The Real “Deal”: Implementation of Resolution Plan under the Insolvency and Bankruptcy Code, 2016

Section 5(26)¹ of the Insolvency and Bankruptcy Code, 2016 (IBC or Code) defines a “resolution plan” as one proposed by a resolution applicant for resolving a corporate debtor’s insolvency as a going concern, while Section 30² concerns its submission to the resolution professional (RP). While the IBC and associated Regulations form a complete Code on this subject, several issues have come up regarding the implementation of resolution plans, which plague the insolvency ecosystem in our country and preclude it from achieving its truest potential and promoting ease of doing business. This article examines the legal framework governing the implementation of resolution plans, whilst looking at challenges arising therefrom and suggests a way forward in this regard.

The law on resolution plans

Under Section 30, upon receiving the submitted plans, the RP is obligated to confirm that they provide for the payments of costs incurred in the insolvency resolution process and debts of operational creditors as well as dissenting financial creditors (who do not vote in favour of the plan). In this context, Regulation 38 of the Insolvency Resolution Process for Corporate Persons Regulations, 2016³ (CIRP Regulations) lays down the mandatory contents of a resolution plan — such as the term of plan, its implementation schedule, management of the debtor’s business, and the adequate means for supervising implementation.

Discussing the scope of the unamended IBC and Regulations, the Insolvency Law Committee Report, 2018 recommended that the National Company Law Tribunal (NCLT, or adjudicating authority) should be empowered to give directions for implementing the plan at the time of approval.⁴ Accordingly, a plan shall state how it deals with various stakeholders’ interests, along with a statement detailing if the applicant has ever failed to implement or contributed to the failure of implementation of any NCLT-approved resolution plan.⁵ Further, a plan shall highlight how it addresses the cause of default, the applicant’s capability to implement it, provisions for effective implementation, along with the timeline therefor.⁶ Thus, the legislative object behind Regulation 37 is to ensure timely insolvency resolution and maximise asset value, through actions like the sale/transfer of debtor’s assets, restructuring of the corporate debtor, or issuance/cancellation/delisting of securities, etc.

“Equitable” entitlements of operational and financial creditors

Section 30(2) IBC makes it clear that operational creditors need to be provided at least the value they would have received upon liquidation. Initially, this was provided for as part of Regulation 38 of the CIRP Regulations. However, the National Company Law Appellate Tribunal (NCLAT or Appellate Authority), in Standard Chartered Bank v. Satish Kumar Gupta, held that the proceeds should be distributed between operational and financial creditors on an equitable basis. It noted that the then unamended Regulation 38 strengthened operational creditors’ rights, by statutorily codifying the rule of “fair and equitable dealing”, along with giving them a clear priority in payment over financial creditors.⁷ In appeal, the Supreme Court noted that this principle of equity applies only in respect of similarly situated creditors,⁸ and unequals cannot be treated equally.⁹

The Court asserted that the principle of “fair and equitable dealing” requires a plan to state how it deals with operational creditors’ interests — this is distinct from mandating that the same proportions of debt need to be paid to all classes of creditors, a conclusion which cannot be reached even in light of the priority in payment given to operational creditors over all financial creditors. Hence, if the Committee of Creditors (CoC) has complied with all provisions of the IBC and CIRP Regulations, it may exercise its commercial wisdom to pass a resolution plan which involves differential payouts to different categories of creditors.¹⁰ In this light, Parliament amended the Code to empower the CoC to determine the share which creditors (as a class and individually) will get, in furtherance of its commercial wisdom.

Around two years ago, the NCLAT advised the Central Government and the Insolvency and Bankruptcy Board of India (IBBI) to examine the possibility of ensuring that operational creditors receive some minimum entitlement based on the amounts realised in pursuance of a resolution plan, over and above the liquidation value.¹¹ This attains significance in light of how recoveries have largely hovered around 30-40% for financial creditors, and had even fallen to 10.7%: in fact, the total quantum of all recoveries has even fallen below the liquidation value in some quarters.¹² Given that the shares received by operational creditors would be even lesser than this, the possibility of them receiving fair and equitable treatment from a committee that lacks representation from their side remains quite remote.¹³

Time as of essence in plans’ implementation

Notwithstanding the quality of assets, the Insolvency Law Committee (2022) noted that a major reason for large haircuts is the time expended in proceedings before the NCLT and NCLAT. This is because of ever-increasing judicial vacancies and pendency hindering timely approval of resolution plans, as well as the disposal of applications challenging resolution plans filed by unscrupulous creditors, resolution applicants, debtors, and other stakeholders. It categorically stated that time is of the essence in insolvency processes, with delays significantly eroding the value of debtors’ assets.¹⁴ Such delays dissuade participation from potential resolution applicants, as they adversely impact their commercial assessments. For this reason, an applicant whose plan is pending approval by the NCLT may end up seeking modifications or even withdrawing it altogether, citing a change in the commercial basis upon which the plan had been proposed.¹⁵ As the Supreme Court has also observed, this defeats the IBC’s core purpose of maximising value for stakeholders, and may potentially trigger liquidation.¹⁶

