A Radical relook at CIRP: Ensuring Implementation of the Resolution Plan

-Prisha Tejani and Umang Pathak†

Introduction 

In 2017, Deccan Chronicle Holdings Ltd., which owns two major daily newspapers in India – The Asian Age and Deccan Chronicle, faced financial rupture due to a large number of defaults and debt liabilities. This resulted in an insolvency petition filed by a financial creditor against it under the Insolvency and Bankruptcy Code 2016 (“IBC”). The corporate resolution process was successful, and the Resolution Applicant (“RA”) was supposed to take over the company and implement the terms under the Resolution Plan (“Plan”). However, the RA failed to effectuate the plan triggering myriad of difficulties such as retrenchment of employees, shutting down of branches and eventual deterioration in the value of the assets of the Corporate Debtor (“CD”).

It is pertinent to note that the IBC lays down an elaborate, step-by-step, procedure to facilitate an outcome that maximizes the returns on the value of assets while also balancing the interests of all stakeholders of the CD. After the Resolution Professional (“RP”) has been appointed, he invites expressions of interest from potential applicants which are then required to submit resolution plans. All plans received by the RP are required to be presented before the Committee of Creditors (“CoC”) for voting. Once the CoC votes for a plan with a 66% majority, the role of the successful applicant becomes very important for the future of the CD. The CoC decides after examining the proposed strategies in the plan, keeping in mind it’s commercial viability, the ability of the RA to manage the CD and to keep it afloat. Once the successful applicant has been declared by the CoC, the RP is required to approach the Adjudicating Authority (“AA”) to get its final approval. The IBC affords limited powers to the AA with regards to the approval of the plan. The Supreme Court of India in the Essar Steel India Limited v. Satish Kumar Gupta established that except the procedural checks mentioned under s. 30(2) (a – e), the AA cannot exceed its jurisdiction and cannot encroach upon the business decision of the COC. In a situation where the RA fails to implement the terms of the resolution plan, then the only remedy available is to file an appeal before the AA under s. 60(5) of the IBC. The AA can also declare the RA to be in contempt of the court and slap a fine of Rs. 1 lakh (which may extend to Rs. 1 crore) or imprisonment of 1 year (which may extend to five years) or both in case ‘any’ person bound to implement the terms of the plan intentionally fails to do so or contravenes the terms of the plan as per s. 74(3). Further, the RA has to forfeit the amount deposited as performance guarantee during the submission of the plan.

The IBC envisages a systematic framework till the completion of the corporate insolvency resolution process (“CIRP”) but fails to consider the discrepancies that occur post-CIRP, concerning the implementation of the plan. It is necessary to adopt a holistic view with respect to the insolvency of the CD and examine the course of action in situations where the successful RA fails to implement the Plan, bringing the CD back to the drawing board or in this case, to its corporate death. Thus, this article intends to address three important issues keeping the above premise in mind –  firstly, the adverse implications on the CD post refusal by the RA to implement the plan; secondly, the need to devise mechanisms to save a commercial viable CD, and the kind of mechanisms that must potentially be considered; and thirdly, permitting the RA to withdraw the plan in specific circumstances where it is no longer reasonable to go through with the proposed plan.

Preface – The Issue of Non-Implementation of the Plan

There have been disputes in insolvency cases, over time, with respect to implementation of the plan by the RA. There are two broad patterns which can be observed in such disputes- a) where the RA seeks to withdraw the plan after acceptance by the CoC but before approval by the Adjudicating Authority AA citing procedural delay in the CIRP and the tardiness of the AA; and b) where the RA refuses to implement the plan after it has been approved by both, the CoC as well as the AA, blaming external factors. One external factor that may be justified is when there is wilful negligence on the part of the RP in providing the RA with all the necessary information required to ascertain the position of the CD (such as the case of Committee of Creditors of Metalyst Forging v. Deccan Value Investors LLP [1]).

The issue falling under category (a) was dealt by the Appellate Tribunal in the cases of Kundan Products Ltd. v. Amit Gupta and Committee of Creditors of Educomp Solutions v. Ebix Singapore. It was held in the former that “once the RA has accepted the conditions of the plan, it was not open for it to take a U-Turn and wiggle out of its liabilities“. On the other hand, the Deccan Chronicles case, Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Kridhan Infrastructure Pvt. Ltd. Vs. Venkatesan Sankaranarayan fall under category (b). It was held that once the plan has been approved by the CoC and the AA, the RA is duty bound to implement it.

It is certain that there are provisions under the IBC that deal with the incumbent issues, but the real concern is whether these provisions are enough to safeguard the interests of all the stakeholders of the CD.

• Failure to Implement the Plan – Predicament of the CD

If the successful RA fails to comply with the plan then, in most cases, either the CD faces its commercial death or the court compels the unwilling RA to implement the plan. The RA is compelled on the grounds that the IBC has no specific provisions governing withdrawal of the plan and it is a binding contract which demands specific performance. Even though liquidation is a potential option under the IBC, it becomes a major dilemma in cases where the CD is a going concern and could have been saved had it not been for the callousness of the RA. For example, in the Kridhan Infra case, Tecpro Systems Ltd. was going through CIRP under the IBC. All the procedures were adhered to and completed successfully. A plan was accepted by the CoC and also approved by the AA, but the RA failed to implement the plan even after a 6 month extension was afforded. The CoC then passed a resolution to liquidate Tecpro and the Court approved the same because it found that the RA would not be able to raise funds to revive the company. The plan was approved in May of 2019 and the liquidation order was passed in March of 2021. Even though the CIRP was completed in the required number of days and the RA had deposited the guarantee amount in the escrow account, Tecpro, a commercially viable company, could not be saved because of the non-compliance of the plan by the RA.

