The outbreak of Novel COVID-19 and the nationwide imposed lockdown in India has caused all walks of life to a standstill. Courts and Tribunals came to the rescue of litigants who were facing practical difficulties in filing the petition and passed orders on both judicial side protecting the right to institute proceedings belatedly as well administrative side by bringing the court-room to computer desks.
In respect of insolvency matters specifically, both the Tribunal and the IBBI allowed exclusion of lockdown period for the purpose of timelines under Section 12 of the IBC.
In this article, we discuss the process of implementation of Resolution Plan and whether various Court orders and notifications helped in seeking extension of implementation of Resolution Plan during the lockdown. We also discuss the aid of technology in implementing a Resolution Plan during lockdown period.
The recent outbreak of the Novel Coronavirus 2019 ("COVID-19") has caused major disruptions in the World, affecting even the most developed nations such as United States of America and China. Newspapers, blogs, phone notification and private messengers speak only of the mighty virus. Globally, about 17 Lakh people have been tested positive and near about 1lakh people have lost their lives1 . The impact on the economy is more severe than the 2008-2009 recession, in less than 4 weeks.
In these unprecedented times, Governments across nations have stood up to provide not only food and shelter, but also introduced various regulatory and statutory relaxations such that citizens do not face penal consequences of their inadvertent non-compliance. Some of these relaxation in India include (1) extension of last date for filing IT Returns and GST Annual Returns for FY 2018-19 from 31-March-2020 to 30-June-2020 (2) extension of mandatory requirement to hold Board Meetings by a period of 60 days till next two quarters i.e., till 30-Sep-2020 (3) extension of timelines for filings under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
For the purposes of this article, we deal with (1) the meaning and process of implementation of Resolution Plan (2) scope of Corporate Insolvency Resolution Process qua implementation of a Resolution Plan and, (3) exclusion of time during lockdown period to implement the Resolution Plan and the need thereto. We also briefly discuss the experience of authors in implementing a Resolution Plan during the lockdown period with help of technology.
MEANING AND PROCESS OF IMPLEMENTATION OF RESOLUTION PLAN
In the Corporate Insolvency Resolution Process ("CIRP") of a Corporate Debtor, the Resolution Professional processes Claims of Creditors of the Corporate Debtor2 and constitutes a Committee of Creditors3 . The Resolution Applicant who desires to acquire the debt ridden Corporate Debtor, provides for the mechanism and amount of payment to the Creditors in its Resolution Plan4 . The Resolution Plan is put to vote before the Committee of Creditors (CoC)5 and if approved by a majority of 66% or more, is put for approval before the Adjudicating Authority6 (National Company Law Tribunal).
Usually, the Resolution Applicant seeks a time period of 30-90 days from the receipt of order approving the Resolution Plan by the Adjudicating Authority to complete the process of acquisition. This time period is sought to complete the process of acquisition and involves raising the funds to make payment to the Creditors against their approved claim amount. This aspect of payment of Creditors is thoug hone of the various process of implementation of the Resolution Plan albeit the most important one. In most cases, the Adjudicating Authority is pleased to grant the said 30-90 days' time.
The payment to Creditors has to be made in accordance with, inter-alia, Section 30 of the Code, 2016 and Regulation 38 of the CIRP Regulations Code, 2016 which prescribe priority in payment to categories of Creditors.
Other process in the implementation typically involves reduction of share capital of the Corporate Debtor, issuance of new shares of the Corporate Debtor to new shareholders, appointment and constitution of new Board of Directors of the Corporate Debtor, conversion of debt into equity, merger, execution of agreements for availing funding from third parties such as banks and financial institutions, execution of escrow agreement between CoC and the Resolution Applicant for payment to the Creditors, issuance of no-dues certificate by the Creditors etc. The order approving Resolution Plan of Ruchi Soya Industries Limited7 , Euro Pallets Pvt. Limited8 , Monnet Ispat and Energy Limited9 mention some of these steps above.
If the Corporate Debtor is a listed company on the stock exchange, then the process also involves intimation to the stock exchange about completion of the CIRP. If the Resolution Applicant proposes to keep the Corporate Debtor as a listed company on the stock exchange, then the process involves initiation of trading on the stock exchange. The process also includes intimation to the Registrar of Companies and stock exchanges of closure of the CIRP.
Furthermore, immediately upon implementation of resolution plan, the lenders are required to handover the original title deeds and other papers relating to the assets of the Corporate Debtor to the nominee of Resolution Applicant. There are several integration activities which are required to be undertaken immediately after the implementation of a Resolution Plan by the Resolution Applicant such that the Corporate Debtor can be revived.
