The Insolvency and Bankruptcy Code, 2016 (Code) of India was enacted with the primary objective of resolving insolvency in a time-bound manner, ensuring the maximization of value of assets, and balancing the interests of all stakeholders. The Code aims to provide a clear and efficient mechanism for the revival or liquidation of a corporate debtor, with the committee of creditors (CoC) playing a central role in the resolution or liquidation process by exercising its commercial wisdom. However, such commercial wisdom should be exercised within the four corners of the law. The complexities and nuances involved in insolvency proceedings often give rise to legal challenges and disputes, particularly concerning the authority of the CoC and the Resolution Professional and jurisdiction of Adjudicating Authority.
Recently in Swan Energy Ltd. vs Chandan Prakash Jain and Ors.1, Hon'ble National Company Law Appellate Tribunal (NCLAT) dealt with one of such issues.
In the present case, Swan Energy Limited (Appellant) has challenged the substitution of Westend Investment and Finance Consultancy Private Limited (Westend) as successful resolution applicant in place of Invent Assets Securitization & Reconstruction Private Limited (Invent/SRA), the original successful resolution applicant, post filing of resolution plan approval application before the National Company Law Tribunal, Ahmedabad bench (Adjudicating Authority).
Pursuant to the CIRP process of the corporate debtor, the CoC had duly approved the resolution plan submitted by Invent with a 72.97% vote in its 20th CoC meeting, following which, the Resolution Professional filed an application (IA No.764 of 2021) for the approval of the said resolution plan submitted by Invent. In the meantime, during the pendency of this application for resolution plan approval, Reserve Bank of India (RBI) issued a circular dated October 11, 2022, which provided that Asset Reconstruction Companies (ARCs) are not permitted to commence or carry on any business other than that of the securitization or asset reconstruction or the business referred to in Section 10(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), without prior approval of the RBI subject to fulfilment of various/ certain conditions.
Consequently, Invent became ineligible to be the SRA in the CIRP of the corporate debtor and filed an IA No. 1 of 2023 in IA No, 764 of 2021 seeking substitution of its position with Westend. This substitution was approved by the CoC during its 26th meeting (during the pendency of Plan Approval Application before the Adjudicating Authority), after obtaining certain clarifications and undertakings from Westend. Subsequently, the revised resolution plan, modifying the SRA with 'Westend Investment and Finance Consultancy Private Limited' was placed for the CoC's approval. The revised resolution plan subsequently approved by the Adjudicating Authority on December 04, 2023 (Impugned Order).
The Appellant challenged the Impugned Order, contending that substituting Invent with an entity who is not a part of the CIRP process, after the CoC had already approved the resolution plan of Invent was contrary to the provisions Code and regulations framed thereunder.
Accordingly, NCLAT framed two primary legal questions for consideration (i) Whether after approval of the Resolution Plan of a Resolution Applicant by the CoC and filing of application before the Adjudicating Authority for approval of the Resolution Plan which is approved by the CoC, the CoC had any jurisdiction to substitute the SRA with another SRA who was not part of the CIRP process? (ii) Whether CoC has jurisdiction to modify a Resolution Plan already approved by the CoC and submitted before the Adjudicating Authority for approval under Section 30(6) of the IBC?
Regarding the first issue, the Appellant argued that the substitution of the SRA after resolution plan is duly approved by CoC with requisite vote was contrary to the scheme of the Code and regulations framed thereunder. The Appellant further submitted that the provisions of the Code provide a structured process for the submission and approval of resolution plans, and the substitution of an SRA outside this process is as a deviation from the established legal framework.
On the second issue, the Appellant contended that CoC cannot ask to modify the approved resolution plan which had already been filed with the Adjudicating Authority for its approval, particularly by substituting the SRA with another corporate entity, as the same was beyond the CoC's jurisdiction.
In the instant case, while approving the revised resolution plan, Adjudicating Authority directed the Resolution Professional to explain the relevant provisions under the Request for Resolution Plan (RFRP) that allowed for the substitution of the Resolution Applicant after the plan approval and also to place on record the relevant resolution of CoC, where at the feasibility and viability of the Plan was duly verified by the CoC. Liberty was given Resolution Professional to hold one more CoC meeting, if it is not clearly recorded in the previous meeting.
Accordingly, an Additional Affidavit was filed by the Resolution Professional placing on record RFRP and submitting that the revised resolution plan is feasible and viable as duly examined by the CoC by exercising its commercial wisdom and accordingly CoC has approved the revised resolution plan by 100% voting. However, it is pertinent to note that Resolution Professional did not specifically point out the provision in the RFRP by which SRA could be substituted after approval of the Resolution Plan by CoC.
