Single Modification To A Resolution Plan – Whether Practicable?

1. In this article the authors have analysed the practicability of an amendment¹ which has been made to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations"), which introduced Regulation 39(1A)(a)² ("Regulation"), which prescribes that a resolution professional ("RP") can permit only one modification to a resolution plan, provided that the request for resolution plan ("RFRP") allows for such modification. The question is whether limiting the number of modifications to just one will be sufficient for getting an optimum value for a corporate debtor ("CD") and whether the committee of creditors ("CoC") can require more than one modification to a resolution plan.
   
   
2. Prior to introduction of the Regulation, there was no specific legislation on the number of modifications which could be made to a resolution plan. A cap has been introduced with a view to avoid delays in the corporate insolvency resolution process ("CIRP") and for ensuring adherence to timelines for CIRP prescribed under Insolvency and Bankruptcy Code, 2016 ("Code").³

1. Value maximization; role of CoC and negotiations with prospective resolution applicants ("PRA")
   
   
   1. The Preamble to the Code lists down time bound resolution of a CD for maximization of value of its assets as one of its objectives. In the matter of Ebix Singapore Private Limited & Ors. v. Committee of Creditors of Educomp Solutions Limited & Ors.⁴ ("Ebix Singapore"), the Hon'ble Supreme Court while observing that CIRP is essentially a creditor-driven process stated that "the aim of the process, in preferential order, is to: first, enable resolution of the debt by maintaining the corporate debtor as a going concern, in order to preserve the business and employment of the personnel; second, maximize the value of the assets of the corporate debtor and enable a higher pay-back to its creditors than under liquidation; and third, enable a smoother and faster transition to liquidation in the event that a time bound CIRP fails, in a bid to avert further deterioration of value". In the matter of Bank of Maharashtra and Ors. v. Videocon Industries Ltd. and Ors.⁵, the National Company Law Appellate Tribunal ("NCLAT") has held that the CoC is the custodian of public trust and has to determine feasibility, viability and commercial aspects of a resolution plan and ensure that all the stakeholders are treated fairly in the process. In the matter of Committee of Creditors of Essar Steel India Limited Satish Kumar Gupta and Ors.⁶, the Hon'ble Supreme Court while giving paramount importance to the commercial wisdom of the CoC has opined that there is only a limited judicial review available for re-opening issues decided by the CoC.⁷ In view of the responsibility entrusted upon the CoC it is imperative that the CoC be permitted to negotiate a resolution plan in such a manner so as to get better commercial terms towards value maximisation.
      
      
   2. The Hon'ble Supreme Court⁸ has time and again recognised the right of the CoC to negotiate resolution plans with PRAs to arrive at a mutually agreeable plan. As a corollary to any negotiation, it is important that the parties should have the flexibility to make as many modifications to a plan as may be required in order to achieve the desired result of negotiation. This obviously has to be seen together with the objective of the Code to ensure that the resolution process is completed within a time bound manner.⁹ Thus, it is important to have a balanced approach.
      
      
   3. There may be a whole gamut of factors which may come into play at the time of negotiation of a resolution plan, for example, the extent of operations of CD, its key assets and liabilities, the number of stakeholders involved, especially if the CoC has a large number of creditors, the stature of the PRA and its risk appetite, resolution amount being offered, etc. Where there are many PRAs then in order to arrive at a satisfactory resolution plan which can be put to vote by the CoC it would be inevitable for it to negotiate simultaneously with all and incorporate such modifications from time to time as would be required. There could also be a situation where the CD is generating cashflows on a going concern basis, but the resolution plan submitted is below liquidation value of the CD. In such a case, CoC may be required to negotiate with PRAs to come up with an optimum plan, otherwise the CD may be forced into liquidation. A 'one size fits all' approach hence may not work in all situations of CIRP.
   
   
   
2. Restarting the whole process
   
   Where due to restriction under the Regulation the CoC is not permitted to modify a plan, then the other option available for the CoC is to re-start the CIRP under Regulation 36B(7)¹⁰ of the CIRP Regulations by re-issuing the RFRP and re-running the whole process. Needless to specify that this approach not only will result in losing out on the entire time spent so far but will also put the CD at a risk of being liquidated, which could not be the intention of the legislature.
   
   
3. Directory v. mandatory
   
   There are instances wherein the courts and tribunals have held that certain provisions of the Code are directory in nature and not mandatory on grounds such as the provision is procedural in nature¹¹ or compliance with such provision would cause injustice to the CD and hence would not be in line with the object of the Code.¹² Accordingly, it can be argued that as the requirement of the Regulation is procedural in nature, treating it as mandatory in all circumstances may be fraught with serious consequences to all stakeholders involved.