It is necessary to develop mechanisms which would potentially save the CD even after the RA has refused to implement the plan. While there exist mechanisms to hold the RA accountable (as explained above), these will do nothing in furtherance of reviving the CD. Further, as opinined by the Supreme Court in the cases of S.C. Sekaran v. Amit Gupta and Swiss Ribbons v. Union of India, liquidation should be a matter of last resort. The IBC is a beneficial legislation and recognizes a wider public interest in resolving corporate insolvencies. Its object is “not merely recovery of monies due and outstanding” but also to ensure revival and continuation of the CD and preventing its corporate death wherever possible and viable. When it comes to companies which have the potential to be revived, the non-implementation of the plan by the successful RA has adverse impacts on all stakeholders of the CD and the economic health of the country as a whole. This truculent issue forms the heart of many reasons behind the failure of the IBC with just 21% recovery rates. It frustrates the purpose of the IBC that is to balance the interest of all the stakeholders, where the life of the CD is in the hands of a RA and the parties have no say, other than appeal before the tribunals.

• Rescue mechanisms that can be considered to prevent corporate death

It is affirmed that liquidation should only be resorted to if it is found that the company cannot be sustained. But when the company is commercially viable, the Court should make certain accommodations in an attempt to restore the CD. This should certainly happen in a time efficient manner, so to not stray from the objectives of the IBC.

One rescue mechanism that the Court may consider is a rebidding process be initiated when the RA refuses to implement the plan or in cases where more than one bid was made, the second highest bidder be sought to submit a revised plan if it is willing to do so. It may be argued that this mechanism may lead to a delay and the process may not be completed within the required time limit. However, even after the acceptance of the plan by the CoC, in majority of insolvency cases, the court’s inordinate delay to approve the plan frustrates the time sensitive objective of the IBC and is the very reason which leads the RA to withdraw the plan. During this vacuum, it is affordable to conduct another round of bids or invite a revised plan. This process of rebidding must be approved by the CoC since the AA does not have the requisite vires to initiate the same.  The CoC must be given an option to vote on whether there should be a new round of invitation of bids. If the CoC believes that another chance should be given to the CD and the resolution to rebid is supported by 66% majority, the AA must allow it after the requisite procedural checks.

This suggestion becomes even more plausible after the 2019 amendment made to S. 12 of the IBC which changes the 180-day frame to a time period of 330 days within which the process must be mandatorily completed; including time taken for extensions and in legal proceedings. 330 days is a generous time frame which can accommodate a resolution for rebidding or inviting a revised application if needed. Further, the Supreme Court, in Committee of Creditors of Essar Steel v. Satish Kumar Gupta, recognised that if the delay or a large part thereof was attributable to the tardiness of the AA or the Appellate Tribunal itself, it may be open, in such cases, for the courts to extend the time period beyond 330 days. 

The suggested rescue mechanism is not entirely unprecedented. In the Amtek Auto case default worth Rs. 13,000 crore, the Supreme Court allowed the CoC to pass a resolution for another round of bids after the former successful RA failed to implement the plan. The CIRP was initiated against Amtek Auto in July of 2017. The CoC accepted the plan proposed by Liberty Housing Group in April, 2018. The same was approved by the AA in July 2018. Liberty failed to implement the terms of the plan and refused to adhere to the payment schedule. A liquidation order was passed by the AA which was later stayed by the Supreme Court on an appeal by the CoC. It was argued that Amtek was a commercially viable company and it should be given one last chance to be saved, for the betterment of the stakeholders and the economic environment of the country as a whole. The Supreme Court accepted the arguments of the CoC, restored the CoC to consider fresh offers and ordered the CoC to come to a decision within 21 days which was further extended by three weeks. The CoC examined five prospective offers and declared the plan by Deccan Value Investors to be accepted. After negotiations, the revised plan submitted by DVI was finalized in February 2020.The outbreak of the pandemic led to some complications in the implementation of the plan and it remains to be seen how the AA will deal with closing one of the biggest insolvency cases while keeping in mind the interests of the stakeholders and limitations placed on the RA because of the unprecedented situations.

Concluding Remarks

It is imperative for the legislature to take cognizance of the incongruity that occurs post the CIRP process with respect to the implementation of the plan by the successful RA, especially in the current situation. India has been one of the countries with the highest number of Non-Performing Assets, even before the pandemic. The situation as expected to worsen as the Reserve Bank reported an expectation of increase in Non-Performing Assets in 2021 citing the second wave of the virus. An effective insolvency system will act as a pillar to improve the domestic banking system by giving banks an opportunity to prevent the deterioration of asset quality. There is a desperate need for the Indian legislature to look at the bigger picture instead of focusing on the procedural absurdities so that it does not miss out on the beauty of the forest for the size of the trees.

†Umang Pathak is a 4th year, BBA LLB (Hons.) at Jindal Global Law School, Sonipat and Prisha Tejani is a 4th year, BA LLB (Hons.) at NALSAR University of Law, Hyderabad

[1] The RP had failed to provide the RA with some relevant information, which was pertinent to the value of the assets of the CD, which is a requirement under s. 25(1) of the IBC. There was no possibility for the RA to procure such information through due diligence because it was not in public domain.