India enacted the Insolvency and Bankruptcy Code, 2016 (IBC) to provide a new and an exclusive framework for reorganisation and insolvency resolution. One of its objects is resolution of insolvency of corporate persons, firms and individuals in a time bound manner. Undue delays had marked the earlier insolvency and bankruptcy regimes and it was hoped that this would change with the enactment of the IBC. Unfortunately, that has not happened. Delays, protracted judicial proceedings and appeals have marked large number of cases filed under the IBC. As of June 30, 2020, of the 2108 corporate insolvency resolution process filed and pending under the IBC (CIRP), 1094, i.e., more than 50% were pending for over 270 days since their initiation.
A case that illustrates this trend well is the resolution process of Wind World (India) Ltd1. (Wind World/Corporate Debtor), an insolvent wind power company. Wind World was admitted into CIRP under the IBC on February 20, 2018. Suraksha Asset Reconstruction Limited, Lakshdeep Investment and Finance Private Limited and Suraksha Reality Limited (collectively, "Applicants") submitted a resolution plan on November 13, 2018. Committee of creditors for the Corporate Debtor (CoC) approved the resolution plan with a 69.87% majority on November 16, 2018. The resolution professional filed an application for approval of the resolution plan before the National Company Law Tribunal, Ahmedabad bench (NCLT) on November 18, 2018. The application is still pending and as a result, the CIRP is yet to conclude even after a period of 900 days since its initiation. The IBC requires the CIRP to be completed with 330 days of its commencement.
During the pendency of the application for approval of the resolution plan, the Applicants filed another application before the NCLT for withdrawal of resolution plan. On September 8, 2020, NCLT passed an order in the said application allowing the Applicants to withdraw their resolution plan without payment of any charges. It directed the resolution professional to modify/amend the process document (i.e., invitation for expression of interest to submit a resolution plan), seek other resolution plan(s), finalize the same within a period of 15 days and complete the CIRP within 75 days thereafter. The resolution professional was directed to file an application for liquidation of the Corporate Debtor, if no resolution plan was received or, if received, was not approved by the CoC within the period of 90 days.
The Applicants made the following submissions in their application for withdrawal of the resolution plan:
- since speed and timeliness are the corner-stones of the IBC, given the delays, the Applicants were eligible to withdraw the resolution plan. Reliance was placed on Section 12 of the IBC which requires CIRP to be completed within 330 days from the date of its admission excluding any extension of this period in exceptional or extraordinary circumstances;
- they would not be able to revive the Corporate Debtor as planned and would not be able to recover their investment in the manner envisaged by them at the time of submission of the resolution plan;
- the resolution plan amounted to a contract and its timely approval was essence of the contract. Hence, delay in approval of the resolution plan discharged the Applicants from their obligations under the contract. It was also contended that this was a case of a bilateral contract and there were reciprocal promises and once resolution professional/CoC failed to get the resolution plan approved, the Applicants could not be forced to perform beyond such time line; and
- pursuant to Section 60(5)(c) of the IBC, NCLT has the power and jurisdiction to decide the issue of withdrawal of resolution plan. Section 60(5)(c) gives NCLT the power to decide any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the IBC.
III. Contentions on behalf of the CoC and the resolution professional
The CoC and the resolution professional made the following submissions while opposing the Applicants' application for withdrawal of the resolution plan:
- while CIRP is required to be a time bound process, IBC time lines are only indicative and not mandatory. Further, the IBC and the process document for the Corporate Debtor's CIRP did not permit or provide for withdrawal of a resolution plan and therefore the Applicants' application should be rejected;
- NCLT's jurisdiction under Section 31(1) of the IBC, which provides for approval or rejection of the resolution plan by NCLT after it has been approved by the CoC, is limited. It can only examine whether the resolution plan as approved by the CoC meets the requirements listed in Section 30 (2) and thereafter approve or reject the resolution plan. Section 31 is a self-contained provision dealing with approval of the resolution plans and the legislature did not include a provision in the IBC providing for withdrawal of a resolution plan by a resolution applicant after its approval by the CoC. Hence, the NCLT could not permit the Applicants to withdraw the resolution plan on the basis of Section 60(5)(c) of the IBC;
- resolution plan did not include a term providing time as the essence of the contract. No dates are fixed for performance of the contract by the parties and to make time the essence of the contract both the parties are required to be ad-idem. Therefore, the contract is not voidable at the option of the Applicants and they cannot withdraw the resolution plan due to delays;
- the Applicant's performance of the contract was not dependent on the performance of the resolution professional or CoC. The resolution professional and the CoC had not prevented the Applicants from performing their promises. Delay in approval of resolution plan by the NCLT could not be construed to mean that the Applicants were prevented from performing their obligations under the resolution plan; and
- Section 56 of Indian Contract Act, 1872 (Contract Act) would not be applicable in a situation where contract had become commercially onerous or unviable for a party to perform due to occurrence of any event subsequent to parties entering into contract2.
