A step back: reconsideration of the resolution plan by the CoC

Insolvency and Bankruptcy Code, 2016 (“Code”) was enacted inter-alia with an aim to resolve and reorganise the corporate debtor’s insolvency in a timely manner for maximisation of value of its assets. To accomplish the objectives laid down under the Code, a comprehensive step-by-step process is provided right from the moment of default till its realisation.

One of the most crucial stages in the entire corporate insolvency resolution process (“CIRP”) is the approval of the resolution plan by the Committee of Creditors ("CoC”) as the same is a deciding factor of how the insolvency of the corporate debtor would be resolved. While considering a resolution plan, the CoC considers several factors and after exercising its commercial wisdom, approves or rejects a resolution plan. Only after the assent of the CoC by voting of not less than sixty-six percent of voting shares, the resolution plan is approved in terms of Section 30(4) of the Code. The Hon’ble Supreme Court in Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd (1) held that once a resolution plan is approved by the CoC, it is inter-se binding between the CoC and the Successful Resolution Applicant. (“SRA”)

Pursuant to the approval of the CoC, an application under Section 31 of the Code is required to be made to the Adjudicating Authority (“AA”) viz., the National Company Law Tribunal. (“NCLT”). The NCLT upon being satisfied that the approved plan aligns with the objectives and criteria laid down under Section 30(2) of the Code, will approve the resolution plan, which would then become binding upon the corporate debtor and its employees, creditors, guarantors, and other stakeholders involved in the resolution plan. However, if the same is not in terms of Section 30(2) of the Code, the NCLT has the power to reject the resolution plan. It is only after the approval of the resolution plan by the NCLT, that it attains finality.

Even though CoC approves a resolution plan after its consideration in light of various factors and pursuant to exercising its commercial wisdom, there have been instances when the CoC approved resolution plan was remanded back for reconsideration. A question arose upon the scope of NCLT’s powers to remand back the plan to the CoC when the Code explicitly provided for approval and rejection of the resolution plan under Section 31. The Hon’ble Supreme Court in Essar Steel India Ltd. vs. Satish Kumar Gupta and Ors (2) had the opportunity to settle the conundrum of the scope of NCLT’s power in respect of judicial review. The Apex Court held that though the NCLT cannot interfere with the commercial decision taken by the CoC on merits, it has the power of limited judicial review to send back the resolution plan for reconsideration of the CoC if the same was not in terms of the parameters laid down under Section 30(2) of the Code. The same was reiterated and reaffirmed in Jaypee Kesington Boulevard Apartments Welfare Association & Ors v. NBCC (India) Limited & Ors. (3) Further in Bank of Maharashtra v. Videocon Industries Ltd (4), it was affirmed that if CoC has the power to approve a resolution plan, it also has the power to reconsider and review its own decisions on resolution plans as the commercial wisdom of the CoC is non-justifiable.

Recently the NCLT and NCLAT relied upon the settled position laid down by the Hon’ble Supreme Court concerning reconsideration of CoC approved resolution plans while deciding the batch of matters discussed hereunder:

In the matter of Asset Reconstruction Company (India) Ltd v. Nivaya Resources Private Limited & Anr (5), the NCLT Ahmedabad Bench was deciding an application filed by the authorised representative of the CoC, of GPT Steel Industries Ltd (Corporate Debtor) requesting the remand of the approved resolution plan of the SRA and reconsideration of all the resolution plans submitted during the CIRP. The remand was sought on the ground that the resolution applicant had misrepresented facts and provided false undertakings in its resolution plan. After consideration of the facts and circumstances, the NCLT relied upon the decision in Videocon (supra) and Essar (supra) and remanded the matter back to the CoC given the changed circumstances and commercial wisdom of the CoC.

In Piya Puri and Ors v. Debhashish Nanda, RP of Venta Realtech Private Limited and Ors (6), the minority financial creditors of the Corporate Debtor had filed an appeal against the decision of the NCLT, New Delhi Bench under Section 31 of the Code. The appeal challenged the material irregularities committed by the Resolution Professional of the Corporate debtor and authorised representative of the financial creditors and prayed that the NCLT approved resolution plan be set aside, and a revised plan be placed before the CoC after following the due process of law. The NCLAT after considering the facts and submissions put forth by the parties dismissed the appeal on the ground that hyper technicalities cannot be allowed to frustrate the proceedings under the IBC as the same would defeat the very object and purpose of the Code.

