Section 31 of IBC – Insolvency and Bankruptcy Code, 2016 : Approval of resolution plan

The Insolvency and Bankruptcy Code, 2016 Part-II Insolvency Resolution and Liquidation for Corporate Persons Chapter-II Corporate Insolvency Resolution Process Section […]

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The Insolvency and Bankruptcy Code, 2016

Part-II Insolvency Resolution and Liquidation for Corporate Persons

Chapter-II Corporate Insolvency Resolution Process

Section 31: Approval of resolution plan.

*31. (1) If the Adjudicating Authority is satisfied that the resolution planJ1 as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve3 the resolution plan which shall be bindingJ2 on the corporate debtor and its employees, members, creditors, 1[including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantorsJ3 and other stakeholders involved in the resolution plan.

2[Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.]

(2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, rejectJ4 the resolution plan.

(3) After the order of approval under sub-section (1),—

(a) the moratorium order passed by the Adjudicating Authority under section 14 shall cease to have effect; and

(b) the resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database.

2[(4) The resolution applicant shall, pursuant to the resolution plan approved under sub-section (1), obtain the necessary approval required under any law for the time being in force within a period of one year from the date of approval of the resolution plan by the Adjudicating Authority under sub-section (1) or within such period as provided for in such law, whichever is later.

Provided that where the resolution plan contains a provision for combination, as referred to in section 5 of the Competition Act, 2002, the resolution applicant shall obtain the approval of the Competition Commission of India under that Act prior to the approval of such resolution plan by the committee of creditors.]

Reference

*Effective from 01.12.2016.

1. Ins. by the Insolvency and Bankruptcy Code (Amendment) Act, 2019, w.e.f. 16.08.2019 [S.O. 2953(E)]. The 2019 amendment is declaratory and clarificatory in nature. and therefore will be effective from the date on which the Code has come into effect, refer Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. & Ors. (2021) ibclaw.in 54 SC, (p94-95).

2. Ins. by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, w.e.f. 06.06.2018.

3. Public shareholding in a listed company falls below as specified limit: Vide Notification GSR-675(E) dated 24.07.2018, the Central Government amended the Rule 19A of Securities Contracts (Regulation) Rules, 1957 that where the public shareholding in a listed company falls below 25%, as a result of implementation of the resolution plan approved under section 31 of the of the Code, such company shall bring the public shareholding to 25% within a maximum period of 3 years from the date of such fall and if the public shareholding falls below 10%, the same shall be increased to at least 10%, within a maximum period of 12 months from the date of such fall, in the manner specified by the SEBI.

Further, vide Notification No. G.S.R. 423(E) dated 18.06.2021, provided that every listed company shall maintain public shareholding of at least 5% as a result of implementation of the resolution plan approved under section 31 of the Code.

4. Clarification regarding approval of resolution plans under section  30 and 31, vide GC-IBC/01/2017 dt. 25.10.2017.

Judicial Pronouncements:

J1. Nature of Resolution Plan: a pure contract or statutory contract?: A CoC approved Resolution Plan is a creature of the IBC and cannot be construed as a pure contract between two consenting parties, prior to its approval under Section 31 of the IBC. Resolution Plans are not in a nature of a traditional contract per se, and the process leading up to their formulation and acceptance by the CoC is comprehensively regulated by the insolvency framework. Remedies that are specific to the Contract Act cannot be applied, de hors the over-riding principles of the IBC. The IBC and its regulations institute sufficient safeguards to ensure the binding effect of a CoC-approved Resolution Plan. [Ebix Singapore Pvt. Ltd. v. CoC of Educomp Solutions Ltd. and Anr. (2021) ibclaw.in 153 SC, p116,125,149&161]

J2. Fresh/Clean Slate Theory/Hydra Head Popping up

  • Section 31(1) ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were. [CoC of Essar Steel India Ltd. v. Satish Kumar Gupta and Ors. (2019) ibclaw.in 07 SC, p66]
  • The approval of a resolution plan under Section 31 results in a clean slate. The benefit under Section 31, following upon the approval of the resolution plan, is that the successful resolution applicant starts running the business of the corporate debtor on “a fresh slate”. [Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Anr. (2021) ibclaw.in 46 SC, p74-75).
  • Once a resolution plan is duly approved by the Adjudicating Authority under Section 31(1), the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan. [Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. & Ors. (2021) ibclaw.in 54 SC, p95]
  • These stakeholders are not direct participants in the CIRP but are bound by its consequence by virtue of the approval of the Resolution Plan, under Section 31(1) of the IBC. [Ebix Singapore Pvt. Ltd. v. CoC of Educomp Solutions Ltd. and Anr. (2021) ibclaw.in 153 SC, p150]

J3. Personal Guarantor’s Liability

  • Section 31(1) makes it clear that once a resolution plan is approved by the CoC it shall be binding on all stakeholders, including guarantors. [CoC of Essar Steel India Ltd. v. Satish Kumar Gupta and Ors. (2019) ibclaw.in 07 SC, p66]
  • Section 31(1) makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. The object of the Code is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. [State Bank of India v. V. Ramakrishnan and Anr. (2018) ibclaw.in 29 SC, p22-23].
  • The sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. It is also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors). [Lalit Kumar Jain v. Union of India and Ors. (2021) ibclaw.in 61 SC, p108-109& 112]

J4. Rejection of Resolution Plan

  • A resolution plan which does not meet the requirements of Section 30(2) of the IBC, would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor. [State Tax Officer v. Rainbow Papers Ltd. (2022) ibclaw.in 107 SC, p48]
  • Even if Section 31(2) is construed to confer discretionary power on the Adjudicating Authority to reject a Resolution Plan, it has to be kept in mind that discretionary power cannot be exercised arbitrarily, whimsically or without proper application of mind to the facts and circumstances which require discretion to be exercised one way or the other. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan. [State Tax Officer v. Rainbow Papers Ltd. (2022) ibclaw.in 107 SC, p50&52]
  • The Adjudicating Authority under Section 31(2) of the IBC can only examine the validity of the plan on the anvil of the grounds stipulated in Section 30(2) and either approve or reject the plan. The Adjudicating Authority cannot compel a CoC to negotiate further with a successful Resolution Applicant. The IBC framework, does not enable withdrawals or modifications of Resolution Plans, once they have been submitted by the RP to the Adjudicating Authority after their approval by the CoC. [Ebix Singapore Pvt. Ltd. v. CoC of Educomp Solutions Ltd. and Anr. (2021) ibclaw.in 153 SC, p157&161]

J5. Commercial Wisdom/decision of CoC/Judicial Scrutiny of Resolution Plan

 

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