IV. Decision of NCLT
The NCLT discussed the scheme of IBC and the various stages of the CIRP and observed that model timelines provided under IBC require NCLT, as the adjudicating authority, to approve the resolution plan within 15 days of receipt. Since the IBC provides timelines for different stages of CIRP, from its initiation to approval of resolution plan by NCLT, Applicants and other stakeholders are correct in having a legitimate expectation that the Resolution Plan would be approved within a reasonable time. The NCLT observed that in case it is not approved within the specified time then certainly the Applicants must have a way out and cannot be bound to the resolution plan in perpetuity.
On the issue of its jurisdiction under Section 31 of the IBC, the NCLT held that there can be no dispute that when a plan is approved by CoC and such plan is submitted by the resolution professional for NCLT's approval under Section 30(6) of the IBC, NCLT is obliged either to approve or reject this plan, if such plan meets or does not meet the provisions of Section 30(2) of IBC and proviso to Section 31(1) of IBC, as the case may be. At this stage of approval /rejection of a resolution plan, the NCLT cannot take help from Section 60 (5) of the IBC to question the commercial wisdom of a committee of creditors.
NCLT distinguished the application for withdrawal filed by the Applicants from the application filed by the resolution professional for approval of the resolution plan under Section 31 of the IBC. NCLT held that provisions of Section 31 were not applicable to the application for withdrawal of the resolution plan and hence the contentions of the resolution professional and the CoC on NCLT not having jurisdiction were without merit. Regarding Section 60 (5) of the IBC, the NCLT observed that Section 60(5)(c) gave NCLT the power to decide any question of priorities or; any question of law or facts which arises out of or in relation to the insolvency resolution or liquidation proceedings of corporate debtor or corporate person under the IBC.
NCLT held that the Applicants' application involved questions of both law and facts. The question of law being whether the Applicants have the right to withdraw from the resolution plan and the question of fact being what would be the reasonable time for approval of the resolution plan by the NCLT and therefore NCLT had the requisite jurisdiction to entertain the application.
Regarding withdrawal of the resolution plan, the NCLT took assistance from other provisions of the IBC, namely, Regulation 38 (2) of the (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) which requires a resolution plan to have a term. NCLT interpreted this to observe that a resolution plan cannot go on in perpetuity and is required to have an end date thereby leading to a conclusion that it can be withdrawn. NCLT held that if the resolution professional's application for approval of the resolution plan (currently pending before the NCLT) was to come up for hearing, the same would be rejected since the resolution plan did not have a term as required by Regulation 38 (2). As a result of this deficiency in the resolution plan, the NCLT would have had to pass an order under Section 33 (1)(b) of the IBC3 directing liquidation of the Corporate Debtor. The NCLT observed that by permitting the Applicants to withdraw the resolution plan and by directing fresh insolvency resolution instead of passing an order directing liquidation under Section 33 (1)(b) the assets of the Corporate Debtor would obtain a better valuation.
The NCLT held that there was no prohibition on applying provisions of other laws including the Contract Act. While negating the CoC and resolution professional's contention of the process document being a unilateral contract, the NCLT held that the process document was in fact a bilateral contract since it provided for obligations for both the parties. The NCLT took note of the fact that a large number of litigations in relation to the CIRP were already pending before various courts and that the resolution plan's finality could be challenged even after the NCLT granted its approval. Therefore, the NCLT found substantial merit in the Applicant's argument that despite the inordinate delay there was still no end in sight and that there was no guarantee the CIRP wouldn't continue. In NCLT's view, due to non-occurrence of a contemplated event i.e. approval of resolution plan by the NCLT, the resolution plan will not be implemented in a reasonable time therefore the Applicants stood discharged from its obligation.