In Noble Marine Metals Co. WLL v. Kotak Mahindra Bank Limited & Ors (7), the Hon’ble NCLAT Delhi upheld the decision of the NCLT, Delhi Bench and remitted the resolution plan to the CoC for reconsideration in accordance with law. The question before the NCLAT was whether the NCLT was correct in remitting back the CoC approved resolution plan as it provided a mandatory release of the personal guarantee of the promoters in violation of Section 128 of the Indian Contract Act, 1872. The NCLAT upheld the decision of the NCLT considering the law laid down in Essar (supra) and Jaypee (supra) and the basis that only a clause in contravention of the law was sought to be reconsidered by the CoC and not the entire resolution plan.

In Express Resorts and Hotels Limited v. Amit Jain, RP, Neesa Leisure Limited and Ors (8), the NCLAT, Delhi Bench was deciding an appeal against the decision of the NCLT, Ahmedabad Bench which had remitted the approved resolution plan to the CoC for reconsideration owing to receipt of better offers post covid-19. The NCLAT set aside the decision of NCLT since the CIRP period of the corporate debtor and extension period had come to an end. It was opined that the CoC had approved the resolution plan and it was not a case of manifest error or breach of Section 30(2) which could be allowed to be reconsidered. Only because certain other lucrative offers are received by the CoC after the approval of the resolution plan, CoC cannot be permitted to change its heart and reconsider the same. If the same is allowed, the object of the Code and the timelines prescribed would become redundant.

In BSE Limited v. Mr. Maligi Madhusudhana Reddy, Resolution Professional of Cura Technologies Limited (9), the NCLT Hyderabad Bench was deciding an application filed by BSE for condonation of delay in filing its claim with the Resolution Professional of the Corporate Debtor and consequent inclusion in the list of the operational creditors. The said application was filed by BSE pursuant to approval of resolution plan by the CoC and pending NCLT approval. After hearing the parties, the NCLT Hyderabad Bench condoned the delay and directed the Resolution Professional to admit or reject the claim at his discretion.

Conclusion:

What emerges from the above discussions and the judicial precedents is that a CoC approved resolution plan is binding inter-se on the CoC and the SRA. However, if the same is found to be in breach of Section 30(2) of the Code, the NCLT and NCLAT have been vested with powers to either reject or remand the same for reconsideration of the CoC. A question as to whether the rejection or remand which results in the CIRP taking a step back, is justified or not would depend upon the facts and circumstances of each case. The interesting approach taken by the Hon’ble NCLT Hyderabad in BSE (supra), has widened the scope of reconsideration of resolution plan by the CoC. The NCLT Hyderabad Bench has taken a different view by vesting discretionary powers in the Resolution Professional to take a call on the admission or rejection of claim. It is not out of place to mention that the decision of the Resolution Professional in such cases will require discussions with the CoC which will result in reconsideration of the resolution plan by the CoC. If the CoC approves the inclusion of any operational creditors in the list of operational creditors, a revised resolution plan will be filed with the NCLT for its approval.

Further, at the time of deciding the issue of remand, it is significant to remember that the CIRP is a time-bound process and mere irregularities, or receipt of better offers cannot be a ground to interfere with the ongoing CIRP as the same may result in a breach of the timelines prescribed under the Code. While in Asset Reconstruction Company (India) Ltd (supra), the NCLT considered the fact that there were misrepresentations by the SRA and the public interest was at stake and remanded the matter back to the CoC, it would be interesting to see how the same would be dealt with if the misrepresentations came to light at a later stage when the CIRP or the extension granted for completion of CIRP was expiring. Further, it is worth note-making that there is always a possibility that a SRA could make misrepresentations and therefore, it is of utmost necessity to carry out due diligence while considering the resolution plans submitted by the resolution applicants. In case of any fraudulent conduct by the SRA, the NCLT and the NCLAT must deter such conduct by imposing penalties under Section 235A of the Code.   

(1) 2022 2 SCC 401
(2) (2020) 8 SCC 531
(3) 2021 SCC OnLine SC 253
4) CA (AT) (Ins) No. 503 of 2021
(5) IA No./239/AHM/NCLT/2022 in CP (IB) No./ 157/AHM/NCLT/2018
(6) CA (AT)(Insolvency) No. 906 of 2022
(7) CA (AT) (Insolvency) No. 653 of 2022
(8) CA (AT) (Insolvency) No. 1158 of 2022
(9) I.A. No.1044/2022 CP(IB) No. 224/9/HDB/2021