In this light, resolution applicants have been disallowed from seeking modifications to approved plans, or from withdrawing them. In Amtek Auto Ltd. (CoC) v. Dinkar T. Venkatasubramanian¹⁷, the Supreme Court thwarted a successful resolution applicant, who relied on open-ended clauses in the plan, from seeking a direction to compel the CoC for negotiating a modification to an already approved plan. The Court observed that leaving any scope for negotiations in the CoC after it has approved a plan would be contrary to the IBC.¹⁸ In subsequent proceedings, the Court gave directions for expeditious implementation of the approved resolution plan as well as timely completion of the insolvency resolution process. Interestingly, the Court relied on Section 12¹⁹ of the Code, noting how delays in the plan’s implementation defeat the very object of the statutory time-limit stipulated for completion of the insolvency resolution process.²⁰

In Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (CoC), the Court refused to allow a resolution applicant to withdraw an approved plan. It referred to Regulation 38 of the CIRP Regulations and ruled that a plan, whose implementation could be withdrawn at any successful resolution applicant’s behest, is inherently unviable. Accordingly, the question of a plan’s binding nature cannot remain indeterminate at the discretion of its very proponent. Negotiations in the CoC end when it approves a plan, only being subject to final approval by the NCLT.²¹ The NCLT enjoys a limited power of review over the resolution plan — such review cannot trespass upon business decisions taken by a majority in the CoC in the exercise of its commercial wisdom.²²

That said, the recognition of the time-bound nature of insolvency resolution needs to be balanced with the need to keep the debtor’s business running as a going concern. Accordingly, once a plan has been implemented, the debtor’s existing management is replaced with entities completely unconnected with it.²³ In this regard, a plan must not envisage scenarios whereby the corporate debtor’s subsisting management returns to manage it during the term of its implementation.²⁴

At the same time, in Essar Steel case, the Supreme Court unequivocally stated that a successful resolution applicant has to necessarily commence on a fresh slate after the conclusion of the corporate insolvency resolution process — this means that in some form, all/most plans would envisage extinguishment of claims. If this were not to be assured, successful applicants would face a scenario in which undecided claims emerge as metaphorical “hydra heads” once a plan is implemented.²⁵ Accordingly, the “clean slate theory” is based on Section 31 assuring the binding nature of a plan approved by the NCLT upon all stakeholders.²⁶ By establishing a clear structure that restricts claims against the debtor from being raised in perpetuity, the law encourages resolution applicants to take over stressed entities and their management.²⁷

However, as highlighted above, delays caused by unscrupulous applications tend to erode the value of debtors’ assets, which leads to all categories of creditors taking exceptionally large haircuts more often. This is despite the judiciary holding that no demand notices can be raised once a resolution plan is being implemented, even if the same relate to dues owed to any statutory authority under tax laws.²⁸ This is further aggravated by the absence of any prescribed timeline within which the NCLT ought to approve plans passed by the CoC. At the same time, Section 32 of the IBC clearly restricts the grounds upon which the approval granted to a resolution plan may be appealed, as are given under Section 61(3)²⁹ of the Code.³⁰

These grounds mostly resemble those upon which the NCLT may exercise its power of review over plans approved by the CoC. As the NCLT can be expected to ensure compliance with statutory prerequisites, the resort to appeal would be, ideally and at best, restricted to the most extraordinary situations. While it would be inappropriate to wholly take away the right of appeal against decisions made by a quasi-judicial authority, the vesting of such a right has also created the scope for misuse on account of frivolous appeals filed by disgruntled stakeholders.

At the same time, observations made during certain proceedings before the NCLAT have been criticised for venturing beyond the scope of the IBC and calling into question the “clean slate” theory. The NCLAT, in Union of India v. Vijaykumar V. Iyer³¹, cast aspersions on the bona fides with which insolvency resolution had been commenced (and reopened the issue of its valid commencement) at a time when insolvency resolution had been completed and the challenge to the plan was restricted to the limited benchmark of Section 30 of the IBC (and associated Regulations). Such an approach, it is feared, may potentially prevent insolvency resolution processes from coming to fruition and wither the legislative intent behind providing finality to all pre-insolvency resolution claims, whether governmental or otherwise.³²

Absence of consequences for non-implementation

Another major challenge concerns the impossibility/lack of implementation of resolution plans, due to either force majeure or the frivolous nature of bids made by resolution applicants. As noted above, the Supreme Court has been reluctant to permit the withdrawal of or modifications to resolution plans approved by the NCLT. However, in Satyanarayan Malu v. SBM Paper Mills Ltd., the NCLT permitted withdrawal of a resolution plan, as it gave effect to a one-time settlement reached between parties — the NCLT stated that the plan approved by the CoC had become redundant, and the issue required no adjudication.³³ This threatens the implementation of resolution plans in scenarios where a corporate debtor uninterested in a resolution applicant’s plan seeks a one-time settlement, by making lesser payments to creditors to protect itself from unwarranted takeover or restructuring.