Each of the abovementioned process involves hours of drafting and negotiation between the Resolution Applicant, Resolution Professional and Committee of Creditors and their respective advisors. It also involves coordination and liaisoning with several stakeholders including statutory and regulatory authorities. It is a lengthy and time consuming process and hence, the Adjudicating Authority is often pleased to grant time period of 30 to 90 days to implement the Resolution Plan. Often in this process, one or the other Creditor, unsuccessful Resolution Applicant (s) challenges the Resolution Plan which derails the process. Each litigation during the implementation gives rise to new challenges for the Resolution Applicant and the lenders, all of the above which require significant man hours.
SCOPE OF CIRP &INCLUSION OF IMPLEMENTATION OF RESOLUTION PLAN
Under the Code, 2016, the CIRP is said to have been initiated once an application for initiating CIRP is admitted by the Adjudicating Authority under Section 7 or 9 or 10 of the Code, 2016. However, the Code, 2016 does not provide specifically provide when the said CIRP ends. The limited direct and specific reference is under Section 15 (1) (f) of the Code, 201610, whereby the Interim Resolution Professional is required to mention the date on which the CIRP shall close. The said provision does not prescribe the event or completion of a particular activity which shall be deemed to be closure of CIRP.
Some indirect references can be drawn from Section 12 (1)11, Section 14 (4)12, Section 31 (3)13 and Section 33 (1) (a)14 of the Code, 2016, which guide us towards the answer that approval or rejection of a Resolution Plan under Section 31 of the Code, 2016, would be the date when the CIRP is said to have been ended/closed. Another reference can be drawn from the model time-line prescribed under Regulation 40A of the CIRP Regulations provides for 'Approval of resolution plan by AA' as the last step towards CIRP.
Therefore, the period after approval by the Adjudicating Authority during which the various activities or processes required to be undertaken, colloquially referred to as implementation period, is not included within the meaning of CIRP under the definition and meaning ascribed under the Code, 2016 and CIRP Regulations.
RELAXATIONS BY COURTS AND TRIBUNALS
After imposition15 of nationwide lockdown and various notifications/circulars by Central and State Government thereto, physical filing of pleadings in Courts became practically impossible. Hon'ble Supreme Court of India took suo moto cognizance and passed an order dated 23-Mar202016 extending the limitation prescribed under general law or special law, whether condonable or not, with effect from 15 March 2020 till further orders.
In respect of insolvency matters, Hon'ble NCLT notified17 that all NCLT benches shall remain closed from 23-March-2020 to 31-March-2020 and only urgent matters would be taken up in accordance with the said notification. The said notification makes a categorical note that "As regard to the IBC-2016 matters extension of time, approval of resolution plan and liquidation will not be construed as urgent matters". After imposition of the national lockdown, the above notification was extended to 14-April-2020 by another notification18 .
Relying on the order passed by the Hon'ble Supreme Court, the Hon'ble NCLAT vide order dated 30-Mar-202019, excluded the lockdown period for the purpose of counting of the period for 'Resolution Process under Section 12 of the Code, 2016, in all cases where 'Corporate Insolvency Resolution Process' has been initiated. Significant respite also came from the 29-Mar-2020 amendment to Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the "CIRP Regulations"), wherein Regulation 40C20 was introduced which provides that period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.
The cumulative effect of the above mentioned orders, notifications and amendment to CIRP Regulations was that if the CIRP were to end between 24-Mar-2020 and 14-April-2020 (tentative), the said time period of 21 days would be excluded from the 'CIRP Period'.
EXCLUSION OF TIME PERIOD FOR IMPLEMENTATIONDURING THE LOCKDOWN PERIOD AND NEED THERETO
Since the process to be executed after approval of the Resolution Plan by Adjudicating Authority does not fall within the meaning of "CIRP" under the extant insolvency laws, the order dated 30- Mar-2020 by NCLAT21 and Regulation 40C22 would not aid the Resolution Applicant for any additional time. The consequence this non-inclusion is that if the last date of implementation of a Resolution Plan falls within the lockdown time period, then the Successfully Resolution Applicant is contractually and legally required to implement the Resolution Plan, failing which the Successful Resolution Applicant is at the risk of breach of contract, contempt of court and other non-compliances.