This raises a significant concern about the legal validity of such a substitution and also raises questions about the adherence to the principles of natural justice and the fairness of the process. The provisions of the Code and regulations framed thereunder provide a structured framework for the insolvency resolution process, wherein the role of the CoC is pivotal. The CoC's primary responsibility is to evaluate and approve a resolution plan that meets the criteria laid out in Section 30(2) of the Code. Once a resolution plan is approved by the CoC and submitted to the Adjudicating Authority for approval, the question arises whether the CoC retains the authority to substitute the SRA with another entity not originally part of the CIRP process?
It is relevant to note that the substitution effectively allowed a new entity, Westend, to step into the shoes of the original SRA which did not go through the rigorous evaluation and selection process that other resolution applicants underwent. The same resulted into an uneven playing field and undermined the transparency and credibility of the process followed by the Resolution Professional and CoC for the CIRP of the corporate debtor. Any modification of the resolution plan by substituting the SRA without following the due process prescribed under the Code also undermined the sanctity of the CoC's decision. The provisions of the Code mandate a time-bound resolution process, with specific stages for the submission, evaluation, and approval of resolution plans. Once the CoC approves a resolution plan and it is submitted to the Adjudicating Authority, the process is generally considered final, subject to the Adjudicating Authority's approval. Thus, any modification of an already approved resolution plan raises questions about the finality and certainty of the CoC's decisions.
In the instance case, the Hon'ble NCLAT, while hearing the appeal, critically examined the process followed by the CoC and the Resolution Professional in substituting the SRA and modifying the resolution plan. It noted that the CIRP of the corporate debtor had formally ended on September 14, 2021, yet the CoC continued to hold meetings and modify the resolution plan over an extended period. This prolonged process and the subsequent modifications were found to be in violation of the provisions of the Code and regulations framed thereunder, which emphasize a time-bound and structured process.
Hon'ble NCLAT further highlighted that the clauses cited by the respondents regarding implementation through subsidiaries or nominees do not support the substitution of the SRA as these clauses are intended to facilitate the plan's implementation, not to alter the identity of the SRA. Hon'ble NCLAT also rejected the reliance placed by the respondent on the commercial wisdom of the CoC as a justification for the substitution and clarified that while the commercial wisdom of the CoC is paramount, it cannot be used to override the statutory provisions of the IBC and the principles of natural justice. Hon'ble NCLAT held that the provisions of the Code do not permit such substitution and that the actions of the CoC and Resolution Professional were not in conformity with the statutory scheme. The CoC had no jurisdiction to approve the revised resolution plan submitted by Westend or to substitute it as SRA as the same is a clear breach of Regulation 39(1)(B) of IBBI (Insolvency Resolution Process for Corporate Persons), 2016 (CIRP Regulations) which clearly states that "CoC shall not consider any resolution plan that is received from a person who does not appear in the final list of prospective resolution applicants."
The Hon'ble NCLAT further held that according to the terms of RFRP and mandatory provisions of the Code, there are different stages for re-evaluation of the Resolution Plan and applicant who had not participated in any of the stages of CIRP process cannot suddenly be substituted as SRA at the stage of approval of plan by the Adjudicating Authority. Thus, substitution of Westend in the resolution plan is contrary to the statutory scheme of the Code and regulations framed thereunder. The resolution process under the Code is intended to be transparent, fair, and equitable, with all prospective resolution applicants given an equal opportunity to submit their plans and participate in the process. Substituting an SRA after the plan has been approved by the CoC undermines the integrity of this process and potentially disadvantages other resolution applicants who participated in good faith.
Upon perusal of the above judgment, we are of the view that the judgment passed by NCLAT brings to the forefront critical issues concerning the jurisdiction and authority of the CoC and the Resolution Professional in the insolvency resolution process. The case underlines the importance of adhering to the statutory framework laid out by the Code and the CIRP Regulations to ensure a fair, transparent, and time-bound resolution process. NCLAT's decision to set aside the order passed by the Adjudicating Authority reaffirms the need for strict compliance with the provisions of the Code. Further, as per the explanation under Regulation 18 of CIRP Regulation,2 it is clear that no CoC meeting can decide on matters which do affect the resolution plan submitted before the Adjudicating Authority. Therefore, the steps taken by the CoC and Resolution Professional in the instant case is clearly against the settled position of law. The decision of NCLAT in the instate case highlights the limitations on the power of the CoC and the importance of maintaining the integrity of the CIRP process.
In conclusion, this case serves as a crucial reminder for all the stakeholders involved in the insolvency resolution process to act within the bounds of the law and to ensure that the process remains transparent, fair, and consistent with the objectives of the Code.
Footnotes
1. Company Appeal (AT) (Insolvency) No. 313 of 2024
2. Substituted by Notification No. IBBI/2023-24/GN/REG113, dated 15th February, 2024 (w.e.f. 15-02-2024)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.