Examining the Law on Withdrawal of Resolution Plans under The Insolvency and Bankruptcy Code, 2016

Sourav Paul*

Introduction

On 13th September 2021, the Supreme Court of India (‘SC’) in Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd. and Anr. (‘Ebix Singapore’), settled the law on the withdrawal of a Resolution Plan under the Insolvency and Bankruptcy Code, 2016 (‘Code’). The SC noted that there is no provision under the Code that allows for the modification or withdrawal of a resolution plan upon the request of a successful resolution applicant, provided it has been approved by the majority of the Committee of Creditors (‘CoC’).

This article comments on the judgment and analyses the principles discussed in the same. It also analyses whether a complete bar on the withdrawal of a Resolution Plan would amount to forcing an unwilling resolution applicant to move forward with a plan that it considers unviable.

Position of Law Prior to Ebix Singapore Judgment

The issue regarding the withdrawal of resolution plans under the Code has been a matter of contentious debate since there was a lack of consistent precedents from the adjudicating authorities and courts. In Panama Petrochem Ltd. v. Aryavart Chemicals Pvt. Ltd. (‘Panama Petrochem’), the National Company Law Tribunal (‘NCLT’) opined that while considering the withdrawal applications under Section 31 of the Code, [BK3] the adjudicating authorities and courts must consider the totality of the circumstances. In this case, the CoC had already approved another Resolution Plan. There was also a significant change in the financial capability of the resolution applicant since one of the investor-backed off. The NCLT cautioned that the practice of withdrawal of an already approved Resolution Plan must be discouraged and should not become a routine. In Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh and Ors., the SC noted that exit route under Section 12A of the Code [BK4] could not be used for withdrawing an approved Resolution Plan. However, SC left open the question of whether the resolution applicant forfeits the right to withdraw from the process since it has been approved by the CoC. 

In Suraksha Asset Reconstruction Ltd. v. Shailen Shah, Resolution Professional for Wind World (India) Ltd., the NCLT held that there is no express provision in the Code that bars the withdrawal of approved Resolution Plans. It opined that a Resolution Plan is not perpetual since Regulation 38(2)(a) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) mandates that a Resolution Plan must have a fixed term. As a result, a party is free to withdraw a Resolution Plan as prescribed in the contract or the law. It also held that the power to allow withdrawal is rooted in Rule 11 of NCLT Rules, 2016. However, this decision was overturned by the National Company Law Appellate Tribunal (‘NCLAT’) in CoC of Wind World (India) Ltd. v. Suraksha Asset Reconstruction Ltd. The NCLAT relied on the reasoning of Ebix Singapore to hold that withdrawal of an approved Resolution Plan is impermissible under the present framework of the Code. In CoC of Metalyst Forging Ltd. v. Deccan Value Investors LLP (‘Metalyst Forging’), the NCLAT ruled that the approved Resolution Plan was violative of Section 30(2)(e) of the Code[BK5] . The Corporate Debtor’s financial and technical documents were discrepant and false. It further noted that the adjudicating authorities do not have the power to compel specific performance of a Resolution Plan by an unwilling resolution applicant.

In Kundan Care Products Ltd. v. Amit Gupta (‘Kundan Care’), the NCLAT opined that it had no jurisdiction to entertain the withdrawal applications[u6] . It ruled that post-Section 31, order the Resolution Plan becomes binding upon all the stakeholders[BK7] , and therefore, a resolution applicant must not be allowed to withdraw an approved plan, thereby derailing the insolvency resolution process.

Decoding the Reasoning of Ebix Singapore Case

The SC, in unequivocal terms, ruled that the withdrawal of an approved Resolution Plan is impermissible under the Code. It premised this reasoning based on two grounds—(a) that a Resolution Plan is not a contract and (b) that the scheme of the Code does not allow such withdrawal.

The Court opined that a Resolution Plan under Section 30 of the Code [u8] is neither a simpliciter nor a statutory contract. They are solely governed by the scheme laid down in the Code and come to light after extensive commercial negotiations. Furthermore, unlike usual contracts, a Resolution Plan is also binding on the non-signatories under Section 31(1) of the Code[u9] . It also highlighted while relying on CoC of AMTEK Auto Ltd. v. Dinkar T. Venkatasubramanian that the concept of force majeure cannot be invoked to withdraw an approved Resolution Plan, even if a force majeure clause is incorporated in the Resolution Plan since contract law and common law principles would not apply to Resolution Plans.

The Court stressed on the fact that the scheme of the Code does not permit withdrawal of a Resolution Plan. It pointed out that only Section 12A of the Code [u10] and Regulation 30A of the CIRP Regulations [BK11] allow withdrawal of insolvency proceedings. It opined that if withdrawal applications are allowed, it will disturb the strict statutory timelines laid down in the Code, thereby impairing the legitimate interests of the creditors. The Court also clarified that the adjudicating authorities had no power to grant withdrawal applications since the power of judicial review is only limited to ensuring compliance with Section 30(2) of the Code. It cautioned that the technicality of the plan must not be assessed by the adjudicating authorities since the members of the CoC are experts as ruled in Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta.

In the Kundan Care Appeal, the SC used its power under Article 142 of the Constitution and allowed the negotiations between the CoC and the resolution applicant to modify the Resolution Plan. However, this route stands closed in light of the recent case of National Spot Exchange Ltd. v. Anil Kohli, Resolution Professional for Dunar Foods Ltd., wherein the SC held that what cannot be done directly under the Code, cannot be permitted to be done indirectly, in exercise of powers under Article 142 of the Constitution.

Does Specific Performance of a Resolution Plan by an Unwilling Resolution Applicant Violate the Spirit of the Code?

In the words of Dr. M.S. Sahoo, the only aim of the Code is to “keep the firm alive, to maximise the value of the asset and balance the interest of all stakeholders”. One of the most important stakeholders in the insolvency process is the resolution applicant. The larger question that arises is whether an unwilling resolution applicant can revive a Corporate Debtor and whether such a bargain is viable. The Code does not contain any provision which mandates the adjudicating authorities and the Courts to compel specific performance of the Resolution Plan by an unwilling resolution applicant. The SC, through this judgment, has imposed a blanket ban, with no exceptions, on the withdrawal of approved Resolution Plans, which may violate the spirit of the Code. There may be the situations like Panama Petrochem [u12] where alternate Resolution Plans have been prepared, or the financial health of the resolution applicant has deteriorated significantly. There may be instances similar to Metalyst Forging [u13] wherein the Corporate Debtor submitted false information to the resolution applicant. Therefore, a complete bar on the withdrawal of approved Resolution Plans would defeat the underlying objective of the Code. 

Conclusion

The SC in Ebix Singapore laid special emphasis on the interests of the creditors and other stakeholders over the interests of a successful resolution applicant. It is a welcome decision that gives certainty to the controversy that approved Resolution Plans cannot be withdrawn. However, the Court should have carved out some exceptions to the general rule. Moreover, due to this judgment, the parties cannot include contingency and walk-away clauses in the Resolution Plans, which is not in line with the universal best practices. Therefore, the resolution applicants must act with caution while negotiating the terms, since once the Resolution Plan has been approved by the CoC, an exit option would no longer be available.

*The author is a 2nd year student pursuing B.A. LL.B (Hons.) at the National University of Juridical Sciences, Kolkata (NUJS).