Tackling the Hindrances arising Post Approval of the Resolution Plan
– Authored by:
Sujay Agrawal, 4th year student at Symbiosis Law School, Pune
We are aware that the Insolvency and Bankruptcy Code, 2016 (“the Code”) has been one of the most pathbreaking economic legislation in recent times. With all the pillars of the process working together in harmony, the Code has been effective in ensuring resolution of the Corporate Debtors (“CD”) and timely liquidation for unviable firms. Without going much into the statistics, the Author would like to mention that CDs with assets worth more than Rs. 1.11 lakh crore has been rescued and CDs with assets worth Rs. 0.46 lakh crore has been liquidated. Thus, the Code has been quite encouraging for all the stakeholders involved in the process. However, as we know, no legislation is short of lacunas prevailing in the mechanism and the Code is no exception.
With appointment of NCLT members, we can expect the very core issue with the Code i.e., effective functioning of NCLTs due to vacancies in the tribunals, to be resolved in the near future. There are several similar hinderances that keep on arising during the implementation of the Corporate Insolvency Resolution Process (“CIRP”). Instead of touching upon several such inconsistencies, in this Article, the Author would delve into certain specific hinderances concerning circumstances post the approval of resolution plan and provide suggestions pertaining to the same. First of all, the Author would delve into certain aspects arising pertaining to the Clean Slate theory. Thereafter, the Author would discuss factors/hinderances concerning the withdrawal or modification of resolution plan.
Issues Pertaining to the Clean Slate Theory
The Clean Slate theory stipulates that post the culmination of the CIRP and approval of the resolution plan, any pending claims qua the CD would stand extinguished, thereby enabling the successful resolution applicant to start with a fresh/clean slate. Clean Slate Theory is impliedly provided under Section 31 of the Code, which says that the approved resolution plan would be binding on all the stakeholders of the plan.
Certain claims/litigations raised post the approval of the Resolution Plan hinders the smooth implementation of the plan to effectuate a successful resolution of the CD. We have been witnessing through several case laws that the Judiciary has been very active in upholding the Clean Slate theory. Recently in Ghanashyam Mishra Sons v. Edelweiss Asset Reconstruction Company (2021) ibclaw.in 54 SC, the Apex Court upheld the theory and held that if claims are allowed post the approval, the resolution plan would not be implemented in an effective manner as the calculations on which the plan was based would go haywire.
Now, the concern for the smooth implementation of the plan could not be questioned, however, we cannot neglect the genuine claims that might arise for determination post the approval. The argument could be raised that such claims should be rejected outrightly as they didn’t come before the approval of the plan and a creditor cannot be allowed to sleep over his rights. However, in certain instances, such claims are not raised because of certain fault on part of some other party other than the creditor. The Author feels that such claims should be taken into consideration and not outrightly rejected to uphold the Clean Slate Theory.
The Author suggests the incorporation of a provision in the Code facilitating inclusion of “Sub Judice/Surplus Funds” in the resolution plan. Such funds would act as surplus over and above the amount provided in the resolution plan and would be kept aside for providing for instances where unexpected claims/costs (which hinders the implementation of the plan) could be raised at a later stage of the process. There could be no straight jacket formula as to what amount could serve as such Sub Judice Funds, but it could vary according to the debts/amounts involved in the CIRP. Further, an appropriate disposal of such funds could be pre-meditated if no such unexpected claims/costs arise in the process.
Furthermore, there are instances where the aforementioned unexpected claims arise in lieu of the negligence committed on part of the Resolution Professional, wherein he/she is negligent in appropriately calling, or rather not calling, and inviting claims under the resolution plan. Due to such negligence, genuine claims are missed out in certain cases. The Author suggests that such negligence or omission could be rectified if proper scrutiny is done over the RP’s work during such invitation for claims and CoC could be more cautious to supervise the same.
Withdrawal/Modification Post approval of Resolution Plan
Somewhat similar to the above issue of unexpected claims, another issue that has been arising quite frequently in CIRPs is the withdrawal or modification of the resolution plan after it has been submitted to the NCLT. One recent instance of the same is the case of Ebix Singapore Pte Ltd. v. Committee of Creditors of Educomp (2021) ibclaw.in 153 SC, wherein the court clearly held that such requests for withdrawal or modification, when failed, would either result in a down-graded resolution amount of the CD and/or a delayed liquidation with depreciated assets which would frustrate the core aim of the Code.
However, it is pertinent to note that there are no provisions in the Code or the Rules governing the timelines/procedure of making such applications after the approval or submission of the resolution plan to the NCLT. The court can expect similar cases to arise in the future. The most viable solution would be to define the counters of this aspect as soon as possible. The Parliament or IBBI must take upon its hands to provide for the timelines and instructions as to till what stage of the process, can such applications for withdrawal or modification of the plan would be entertained. Further, at what grounds would CoC and later the AA would be empowered to allow such applications. Moreover, how would the liquidation factor in if such applications are not allowed or failed post acceptance. This issue must be addressed as soon as possible as it hinders one of the most primary goals of the Code i.e., Time Bound Resolution process by delaying the process beyond the prescribed period of 330 days.
Through the above discussion, we can ascertain that there are significant issues even after the approval of the resolution plan that still need to be addressed in order to ensure an effective resolution of the CD. Despite these challenges, we cannot deny that the Code has played an important role in the timely resolution and liquidation of the CDs thus far. Considering the increasing level of debts and stressed assets in the economy, the burden of the stakeholders would only worsen in the coming times. Fortunately, the Government will soon be making changes in several aspects of the Code, one being regarding the Code of Conduct of CoC. Ensuring CoC’s smooth functioning could be one of the ways to ensure appropriate and pre-meditated implementation of the resolution plan after its approval. It will be in the best interest of all the stakeholders that the above-mentioned inconsistencies are rectified as soon as possible.
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