Nature of resolution plan under Insolvency & Bankruptcy Code, 2016: A Contract or An instrument with statutory force?
Introduction
Resolution plans, owing to their functional character have always been associated with their operational element, i.e. insolvency resolution of the corporate debtors. While the nature of corporate insolvency resolution necessitates the deliberation of such operational aspects, the explication of the character of insolvency resolution plans equally essential, but had been hardly touched upon in India until the decision of the apex court in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Ltd & Anr elaborated upon the concerned deliberation in sufficient detail.
It is noteworthy that whilst the resolution plans have always been discussed in the context of their traditional functional nature, there are a variety of jurisdictions that have considerably emphasized on the nature of such plans. The authors, through the present work have attempted to explicate the nature of insolvency resolution plans by juxtaposing such plans with the concept of contracts, in the light of comparison of such juxtaposition in other jurisdictions, thereby reaching a conclusion about the origin and nature of insolvency resolution plans.
Nature of insolvency resolution plans
The primary idea governing the ambiguity in the nature of insolvency resolution plans and their possible contrast with contracts is that all the rearrangements such as demergers, amalgamations and mergers, which are a part of insolvency resolution plans resemble the conceptual understanding of commercial contracts. Following such a comparison, the rearrangement plans governed by IBC can easily fall within the ambit of statutory contracts. However, there are stark contradictions to such a premise, which is the cause of such ambiguity, as is evident from contrasting SC judgements concerning the nature of rearrangement plans.
In India Thermal Power Ltd. v. State of MP, it was held that if the terms of a contract are determinable via a statute, such a contract is a statutory contract. Construing the insolvency resolution plans under the light of India Thermal Power Ltd. v. State of MP, it can be easily concluded that the statute governing demergers, amalgamations and mergers, i.e. Companies Act 2013 is enough reason for such rearrangements to be termed as statutory contracts. These rearrangements, in addition to being governed by the statute fulfill all the essentials of a contract, i.e., offer, acceptance, adequacy of consideration and certainty in the transaction, thereby fulfilling the requirements of statutory contracts.
However, there are clearly evident contradictions from the afore-explained definition, as was held in the case of SK Gupta v. KP Jain. In this case, the apex court enunciated that corporate rearrangements are not contracts as these do not only bind the signing parties, but also the dissenting shareholders and creditors against the tenets of the Indian Contract Act which binds only the signing parties. The two contrasting stances relating to the nature of insolvency resolution plans are the reasons of the existence of a need to revisit such plans jurisprudentially.
Comparative Analysis of legal positions with respect to nature of resolution plan under IBC
While assessing the true nature of resolution plan under IBC, Supreme Court analyzed the position of law regarding the nature of restructuring instruments across various jurisdictions of instruments which are analogous to the resolution plan under IBC.
Firstly, it was stated that United States courts characterizes court confirmed plans as contracts and hence gives rise to contractual remedies in the cases of breach. In the case of In Re Hoffinger Industries, Inc,[1] a bankruptcy court in Arkansas held that “a confirmed plan should be enforceable and amenable to damages between contractually bound parties.” Further in Re Shenandoah Realty Partners, L.P. v. Ascend Health Care,[2] it was held that a plan confirmed by the court binds both the parties i.e. debtor and resolution applicant and has same effect of a valid contract.
Secondly, in United Kingdom the Insolvency Act, 1986 allows the administrators, directors and liquidator of company to propose a Company Voluntary Arrangement (Analogous to Resolution Plan under Section- 10 of IBC). Company Voluntary Arrangement, in order to get binding effect, has to get approval of creditors of atleast 75% of votes. Section- 5(2)(b)[3] of the same Act provides that once CVA is approved, the company and creditors are bound by it. Further Professor Roy Goode in this treatise went on to explain that the wording of Section- 5(2)(b) has led the courts to characterize the relationship between the parties to Company Voluntary Arrangement as essentially Contractual in nature and its scope and effect if to be determined by the application of ordinary principles of contractual interpretation.[4]
In certain other judgments, the English courts have held that Company Voluntary Arrangements creates a contractual obligation[5] and is a statutory contract[6] or it has effect of contractual obligations and is subjected to the ordinary principles of contractual interpretations.[7] Contrastingly there are judgments where the English Court has held that Company Voluntary Arrangements are not contract just because certain principles of contract law apply.[8] Therefore the position of law is not settled in United Kingdom in the light of above.
