions of this Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any an instrument having an effect by virtue of any such law".

Can NCLT may be able to import the doctrine of frustration under section 56 of the Indian Contract Act, 1872 ("ICA")? Loss of substratum / foundation is the cornerstone to prove the doctrine of frustration, however is lack of commercial feasibility a good enough reason to establish frustration? Unfortunately, there is enough jurisprudence that have established that loss of commercial viability is not a factor to provide frustration. Further, since there is a statutory obligation that lays down the essentials of a resolution plan, the key elements of a contract viz, offer, acceptance, and free consent, are missing.

The non-contractual nature of resolution plans may be better understood in juxtaposition with laws preceding the Code. Prior to the enactment of the Code, the resolution process was inter alia governed by the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA"), and the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 ("MRU"). The mechanisms of Corporate Debt Restructuring ("CDR") and Joint Lenders Forum ("JLF") required a sign-off on inter creditor agreements and debt creditor agreements thereby offering room for applicability of doctrine of frustration enshrined in the ICA.

It may be prudent to note that the UNCITRAL Model Law on Insolvency on which the Code heavily draws from, envisages scenarios such as discharge or amendment of the resolution plan when it becomes incapable of implementation. Perhaps, the Central Government needs to refer to such provisions to provide the much needed way forward during this unprecedented times. But how far along in time would we need to go to reopen the resolution plans, may be up for the legislature to figure.

(The authors are associated with HS Law & associates and may be reached at [email protected])

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