With regard to applicability of Section 56 of the Contract Act, the NCLT held that an absolute contract remains valid for all times. However, it noted that certain exceptions have emerged to this principle over time like discharge on account of physical incapacity or destruction of subject matter due to natural calamities or otherwise, sovereign intervention which make performance impossible or even a permanent injunction by a court. NCLT however agreed with the contention made on behalf of CoC that mere commercial hardship by itself is not a sufficient ground to release a party from its contractual obligations.
NCLT held that Section 56 of Contract Act is an instance of positive law which applies only when contract does not prescribe for the situations/events of frustration. Since the process document did not provide for any such situation/events of frustration and in fact provided for a perpetual term for the Resolution Plan, Section 56 of the Contract Act would be applicable. The word "impossible" in Section 56 does not mean only physical impossibility but it also includes impracticability. Therefore, NCLT held that due to inordinate delay in approval of resolution plan, object of the Resolution Plan had frustrated and the Applicants stood discharged.
NCLT, in order to dispose of the Applicant's application also, for the sake of argument, considered the application pending for approval of the resolution plan under Section 31 of the IBC and stated that Section 30(2)(e) of the IBC specifies that a resolution plan should not contravene any provisions of law for the time being in force. The words "any provisions of law" also include provisions of the IBC. Accordingly, it is necessary to determine whether the Resolution Plan is in compliance with the mandatory requirements prescribed under Regulation 38(2) of CIRP Regulations.
NCLT observed that the term of a resolution is one such vital requirement. Since the resolution applicant's submission of a resolution plan is a commercial decision and not an act of charity, the resolution applicant cannot be made to wait forever as it may have better avenues for application of funds earmarked for acquisition of business of Corporate Debtor. Apart from this, NCLT also held that inordinate delays cause erosion in the value of assets of Corporate Debtor which also defeats one of the objects of the IBC which is maximization of value of assets of the Corporate Debtor.
In a first, the NCLT applied provisions of the doctrine of frustration contained in Section 56 of the Contract Act to permit a resolution applicant to withdraw a CoC approved resolution plan. The doctrine of frustration is part of the law of discharge of contract that allows parties to a contract to be excused by reason of act agreed to be done under the contract becoming impossible or illegal after execution of the contract. Indian courts have held that an event or change of circumstance which is so fundamental that it strikes at the root of the contract as a whole frustrates the purpose of the contract and brings it to an end4. The delay in approving the resolution plan was held to be an event frustrating the very purpose of the process document/contract.
By reiterating that speed is of utmost essence for resolution of corporate debtors and holding that the timelines provided under IBC must be followed barring a few exceptions, NCLT's decision also upholds the object of the IBC. NCLT creatively interpreted the Supreme Court judgment in Essar Steel's case which had struck down the word "mandatorily" in Section 12 of the IBC as being unconstitutional. Section 12 requires CIRP to be completed mandatorily within 330 days of initiation of CIRP. While striking down the word "mandatorily", the Supreme Court had held that the time period provided in Section 12 can only be breached in extra ordinary circumstances. This in NCLT's opinion meant that the timelines prescribed in Section 12 even per the Supreme Court's judgement in Essar Steel are mandatory barring a few exceptions5.
NCLT also rejected CoC's contention that allowing withdrawal of the plan would lead to further delays and losses to the creditors by holding that the CoC itself did not balance the interests of all stakeholders as required by law, including the resolution applicant. By permitting the withdrawal of the resolution plan, the NCLT sought to make the CoC and the resolution professional more accountable and also to convey a message that inordinate delays could only be avoided when efforts are made by all parties involved in the CIRP.
This was not a first instance of NCLT allowing withdrawal of resolution plan. In the past too, other tribunals have permitted withdrawal of resolution plans albeit for different reasons. In the CIRP of Metalyst Forging Ltd6, the withdrawal of the resolution plan pending approval of the adjudicating authority was permitted on the ground of misleading, unreliable and incomplete information in the information memorandum prepared by resolution professional.