Thirdly, In Australia the scheme of compromise & arrangements operate as the order of the court. While rejecting the approach of English courts of characterizing restructuring instruments as contracts, Supreme Court of New South Wales in the case of Caratti v Hillman,[9] held that such schemes derive its power from the order of court and not from antecedent resolutions of the members & creditors.
Fourthly, Similar to Australia, Singapore court of appeal has referred to such scheme of arrangement between company and creditors or members as “Contractual scheme”. The court subsequently in Daewoo Singapore Pvt. Ltd.[10] noted that in its previous decision which referred to a scheme of arrangement as a ‘contractual scheme’ does not mean that such schemes are considered as statutory contracts unlike English cases. The court finally followed Australian approach which regards such scheme as an order of court.
Position in India
The court while analyzing the nature of insolvency resolution plans referred to the observation of its own judgment in SK Gupta v. KP Jain wherein it was observed that a scheme of compromise & arrangement once sanctioned by the court does not operate merely as an agreement between the parties but has certain level of statutory force which further binds not only the company but also the other dissenting creditors & shareholders.
The above observations were made in the context of the instruments approved by adjudicating authority. In the present case, court observed that the resolution plan, between the period of adjudicating authority’s approval and COC approval, can’t be construed purely as a contract as governed by Indian Contract Act. The ability of resolution plan to bind even those who have not consented indicates that it is not a typical contract as we understood. Further there is no specific provision in the IBC which refers these resolution plans as contracts and the lack of clarity in the report of BLRC regarding the nature of resolution plan (BLRC in its report interchangeably uses the terms ‘agreement’, ‘binding contract’ & ‘financial arrangement’) constraints the courts to arrive at conclusion for referring COC approved plans as contracts and to be governed by the provisions of contract law and principles of common law.
Authors’ perspective
In the present case, the apex court has compared the insolvency resolutions plan with contracts at length, to an extent that it has discussed every essential of a contract in comparison with an insolvency resolution plan. The court has explained the equation of RFRP with invitation to offer, a resolution plan as an offer and the approval by CoC as acceptance of an offer. Further, the court has explained the reflection of the intention to create legally binding obligations in insolvency resolution plans. The court has also explained the approaches of multiple jurisdictions concerning the comparison of insolvency resolution proceedings and contracts.
In the later half of the judgement, the court has negated all the similarities and has mentioned that the international approaches to insolvency resolution plans are specific to such jurisdictions and cannot be generally transplanted in the Indian legal framework. The court would have provided the parties with a clearer comprehension of the issue by refusing to delve in the question of such comparison, as even after such in-depth analysis and detailed contrast, the court did not reach any other rational conclusion than defying the basis of such comparison.
[1] 327 B.R. 389 (Bankr. E.D. Ark. 2005), United States Bankruptcy Court, E.D. Arkansas
[2] Re Shenandoah Realty Partners, L.P. v. Ascend Health Care, Inc, 287 BR 867 (US Bankruptcy Court, WD)
[3] https://www.legislation.gov.uk/ukpga/1986/45/section/4A
[4] Roy Goode, Principles of Corporate Insolvency Law (5th edn., Sweet and Maxwell, 2018)
[5] Re TBL Realisations Plc, Oakley-Smith v Greenberg, [2004] B.C.C. 81 (Court of Appeal)
[6] Tucker v Gold Fields Mining LCC, [2010] B.C.C. 544 (Court of Appeal)
[7] Heis v Financial Services Compensation Scheme Ltd, [2018] EWCA Civ 1327 (Court of Appeal)
[8] Re Rhino Enterprises Properties Ltd. Schofield v Smith [2020] EWHC 2370 (Ch).
[9] Caratti v Hillman [1974] WAR 92 (Supreme Court of Wester Australia)
[10] Daewoo Singapore Pte Ltd v CEL Tractors Private Limited, [2001] 4 SLR 35 (Court of Appeal)
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