INTRODUCTION
Insolvency and Bankruptcy Code, 2016 is a systematic approach towards resolving legal disputes concerning financial crisis and insolvency. The provisions offer a smooth process and structure to be followed in case of insolvency of individuals as well as companies.
‘Resolution plan’ has been defined under section 5(26), IBC. It is a proposal submitted by the resolution applicant for the insolvency resolution as a result of the debtor’s inability to fulfil their debt liability. The code is a reflection of the principles of time conservation and efficiency, ensuring futile plans are not pursued by the CoC and the adjudicating authority. Section 30(2)(e) is one such provision of this code which aims to provide guarantee that the resolution plan(s) which the Committee of Creditors and the Adjudicating Authority assess and approves are in accordance with the requirements of the relevant provisions and hence are lawfully likely to be implemented.
Furthermore, upon the satisfaction of the adjudicatory authority, Section 31(1) of the Code provides for the binding effect of the resolution plan, when the Adjudicating Authority is convinced that the resolution plan agreed by the CoC under clause (4) of Section 30 fulfils the conditions as referred to in sub-section (2) of Section 30. Due to a recent amendment the binding effect under section 31 will also include central and state government.
Decisions of the court are also in furtherance of the objectives of the code- revival, recovery and reorganization along with the resolution of the issue in an expedient manner. The apex court, in the case of Maharashtra Seamless Limited v. Padmanabhan Venkatesh(2020) held that the resolution plan, if approved by the Adjudicating Authority, shall not be subject to withdrawal by the Resolution Applicant.
ISSUE
As discussed in the abovementioned case, Resolution Plans are not subject to withdrawal by the Resolution Applicant after the approval of the Adjudicating Authority. However, a legal lacuna regarding the validity of plan withdrawals filed between the time period of referral by the CoC and the approval sanctioned by the adjudicatory authority still subsists.
This issue has been extensively discussed in the recent case of Hem Singh Bharana Vs. M/s Pawan Doot Estate Pvt. Ltd., NCLAT New Delhi.
SUMMARY OF THE CASE
In the case of Hem Singh Bharana Vs. M/s Pawan Doot Estate Pvt. Ltd., a settlement proposal under section 12A had been presented by the ex-promoters before the approval of Adjudicating Authority w.r.t the resolution plan in question. Regarding the settlement proposal, 100% approval was received in joint lenders meeting of CoC but for the reason that the executive director of one of the member of CoC was not appointed, only 86% vote had been received via a sanction letter. It was also submitted that the settlement proposal offers a better financial proposal than the proposed resolution plan.
Further, an email was sent by the Largest Financial Creditor to the RP of the Corporate Debtor stating that the lenders of the Corporate Debtor and its fellow subsidiary are in the advanced stage of entering into settlement terms with the Promoter of the Corporate Debtor and that the FORM FA with the resolution professional, which is an essential requirement as laid down under Regulation 30A, will be shared shortly. However, the Hon’ble Adjudicating Authority dismissed the application on the ground that no stay order has been granted by any superior court and therefore it cannot keep in abeyance any hearing. The Adjudicating Authority took this decision keeping in consideration the fact that all the members of CoC are of a view that 12A proposal provides a better solution for resolution of the corporate debtor.
LEGAL ANALYSIS
Law as it stands now
There are two ways by which a resolution plan can be withdrawn before the approval of Adjudicating Authority. Firstly, as per the provisions of Section 33(2), the CoC has the power and discretion to even approve the liquidation of the Corporate Debtor and direct the Resolution Professional to file for liquidation even if an application for approval of the plan has already been filed by the Resolution Professional. Provided that such decision of liquidation should be approved by not less than 66% of the voting share of the CoC. Secondly, via a proposal made Section 12A of the Code allows for the withdrawal of an application made in accordance with Sections 7, 8, or 9 upon the applicant’s request and with the approval of the committee of creditors, which must have 90% of the voting power, in the manner specified in Regulation 30A of the CIRP Regulations, 2016.
Discretionary power of the AA
Analysing the decision of the Adjudicating Authority, it is to be noted that the provisions of Section 60(5) of the code states that the Adjudicating Authority has the power to grant such relief as prayed by the appellant in afore-mentioned case and no stay order was required from any superior court for the exercise of such power and grant of such relief.
Further, the Adjudicating Authority has the power to direct the CoC members to consider the 12A settlement proposal in light of the judgment passed by this Hon’ble Appellate Tribunal in “Shri Purushothaman v/s. Union of India and Ors.”, as it was decided that the Committee of Creditors may assess whether the settlement plan made under Section 12A is preferable to the “Resolution Plan” as approved by it and could deliver a proper order.
Point of contention
With this decision there arises a question w.r.t. “Commercial Wisdom of the CoC”. The decisions taken by the CoC while exercising their commercial wisdom must prevail in analysing the resolution plan, as has been highlighted in several landmark judgments regarding the relevance of the commercial wisdom of CoC. It has been held by the Hon’ble Supreme Court in the case of K. Sashidhar vs. Indian Overseas Bank and Others, that it is a presumption that financial creditors are aware on the solvency of the corporate debtor and the soundness of the resolution plan and/or settlement proposal. In order to guarantee that the mentioned procedures are completed within the time frames provided by the code, the commercial wisdom of the CoC has been granted the supreme position without the need for judicial intervention.
In an another case, Vallal RCK v M/s Siva Industries & Anr., once again the Supreme Court held that the approval of the settlement proposal by the CoC is subject to commercial wisdom, which is of chief importance without any judicial intervention. The interference would be warranted only if the Adjudicating Authority finds the decision of CoC to be wholly capricious, arbitrary and in contravention to the provisions of the code or the rules.
CONCLUDING REMARKS
The purpose of the Insolvency and Bankruptcy Code, 2016 is to provide a consolidated and thorough system to address the issues which arise out of insolvency. As observed from the sections discussed above, resolution proposals are an integral part of such redressal. However, to maintain efficiency, carry out the purpose of the act and preserve the time of the parties and the courts, the resolution proposal which is finalized must be appropriate.
Withdrawal mechanisms within the code have been put in place to ensure that the resolution plans so proposed are acceptable, legal and provide the best plan of action. Particularly, the intent behind including Section 12A is to lay down a provision to allow withdrawal of the resolution plan post-admission applications, as when an insolvency application is accepted, it ceases to be a conflict involving only two parties instead turns into a case that includes all of the corporate debtor’s creditors.
Considering the legal principles laid down by the cases discussed above, the legal position regarding withdrawal of proposals has evolved greatly. Settlement agreements have gained greater significance regarding disputes arising out of insolvency and the weightage given to the opinion of the CoC. Commercial wisdom of the CoC has been heavily discussed in contemporary scholarly discourse. Furthermore, it has been stressed by legal scholars and analysts that application of sections for withdrawal shall be used with caution and discretion to maintain the purpose and integrity of the code.
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Author: Tushar Gadia & Ishita Singh
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