No Resolution on Bargaining the SC

Court– Supreme Court of India

Judgment Name – 1. Ebix Corporation Singapore Pvt. Ltd. – the successful resolution applicant of Educomp Solutions Ltd, Civil Appeal No. 3224 of 2020, 2. Kundan Care- the successful resolution applicant of Astonfield (Kundan Care Appeal) in Kundan Care Products Limited vs Mr Amit Gupta and Ors, Civil Appeal No. 3560 of 2020, and 3. Seroco- the successful resolution applicant of Arya Filament in Seroco Lighting Industries Private Limited vs. Ravi Kapoor RP for Arya Filaments Private Limited & Ors., Civil Appeal No. 295 of 2021.(Collectively the C.A. No. 3224/2020 – D.No. 19687)

Judgment date – 13 September 2021

Judges-Dr Dhananjaya Y Chandrachud

Introduction: The Supreme Court (SC) issued a decision (SC) on September 13, 2021.Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd. and Others, Civil Appeal No. 3224 of 2020, granting long-awaited relief. Clarification on the status of a resolution plan under the Insolvency and Bankruptcy Code is long needed. Once the Committee of Creditors has adopted Code 2016 (Code), it becomes effective (COC)

However, the National Company Law Tribunal (Adjudicating Body) has yet to approve it.NCLT/ Authority). According to SC, once the COC adopts a plan, it becomes legally binding. Even when the resolution application is still alive, there is no way to withdraw.The proposal is awaiting NCLT clearance. While SC recognizes that there are inherent delays in the process due to a number of factors, Bottlenecks in the Corporate Insolvency Resolution Process are among the issues to consider. Unsolicited and premature late offers, as well as mutliplicity of litigation, are all examples of CIRP admission.

However, in light of the spirit of the Code, NCLTs were encouraged to accelerate plan approvals. It was decided that these circumstances could not be used as a reason for a resolution applicant to seek departure from the process  a settlement plan that has been authorized

Brief facts of the Case: The Supreme Court heard three appeals submitted by successful resolution applicants in three CIRPs:

1. Ebix Corporation Singapore Pvt. Ltd., the victorious resolution applicant of Educomp Solutions Ltd.

2. Kundan Care- the winning resolution applicant in Kundan Care Products Limited vs Mr Amit Gupta and Ors in Astonfield (Kundan Care Appeal).

3. Seroco Lighting Industries Private Limited vs. Ravi Kapoor RP for Arya Filaments Private Limited & Ors

The successful resolution applicants sought to withdraw or modify their resolution plans for a variety of reasons, including financial hardship, a material change in the corporate debtor’s position as a result of Covid-19, the impact of ongoing investigations on the resolution process, and a delay in resolution plan approval. While sifting through the Code’s timeframes and procedures, SC determined that resolution seekers could not withdraw or amend COC-approved proposals because the Code prohibits such withdrawals.

Principle Issue:

1. Is a settlement plan considered a contract?

2. Can a resolution applicant, awaiting NCLT approval, withdraw or amend a resolution plan due to a change in circumstances?

3. Can resolution plans include provisions allowing for walk-away rights in the event of a significant adverse impact or failure to meet a condition precedent?

4. Can NCLTs/NCLATs force a successful resolution applicant to re-negotiate with COC?

Judgment: Neither simpliciter nor statutory contracts are resolution plans. Commercial discussions, which are fully regulated by the Code, are used to finalize resolution plans. When the COC approves a resolution plan, it binds both the COC and the resolution applicant. When the COC adopts a resolution plan, which is different from a bi-lateral contract, the destiny of all stakeholders is determined.

The Code’s framework prohibits the withdrawal or alteration of resolution plans after they have been presented to the NCLT by the resolution professional and approved by the CoC. As it is, the framework only allows insolvency proceedings to be withdrawn by following the procedures outlined in Section 12A of the Code and Regulation 30A of the CIRP Regulations, as well as under the circumstances identified therein. The resolution applicants are presumed to have evaluated the commercial activities and submitted an informed plan after the information memoramdum is made accessible to them.

While a resolution applicant cannot unilaterally withdraw or alter a resolution plan, the SC allowed discussions between the COC and the resolution applicant to revise the resolution plan in the Kundan Care Appeal as a one-off case, using powers under Article 142. It’s worth noting that this was only achievable because the COC chose to renegotiate. Walk-away rights under resolution plan provisions are not recognized by the Code. Plans with provisions for withdrawal or renegotiation (such as material adverse event (MAE) clauses, frustration, impossibility, and delay clauses) may be considered unfeasible or unviable. NCLT has no authority to force COC to continue negotiations with a successful settlement applicant. The NCLT’s remaining powers under the Code cannot be used to establish procedural remedies that have substantive consequences for the insolvency process.

Author’s Opinion: Until date, there has been a clear description of the procedure prior to COC approval of a resolution plan, as well as the binding character of a resolution plan after NCLT approval, but there has been some uncertainty about withdrawal of resolution plans awaiting NCLT approval. The Supreme Court’s decision clarifies the procedure during the interim time while a proposal is awaiting NCLT approval.

The interests of creditors and stakeholders have exceeded the harm likely to be caused to a successful resolution applicant whose plan has been awaiting approval before NCLT for a long time due to no fault of such bona fide resolution applicants. While contingency provisions and walk-away rights are common in traditional purchase agreements, they are not recognized as part of resolution plans. Since a result, resolution applicants should exercise caution when negotiating commercial conditions with the COC, as the option to withdraw from an authorized plan is no longer accessible. In addition, only resolution applicants with a high risk appetite may be ready to engage, resulting in lower insolvency participation.

The Supreme Court has left the door open for the legislature to establish a system that allows for the withdrawal of resolution proposals for good cause. Before a resolution plan is authorized by NCLT, regulators or authorities may submit comments in order to speed up the approval of resolution plans that are subject to regulatory approval. An modification to this effect may be a good way to reduce the uncertainty for a successful resolution applicant once the resolution plan is approved.

References:

1. https://ibclaw.in/seroco-lighting-industries-pvt-ltd-vs-ravi-kapoor-rp-for-arya-filaments-pvt-ltd-ors-nclat-new-delhi/
2. https://www.legalserviceindia.com/legal/article-2160-nature-of-a-deed-lease-or-licence-with-reference-to-the-test-laid-under-associated-hotels-of-india-ltd-
3. https://www.scconline.com/blog/post/2021/01/21/kundan-care-should-struggling-businesses-be-handed-over-to-unwilling-resolution-applicants/
4. https://main.sci.gov.in/supremecourt/2020/19687/19687_2020_33_1501_29954_Judgement_13-Sep-2021.pdf

Written By: Athul Vergis Cherian

College Name: Christ University, Bangalore (3rd Semester)