However, in Maharashtra Seamless Limited v. Padmanabhan Venkatesh7, the Supreme Court did not allow withdrawal of a resolution plan by the resolution applicant under Section 12(A) of the IBC after it had been approved by the NCLT. In this case, the resolution applicant contended that in order to take over the corporate debtor, it had availed of substantial term loan facility but because of delay in implementation of the resolution plan, it had to pay interest on the loan which it hadn't envisaged. It was also the resolution applicant's case that the business anticipated by them on successful implementation of the resolution plan seemed unworkable. The Supreme Court held that Section 12(A) doesn't apply to the facts of the case as it permitted withdrawal of an application for initiation of CIRP after it is admitted by the applicant who filed the application in the first instance and not in the circumstances of the case. Accordingly, the Supreme Court didn't rule on the question of withdrawal of a resolution plan in other situations.
World over, suitable material adverse change (MAC) clauses are included in commercial deals to allow one or both parties to withdraw from the deal upon occurrences of unforeseen circumstances covered by MAC clauses. Since a resolution plan involves commitment of resources from a resolution applicant and is based on various assumptions including those around business cycles, it is only natural that a delay may adversely impact such commitments and possibly business cycles relevant for the corporate debtor. Hence, in this situation rather than forcing the resolution applicant to stick to the resolution plan, a preferable solution might be to renegotiate the resolution plan. For example, in May this year, Ramkrishna Forgings, the resolution applicant in ACIL Ltd.'s CIRP, developed cold feet on account of Covid 19 and the associated lockdown and wrote to its lenders requesting a renegotiation of the commercial terms of the resolution plan.
However, complication creeps in resulting in a loss of money and time in cases where the resolution applicant expresses its complete unwillingness to continue with the resolution plan and decides to withdraw the plan. For example, Deccan Value Investors (DVI), resolution applicant in the CIRP of Amtek Auto Limited, wrote to lenders of Amtek Auto Limited and invoked the force majeure clause on the ground of impact of Covid 19 on the economy and particularly the auto sector. DVI expressed difficulty in implementation of the resolution plan stating that all its assumptions and calculations underlying the resolution plan had ceased to hold good because of the change in circumstances resulting from Covid 198. DVI had submitted a resolution plan in the CIRP of Amtek Auto Limited in January, 2020 which was subsequently approved by the NCLT. While ordinarily resolution plans do not include force majeure clauses, in case of Amtek Auto Limited, the CoC had permitted DVI to include the same as by January, 2020 early signs of the emergence of Covid 19 were visible.
There is a strong argument in favour of resolution applicants being allowed to withdraw a resolution plan on account of change of circumstances brought about by factors not attributable to the resolution applicants which are different from mere commercial hardship or inconvenience. However, it might be more prudent to permit renegotiation instead of withdrawal. The risk with any such approach is that many resolution applicants could use the pandemic and economic slow-down to wriggle out of financial commitments made earlier and therefore each situation will have to be examined on its own facts with the onus being on the resolution applicant to justify its request. The opportunity cost in case of resolution plans are exceedingly high. Therefore, the resolution applicants should not be allowed to withdraw merely on the basis of a speculation and any request for withdrawal or renegotiation has to be an exception than the norm.
1. Suraksha Asset Reconstruction Ltd. & Ors v. Shailen Shah RP For Wind World (India) Ltd & Anr. IA 439 of 2020 in IA 476 of 2018 CP(IB) 14 of 2018
2. Reliance was placed on Hon'ble Supreme Court's judgment in the case of Travancore Board vs. Thanath International (2004) 13 SCC 44
3. Section 31 (2) of the IBC states: "where the Adjudicating Authority [NCLT] is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan"
4. Satyabrata Ghose v. Mugneeram Bangur 1954 AIR 44
5. Para 108 of Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta & Ors Civil Appeal No 8766-67 of 2019
6. Committee of Creditors of Metalyst Forging Ltd v. Deccan Value Investors LP & Ors. Company Appeal (AT) (Insolvency) No. 1276 of 2019
7. Judgment dated January 22, 2020 (Civil Appeal Nos. 4967-4968 of 2019)
8. It has been reported in public domain that the lenders to Amtek Auto Limited have approached the Supreme Court seeking initiation of contempt proceedings against DVI. This is because the Supreme Court, in an earlier order dated June 18, 2020 in Committee of Creditors of Amtek Auto Limited Through Corporation Bank v. Dinkar T. Venkatsubramanian & Ors. (Civil Appeal No(s). 6707/2019) while rejecting DVI's application for withdrawal of the resolution plan had warned DVI that any future attempts to withdraw its offer will be treated as contempt of court.
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