NCLAT's Ruling in Kundan Care Case: Resolution Applicant in a Quandary

*Paridhi Jain

The Insolvency and Bankruptcy Code, 2016 (“Code”) provides an opportunity to rescue insolvent, but viable companies through the corporate insolvency resolution process (CIRP). In this process, control of the company shifts from shareholders and promoters to the creditors, who are empowered to resolve insolvency by selecting the most viable and feasible resolution plan. The Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh held that a resolution plan once approved by the Adjudicating Authority (“AA”) under Section 31 of the Code, cannot be withdrawn by the resolution applicant. However, the question as to whether a resolution plan approved by Committee of Creditors (“CoC”), but awaiting the approval of the AA, can be withdrawn or not, still remains to be decided by the apex court. In this article, the author attempts to analyze National Company Law Appellate Tribunal’s (“NCLAT”) most recent decision in Kundan Care Products Ltd v. Mr Amit Gupta and Ors., dealing with the said issue.

Resolution Plans becoming unviable

Resolution plans are submitted by resolution applicants and then scrutinized by the resolution professional, who has to ensure that they comply with the requirements laid under Section 30(2) of the Code and Regulation 38 of the CIRP Regulations, 2016. Only those plans which fulfil the statutory requirements are placed before the CoC. The resolution plan, which gets approved by the CoC by a vote of not less than 66%, is selected, but can be implemented only after it gets approved by the AA, which is the NCLT, under Section 31 of the Code. This whole process is time-bound, and has to be completed within 180 days, extendable to a maximum of 330 days.

Unfortunately, in reality, the process is often extended well beyond the statutory time limit owing to numerous reasons, inter alia, delay in getting approval from the AA, lack of adequate information utilities, differences among lenders, etc. This seriously affects the viability and feasibility of the plan as the value of assets of the corporate debtor reduces exponentially with time. The depreciation in asset value in turn adversely affects the ability of resolution applicant to implement the plan. Besides, the outbreak of Covid-19 has further added to the woes of resolution applicants as the resolution plans framed pre-Covid did not account for the current economic realities. As a result, NCLTs have been receiving a rising number of applications from resolution applicants to re-negotiate or withdraw the resolution plans.

Conflicting Judgments

The conflicting positions taken by the tribunals in multiple cases were considered by a three-member bench of the NCLAT in Kundan Care Products Ltd v.Mr Amit Gupta and Ors. In this case, the resolution applicant, Kundan Care, approached the tribunal seeking to withdraw its resolution plan approved by the CoC but awaiting approval of AA. It did so on the ground that the resolution plan became commercially unviable and unfit for implementation on account of delay in the conclusion of CIRP. Their plea was denied by the Tribunal, and further came to be rejected by the NCLAT. The NCLAT emphasized on “maintaining the sanctity of the resolution process”and held that a “Resolution Applicant whose Resolution Plan has been approved by Committee of Creditors cannot be permitted to withdraw its Resolution Plan”. Similarly, the NCLAT had earlier observed in Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pvt. Ltd, that once the resolution plan is approved by the CoC, the applicant cannot take a “topsy turvy” stance, and hence, cannot withdraw the approved resolution plan.

However, the approach of the NCLAT was different in Committee of Creditors of Metalyst Forging Ltd v. Deccan Value Investors LP, where another full bench held that the “Insolvency and Bankruptcy Code does not confer any power and jurisdiction on the Adjudicating Authority to compel specific performance of a plan by an unwilling resolution applicant.” Thus, it allowed the resolution applicant to withdraw its plan which was approved by the CoC but was awaiting approval from the AA. Likewise, the NCLAT permitted withdrawal after the CoC approval in Tarini Steel Company Pvt. Ltd. v.Trinity Auto Components Ltd and Deccan Value Investors L.P. v. DinkarVenkatasubramanian, on grounds of changed circumstances, post-Covid.