Usually, a Resolution Plan requires deposit of Earnest Money Deposit ("EMD") by all Resolution Applicant (s) at the time of submitting their Resolution Plan, which is refunded to all Resolution Applicant (s), except obviously to the Successful Resolution Applicant. The next step/instance of deposit is at immediately after approval of Resolution Plan by the CoC, which is commonly referred to as Performance Deposit or Performance Security. The IBBI amended the CIRP Regulations to introduce Regulation 36B (4)23, which requires the request for Resolution Plans ("RFRP") to provide for a clause mandatorily requiring the Successful Resolution Applicant to provide a Performance Security upon approval of its Resolution Plan by CoC and failing implementation of the said Resolution Plan, such Performance Security to be forfeited. The usual practice is that the Resolution Applicant deposits Performance Security by way of a Performance Bank Guarantee, however, some CoCs require bank deposit of the Performance Security in the accounts of the Corporate Debtor. The Performance Security and EMD collectively amounts to approx. 10-20% of the Resolution Plan Value, if the Resolution Plan Value runs in thousands of Crores and nearly 30%, if the Resolution Plan Value is less than Rs. 500 Crores (based on broad estimations). For instance, the Resolution Plan pertaining to Euro Pallets Pvt. Ltd., required EMD of Rs. 40 Lakh constituting 12.9% of the Resolution Plan.
The importance of highlighting the above is that failure in implementation of the Resolution Plan could lead to a potential loss to the Successful Resolution Applicant. This financial loss of EMD and Performance Security is coupled with the counsel and advisory fees spent in drafting and negotiating the Resolution Plan, along with loss of opportunity cost. Failure in implementation also results in contravention of Section 74 (3) of the Code, 201624, which is punishable with imprisonment of 1-5 years or fine of minimum Rs. 1 Lakh- 1 Crore or both.
Apart from monetary loss, the Resolution Applicant also suffers a loss of reputation for not being able to implement the Plan. All future acquisitions attempted by that Resolution Applicant would be seen through the lenses of this failure and bankers may not be able to repose in faith in future. Regulation 36 (1B) of the CIRP Regulations requires a statement in the Resolution Plan stating if the Resolution Applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the Adjudicating Authority at any time in the past.
The need for exclusion of this time period is essential because receipt of payment to the Creditors and change of management of the Corporate Debtor is the ultimate goal of resolution process. The execution of various agreements as mentioned before require inter-se deliberation between advisors/counsels of the Successful Resolution Applicant as well as among the advisors/counsels of CoC and the Successful Resolution Applicant. The execution require stamp papers, procuring of which has become extremely difficult, if not impossible.
In many resolutions, the Successful Resolution Applicant engages with lenders to fund the acquisition, which funds are at times located abroad. The international transition of funds becomes another challenge. The hurdles can be as simple as printing of documents to arranging the funds, which would vary from the steps envisaged during the implementation period.
It is certain that declaring breach of Resolution Plan by the Successful Resolution Applicant would result in financial loss of the CoC, given that in almost all cases, nearly all of the sanctioned CIRP Period of 270 days (extendable to 330 days) is spent in seeking approval of one Resolution Plan, hence the non-compliance of an approved Resolution Plan would likely result in liquidation of the Corporate Debtor. Even facing this threat of financial loss, the CoC in not a position to unilaterally extend the time period since the time period is approved by Adjudicating Authority in Resolution Plan approval order.
The usual recourse left with the Successful Resolution Applicant is approaching the Adjudicating Authority seeking extension of time under Section 60 (5) of the Code, 2016, however, with the 22- Mar-2020 notification25 of the Hon'ble NCLT stating "extension of time" would not be considered as urgent, it may not be prudent step to approach the Adjudicating Authority and be left with either no order extending the time period or rejection of prayer.
Another recourse which the Successful Resolution Applicant may consider adopting is invoking the Force Majeure clause under the Resolution Plan (if any) with the aid of Section 56 of the Indian Contract Act, 1872, and plead impossibility in performance of the transaction. The step of invoking Force Majeure is a difficult road to travel for the Successful Resolution Applicant has to establish actual impossibility in implementing the Resolution Plan.
Recently, the Hon'ble High Court of Kerala vide order dated 19-Mar-2020 in Writ Petition (Civil) No. 8231/2020 and Hon'ble High Court of Judicature at Allahabad in Writ Petition (Civil) No. 7014 of 2020 had passed which orders had effectively deferred the recovery of all taxes till April 6 in view of the Coronavirus outbreak, as reported. The Hon'ble Supreme Court of India vide order dated 20- Mar-202026 have granted an ad-interim ex-parte stay on both abovementioned orders stating the stand taken by the Government of India through learned Solicitor General that the Government is fully conscious of the prevailing situation and would itself evolve a proper mechanism to assuage concerns and hardships of every one. Thus, to say that there is absolute impossibility in implementing the Resolution Plan taking aid of Force Majeure would be very difficult to establish in a Court of law.