In light of the Regulation being a recent provision and there being no specific case law on this point, it is the view of the authors that where the CoC in their commercial wisdom require more than one round of modification for value maximisation of the CD, especially where CIRP can be completed in a time bound manner, the Regulation should be treated as a directory provision. If the same is not permitted, then such an interpretation would be contrary to the spirit of the Code.

Footnotes

1. Regulation 39(1A)(a) of the CIRP Regulations has been introduced vide Notification No. IBBI/2021-22/GN/REG078, dated September 30, 2021.

2. Regulation 39(1A)(a) of the CIRP Regulations states: "(1A) The resolution professional may, if envisaged in the request for resolution plan - (a) allow modification of the resolution plan received under sub-regulation (1), but not more than once; or"

3. Discussion Paper dated August 27, 2021, Insolvency and Bankruptcy Board of India, available at: https://ibbi.gov.in/uploads/public_comments/Discussionpaper-CIRP-27Aug2021.pdf; Report of the Insolvency Law Committee dated May 2022, Ministry of Corporate Affairs, Government of India, available at: https://www.ibbi.gov.in/uploads/whatsnew/7c9bde175431a4abb8c33bb105e1f2dd.pdf

4. 2021 (4) RCR (Civil) 282.

5. Company Appeal (AT) (Ins.) Nos. 503, 505, 529, 545 and 650 of 2021.

6. (2020) 8 SCC 531.

7. Judicial review is available under Section 31(1) read with Section 30(2) of the Code, insofar as the adjudicating authority is concerned, and under Section 32 read with Section 61(3) of the Code, insofar as the appellate tribunal is concerned.

8. Ebix Singapore Private Limited & Ors. v. Committee of Creditors of Educomp Solutions Limited & Ors., 2021 (4) RCR (Civil) 282; Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors., (2020) 8 SCC 531; K. Sashidhar v. Indian Overseas Bank and Ors, AIR 2019 SC 1329.

9. As per the Ebix Singapore judgement, CIRP has to be completed within the outer limit of 330 days or any extension granted by the adjudicating authority.

10. Regulation 36B(7) of the CIRP Regulations states: "The resolution professional may, with the approval of the committee, re-issue request for resolution plans, if the resolution plans received in response to an earlier request are not satisfactory, subject to the condition that the request is made to all prospective resolution applicants in the final list: ..."

11. In the matter of Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Ltd. and Ors. (AIR 2018 SC 186), the Hon'ble Supreme Court held that the proviso to Section 7(5), Section 9(5) and Section 10(4) of the Code, which pertains to removing defects in the application within a period of 7 days, is procedural in nature and accordingly is a directory provision. The Hon'ble Supreme Court further observed that the NCLAT was correct in holding that the period of 14 days prescribed for the adjudicating authority for ascertaining the existence of default and admitting or rejecting the application under Section 7(4), Section 9(5) or Section 10(4) of the Code is procedural in nature, a tool of aid in expeditious dispensation of justice and is directory.

12. In the matter of Aditya Kumar Tibrewal v. Om Prakash Pandey and Ors. (Company Appeal (AT) Insolvency No. 583 of 2021), the NCLAT held that the time period prescribed under Regulation 35A of the CIRP Regulations (which casts a duty on the RP to take certain measures within a prescribed timeline with respect to preferential, undervalued, extortionate and fraudulent transactions) is directory. The NCLAT observed that where the actions taken by the RP after the prescribed timeline are to be annulled, it will cause injustice to the CD and would be against the value maximization objective of the Code. Further, in Arcelormittal India Pvt. Ltd. v. Abhijit Guhathakurta ((2020) 158 SCL 406), the NCLAT held that the requirement under the proviso to Section 31(4) of the Code, which relates to requiring the PRA to obtain approval from the Competition Commission of India under the Competition Act, 2002 prior to the approval of plan by the CoC, is directory on grounds that treating such requirement as mandatory would be fraught with serious consequences. This has also been relied upon and upheld in the matter of Makalu Trading Ltd. and Ors. v. Rajiv Chakraborty and Ors. (Company Appeal (AT) (Insolvency) No. 533 of 2020) and Vishal Vijay Kalantri v. Shailen Shah and Ors. (Company Appeal (AT) (Insolvency) No. 466 of 2020).

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.