In this regard, the authorities have attempted to rein in bidders from making frivolous bids, to ensure implementation of plans. In Ingen Capital Group LLC v. Ramkumar SV, the NCLAT imposed costs of Rs 10 lakhs to be paid in favour of the CoC by a successful resolution applicant which did not intend to implement the resolution plan, as it could not mobilise enough funds for that purpose. It also directed the Ministry of Corporate Affairs to take appropriate steps against Ingen Capital for trying to take unfair advantage of the insolvency resolution process.³⁴ However, in Liberty House Group Pte. Ltd. v. ARGL Ltd., when the resolution applicant sought to withdraw a plan passed by the CoC when it was pending before the NCLT, the NCLAT not only allowed withdrawal, but also converted the costs of Rs 1 lakh imposed on the applicant (for withdrawal) into litigation costs payable in favour of the corporate debtor. The Court categorically declined to prohibit the applicant from proposing plans, which could have otherwise deterred non-serious plans proposed by vexatious bidders.³⁵

Hence, the Code and CIRP Regulations do not currently provide for any material consequence befalling upon applicants: as per current jurisprudence, resolution plans are not like a contract, which could attract the remedies for breach.³⁶ The only recourse available in such a case would be to invoke the performance guarantee and file a complaint for “knowing and wilful contravention of a resolution plan” with the IBBI and the Central Government under Section 74³⁷, which may lead to imprisonment extending up to five years or a fine up to Rs 1 crore (or both).³⁸ In this regard, the way forward should be to devise mechanisms for gauging an applicant’s seriousness and ability to implement a resolution plan — this can be done by a statement highlighting the applicant’s financial (and other) ability to fulfil its side of the bargain appended along with the resolution plan, as a part of the statutory requirement of determining a plan’s viability and feasibility. Additionally, the NCLT can also be empowered to collect a minimum security deposit, which shall be liable to forfeiture upon non-implementation of a plan by the successful bidder.

The UNCITRAL Legislative Guide on Insolvency Law also notes that insolvency regimes across the world provide for several consequences when a debtor defaults in the performance of obligations under a resolution plan, or when implementation breaks down. Several approaches are highlighted, which may be worth considering for application in the Indian insolvency setup. One, courts may terminate the plan, and transform the insolvency resolution proceedings into liquidation. Two, the plan may be terminated only w.r.t. the specific obligation breached, severing it from the rest — accordingly, the creditor facing the breach stands no longer bound thereby, having its claim restored to the full amount. In some cases, this shall occur only when the debtor falls significantly into arrears in performing its obligations. Three, the plan itself may be required to enlist the consequences of breach.³⁹

Four, insolvency proceedings may be regarded as having ended, with creditors allowed to exercise rights available otherwise under law — however, this would be unable to resolve the debtor’s financial difficulties, add to the courts’ existing burden, and lead to a race for assets between creditors inter se (which the insolvency resolution process itself sought to prevent). That said, this way out may be effective when the remaining assets are fully charged, and there is no distribution to unsecured creditors. Herein, it may be appropriate (depending upon the status of the plan’s implementation) to follow a “compromise approach”: creditors may be allowed to propose a different plan within a specified deadline, with liquidation being the outcome only if no acceptable plan can be prepared. Nonetheless, there is a strong need to balance various factors: the time taken for negotiating a plan, maximising asset value, delivering the best outcome for creditors, and speedy conduct of proceedings.⁴⁰

Conclusion: Reflections on the need of the hour

The UNCITRAL Guide states that a debtor may implement resolution plans without any further intervention or supervision, especially in jurisdictions following a debtor-in-possession model. No such supervision is mandated in countries where proceedings conclude upon a plan becoming effective. Under laws that provide for the conclusion of proceedings only when a plan has been completely executed, an independent person may have to supervise or control its implementation. That said, courts may supervise the debtor after a plan has been approved — this is crucial where there are issues involving the interpretation of debtors’ performance and/or obligations. A supervisor may be appointed at the behest of either the courts or the creditors.⁴¹

Nonetheless, the need of the hour is to devise a robust framework regarding the implementation of resolution plans. While the NCLT has a limited role in approving resolution plans (without interfering with the CoC’s commercial wisdom), time-bound resolution can be enabled by having compulsory timelines in place for approving resolution plans. At the same time, the Government should also take proactive steps to resolve structural factors which contribute to delays at the institutional level before adjudicating and appellate authorities.⁴² Finally, the Government should consider the question of whether having in place a single-window clearance mechanism for processing regulatory approvals would be truly contrary to the objectives of the IBC, as the Insolvency Law Committee Report, 2018⁴³ had opined.

This article has highlighted several provisions on the implementation of resolution plans under the IBC in India, whilst flagging concerns associated with them and suggesting measures to streamline the regime. Speedier and more effective resolution would not only improve the ease of doing business but also trigger a virtuous cycle enabling India to become a $5 trillion economy.