The extension of this time period is not unusual since both Courts and Legislature have recognized movement restrictions and have therefore, excluded lockdown period from CIRP Period and also relaxed the time-lines prescribed under the laws. The extension would also benefit the Resolution Applicant who would later take control of the Corporate Debtor since due to economic depression caused by COVID-19, the chances of Corporate Debtor making profits right after the acquisition would be little. The above, coupled with the existing loss that the Successful Resolution Applicant might be facing currently and the financial burden to implement the Resolution Plan, has the potential to put the Successful Resolution Applicant in a significant financial burden. Relaxation in this unprecedented time has likelihood of giving a necessary breather to the Successful Resolution Applicant.
IMPLEMENTATION DURING THE LOCKDOWN
One of the major challenges in execution of agreements is physical presence of the stakeholders, for negotiation and signing. One way of managing negotiation process is through video conferencing available on Microsoft Teams, Skype, etc.
Execution of the documents can be greatly helped by the customary process of exchanging only the scanned image of the signature pages of agreement, with the understanding that original executed signature page will be couriered after normalcy. Subscription based services such as Leegality, Signdesk can be availed for payment of stamp duty and execution of documents without requiring the physical presence of parties.
Intimation to authorities including SEBI, ROC, Creditors, etc., is possible through digital signature on the document or simply issuing the document with 'Sd/-' with the phone number for the authorities to verify on receipt, which is a pleasant accommodation which various statutory authorities offer.
Whilst it is true that technological aid has provided us platforms for execution of even the most difficult of assignments, however, the absence of personal interaction between the various stakeholders leaves little scope of negotiation wherever required. This gap can be bridged by relying more and more on digital platforms for discussion, negotiation and execution.
Given the importance implementation of a Resolution Plan holds, the process needs to be incorporated into the statute, such that statutory aid can be taken by the Successful Resolution Applicant, Committee of Creditors and the Resolution Professional, whenever required. The entire process of appointment and running of Monitoring Committee/Steering Committee can be brought into the resolution process for uniformity and guidance. Further the CIRP Process Period should be defined to include the time take for implementation of the Resolution Plan as per the terms thereof.
1. See https://www.worldometers.info/coronavirus/, last visited on 11 April 2020
2. Section 18 of the Insolvency and Bankruptcy Code, 2016.
3. Section 21 of the Insolvency and Bankruptcy Code, 2016.
4. Section 30 of the Insolvency and Bankruptcy Code, 2016.
5. Supra Note 4
6. Section 31 of the Insolvency and Bankruptcy Code, 2016.
7. CP 1371 of 2017, NCLT Mumbai
8. CP 1658 of 2017, NCLT Mumbai
9. CP 1139 of 2017, NCLT Mumbai
10. Section 15: Public announcement of corporate insolvency resolution process
(f) the date on which the corporate insolvency resolution process shall close, which shall be the one hundred and eightieth day from the date of the admission of the application under sections 7, 9 or section 10, as the case may be.
11. Section 12: Time-limit for completion of insolvency resolution process
12. Section 14: Moratorium
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be
13. Section 31: Approval of resolution plan
(a) the moratorium order passed by the Adjudicating Authority under section 14 shall cease to have effect; and
(b) the resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database.
14. Section 33: Initiation of liquidation
15. Order dated 24 March 2020 issued by Ministry of Home Affairs, Government of India
16. Suo Moto Writ Petition (Civil) No. 3 of 2020
17. Notice dated 22 March 2020 issued by National Company Law Tribunal.
18. Notice dated 28 March 2020 issued by National Company Law Tribunal.
19. Suo Moto - Company Appeal (AT) (Insolvency) No. 01 of 2020
20. Regulation: 40C. Special provision relating to time-line
21. Suo Moto - Company Appeal (AT) (Insolvency) No. 01 of 2020
22. Supra 18
23. Regulation 36B: Request for Resolution Plan
24. Section 74: Punishment for contravention of moratorium or the resolution plan
25. Notice dated 22 March 2020 issued by National Company Law Tribunal
26. Special Leave Petition (Civil) Diary No. 10669 of 2020
Originally Published 20 April, 2020
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