India: Selecting A Resolution Plan – Discretionary Or Obligatory For Committee Of Creditors?

The Insolvency and Bankruptcy Code ("the Code") envisages that upon the Corporate Insolvency Resolution Process (CIRP) being triggered a moratorium is applicable on all proceedings against the Corporate Debtor till the expiry of 180 days (extendable to 270) or earlier till a resolution plan is approved by the adjudicating authority. The Resolution Professional (RP) appointed by the Committee of Creditors (CoC), in its first meeting, is required to prepare an Information Memorandum (IM) and invite Resolution Applicants (RAs) to present a resolution plan for the revival of the Corporate Debtor. In case if a resolution plan is not received or is not approved by the CoC or the Adjudicating Authority, the resolution process fails and a liquidation order is passed under the provision of Section 33 of the Code.

Who can present a Resolution Plan

According to Section 25 (h) of the Code, the RP is required to invite prospective lenders, investors and 'any other persons' to submit Resolution Plans for the revival of the Corporate Debtor. In effect, any financial institution, private investors, competitors and even the ex management of the Corporate Debtor can obtain the IM from the RP and submit a plan. While till recently the Code was silent on placing any additional restrictions or qualifying criteria on the RAs it was observed that the RP's were inviting prospective applicant who meet a certain criteria. In the case of M/s Tirupati Infrproject Pvt Ltd¹ the RAs were required to deposit 20 cr with the RP and also in case of Jaypee Infratech² only those firms having a net-worth in excess of 1000 crore were invited to submit a plan. Though initially these additional criteria were a bonafide effort to filter out non serious applicant and miscreants it was not sure if they would be able to stand the scrutiny of law. However, with the recent amendments been made to the Code vide ordinance dated 23rd November, now the RP has been empowered by law³ to impose a qualifying criteria for the RAs.

Contents of a Resolution Plan

Section 30 of the Code lays down the mandatory requirement which a resolution plan should fulfil for it to be presented to the CoC. It includes providing insolvency resolution process costs, liquidation value to operational creditors and dissenting financial creditors, its supervision and implementation schedule, and the management and control of the corporate debtor during its term. A reading of Section 30 along with Rule 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, makes it clear that the RP has to present all the plans to the CoC which meet the criteria laid down in the aforementioned section and rules. Before the promulgation of the ordinance dated 23rd November while the RP had no discretion in rejecting any plan received, now with the amended section 25(h) any plan by a person not meeting the specified criteria is liable to be rejected by the RP and will not be presented before the CoC.

Approval Process and the Discretion of the Committee of Creditors

The CoC may approve any plan by a vote of not less than 75% of voting share of financial creditors. While the RP has to ensure that only those plans which meet the essential criteria stated above are presented before the CoC, there are no criteria or guidelines provided in the Code or the Rules on which the CoC should evaluate a plan. The Code gives complete discretion to the CoC to approve any plan before it with any modifications as it may deem fit.

Over the past few weeks there have been comments and concerns from senior bankers about the ex-management submitting resolution plans for the revival of the corporate debtor. Though the bankers were generally not in favour of putting the reins of the troubled enterprise back into the hands of management who was at the helm through its downfall, they were feeling constrained by the lack of any specific provision in the Code relating to this. In effect, while the CoC could have, in its discretion, rejected any plan if it was not convinced about it meeting the requirement, their hands were tied in a situation where the ex management proposed the best plan (at least on paper). Despite their reluctance in entertaining the plans from ex-management, in absence of any statutory backing, the CoC were constrained to treat all the plans received at par and select the one appearing to be the best lest they wanted to expose themselves to criminal prosecution for malafide action.

Amidst these talks of reluctant bankers, a circular dated 07.11.2017, was rolled out by the IBBI wherein an additional requirement was added vide amendment to Rule 38 of the above referred regulations. The amendment required the RAs to disclose among other things any criminal proceedings or disqualifications that they suffer and prescribed that the information may be used by the CoC to assess the credibility of the RA while deciding upon the plans received by them. Though it seemed that the amendment was been brought to address the concerns of the bankers, in reality it was no different from the existing discretion conferred upon the CoC as it stopped short of making the additional criteria a ground for disqualification.

However, things have changed with the promulgation of the ordinance dated 23rd November as it has practically placed statutory disqualifications on the plans received from ex-management/ promoters of the Corporate Debtor.

Without doubt the ex-management of the corporate debtor are best placed in reviving the Corporate Debtor, given their knowledge of the business, experience and most importantly the personal interest in the firm which they have built from scratch. Also, in certain instances the ill financial health of the Corporate Debtor may purely be due to extraneous circumstances and business cycles and not directly attributable to the management. While the ordinance dated 23rd November may have provided some respite to the banking community, whether these disqualifications would be these would be beneficial or detrimental to the overall business climate, or will survive at the altar of justice is yet to be seem.

Footnotes

1. As per the publication made in the newspaper, inviting resolution plans

2. As per the publication made in the newspaper, inviting resolution plans

3. Section 25(h)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.