Analysis

The main reasoning of the NCLAT in Kundan Care for disallowing withdrawal of the resolution plan was “lack of jurisdiction” to grant such permission. It stated that as per the Supreme Court ruling in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, once a plan has been accepted by the CoC, it becomes binding and the AA does not have jurisdiction to interfere and question the “commercial wisdom” of the CoC. However, while referring to the Essar Steel judgment, it did not consider that in the very same case, the Court also provided grounds for reviewing the decision of the CoC, which are:

• that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process;

• that it needs to maximize the value of its assets; and

• that the interests of all stakeholders including operational creditors has been taken care of.

Thus, the decision of the CoC to select a resolution plan is not completely immune from adjudication by the tribunal. If any of the above conditions is not met, then the AA can refuse to grant approval to the resolution plan even though it is selected by the CoC as per Section 30(4). In Kundan Care, the NCLAT failed to review the facts on the above grounds. Moreover, the tribunal also has the power under Section 60(5)(c) to “answer any question of law or fact arising out of or in relation to the insolvency or liquidation proceedings of the corporate debtor”. This decision of the tribunal can then be challenged in the NCLAT under Section 61(3) and be further appealed to the Supreme Court under Section 62. Hence, the reasoning of the tribunal that it lacked the jurisdiction to look into the decision of the CoC and grant such permission is egregious.

The bench in Kundan Care stated that it cannot place reliance on the decision in Metalyst because “in that case, the Resolution Plan approved by the Committee of Creditors was found to be violative of Section 30(2)(e) of the I&B Code.” It held that since in the present case there is no violation under Section 30(2) therefore it ought not to follow Metalyst as a precedent. However, in holding this the NCLAT overlooked substantial provisions of the Code. The Code mandates the Tribunal to oversee the insolvency resolution process and ensure that the resolution plan can be implemented successfully. Section 30(2)(d) mandates the AA to ensure that there are effective means for the implementation and enforcement of the resolution plan. Similarly, the proviso to Section 31 of the Code requires that before granting approval, the AA has to ensure that the plan is capable of being effectively implemented. In this case, due to the lapse of substantial time, the market conditions for the effective and viable implementation of the plan were no more present. The plan had become unviable and unfit for implementation based on the actual technical capacity of the corporate debtor. In such a scenario, by compelling the resolution applicant to implement the plan, the tribunal failed in performing its primary duty of ensuring that the resolution plan can be implemented effectively.

It is also important to note that the Code lays considerable emphasis on the resolution plan being feasible and viable. Section 30(4) of the Code mandates the CoC to consider the feasibility and viability of the plan before selection. Likewise, as per CIRP Regulation 38(3), the resolution plan must demonstrate that it is feasible and viable. Thus, forcing an unwilling resolution applicant to execute a prima facie unviable plan goes against the very letter and spirit of the Code.

Conclusion

The decision in Kundan Care lays down that resolution applicant cannot withdraw the resolution plan once it is approved by the CoC no matter the extent of unviability or impossibility. It does not provide for any exception to this general rule. This sets a precarious precedent as even in cases where the very commercial basis of the plan is frustrated, the resolution applicant will have no recourse. Say, for example, the sole asset of the debtor is destroyed or the value has diminished drastically due to any supervening circumstances which were unforeseeable and beyond the parties’ control, the applicant will have no option but to execute the plan at his own loss or face penal consequences for non-implementation.

It is not the case that the resolution applicant should be allowed to withdraw the plan as per his whims and fancies. However, in situations where it is not his fault and there is a genuine reason for him to withdraw the plan, it must be considered by the tribunal. There is no provision in the Code which compels specific performance by the resolution applicant or which bars him to withdraw the plan before it is approved by the AA. The code instead strives to strike a balance between the interests of all stakeholders of the insolvency resolution process. Thus, the AA should either allow re-negotiation of the terms of the plan so as to accommodate the changes that take place and if that fails then they should be allowed to withdraw the plan. If none of this is permitted and resolution applicant is forced to bear the entire burden, it will not only discourage prospective resolution applicants to come forth but will also inevitably lead the corporate debtor into liquidation frustrating the very purpose of the Code.

*The author is a fourth-year student at Symbiosis Law School, Noida.