In the complex landscape of insolvency and bankruptcy proceedings, the resolution plan is a crucial document that outlines the strategy for resolving a debtor's financial distress. The resolution plan must meet various regulatory requirements to ensure fairness and feasibility. However, questions often arise regarding the permissibility of revising these plans, particularly when it involves both modifications to the plan and an increase in the financial proposal. The same is governed by Regulation 39 (1A) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).
Regulation 39 (1A) states that- "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 (b) use a challenge mechanism to enable resolution applicants to improve their plans"
Although the Resolution Plans are not traditional contracts, as their formulation and acceptance by the Committee of Creditors (CoC) are governed by insolvency regulations however, principles of contractual construction and interpretation can still be useful as interpretive aids if there is any ambiguity regarding the terms of a Resolution Plan. It is clear that the terms of a Resolution Plan represent a commercial agreement negotiated between the resolution applicant and the CoC, aiming to establish a binding legal relationship. Nevertheless, a question arises: is more than one revision to a Resolution Plan, including both modifications and an enhanced financial proposal, permissible under Regulation 39(1A), which was inserted by way of a notification IBBI/2021-22/GN/REG078 by the Insolvency and Bankruptcy Board of India in the CIRP Regulation.
By examining the regulatory framework and judicial interpretations, the authors have made an effort to provide a comprehensive understanding of the nuances of such revisions and its potential impact on the resolution process.
In the matter of Vallal RCK vs. M/s. Siva Industries and Holdings Limited and Others1, Hon'ble Supreme Court of India (SC) decided the question whether the NCLT (Adjudicating Authority) (NCLT) or NCLAT (Appellate Authority) can sit in an appeal over the commercial wisdom of the CoC? SC held that "This Court has consistently held that the commercial wisdom of the CoC has been given paramount status without any judicial intervention for ensuring the completion of the stated processes within the timelines prescribed by the IBC. It has been held that there is an intrinsic assumption that Financial Creditors are fully informed about the viability of the Corporate Debtor and the feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed Resolution Plan and assessment made by their team of experts."
It has been consistently held that it is not open to the Adjudicating Authority or the Appellate Authority to take into consideration any other factor other than the one specified in Section 30(2) or Section 61(3) of the IBC. This position of law has been consistently reiterated in a catena of judgments such as K. Sashidhar v. Indian Overseas Bank and Others; Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Other; Maharashtra Seamless Limited v. Padmanabhan Venkatesh and others; Kalpraj Dharamshi and Another v. Kotak Investment Advisors Limited and Another; Ghanashyam Mishra and Sons Private Limited through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Limited Through the Director & Ors. etc.
In this context, one may pose a question whether CoC, in its commercial wisdom can call for more than one round of challenge mechanism and invite enhanced financial offers?
In Jindal Stainless Ltd. vs. Mr. Shailendra Ajmera, Resolution Professional of Mittal Corp Ltd. & Ors.2 the Appellate Authority held the CoC has the power to negotiate with resolution applicants after receiving the plans and before voting on them. The CoC can also annul the resolution plan process and call for the submission of new resolution plans or modifications of existing ones as per the clauses of RFRP. The Appellate Authority further held "there can be no fetter on the power of the CoC to cancel or modify any negotiation with the Resolution Applicant including a Challenge Process but it is the wisdom of the CoC to take a decision in that regard."
In the matter of Vistra ITCL (India) Ltd. vs. Torrent Investments Pvt. Ltd. and Ors. 3 (Vistra ITCL), the Adjudicating Authority while dealing with the question whether after completion of Challenge Mechanism, the CoC can still negotiate with the resolution applicants to maximise the value of the Corporate Debtor? concluded that ".... even after completion of Challenge Mechanism under Regulation 39(1A) (b), the CoC retain its jurisdiction to negotiate with one or other Resolution Applicants, or to annul the Resolution Process and embark on to re-issue RFRP. Regulation 39(1A) cannot be read as a fetter on the powers of the CoC to discuss and deliberate and take further steps of negotiations with the Resolution Applicants, which resolutions are received after completion of Challenge Mechanism".
It is relevant to note that the order of Adjudicating Authority in the matter of Vistra ITCL was further upheld by the Appellate Authority, Chennai Bench in the matter of Consortium of Prudent ARC Ltd. Vs. Ravi Shankar Devarakonda and Ors,4 and then by the SC inVizag Minerals and Logistics Private Ltd. v. Ravi Shankar Devarakonda and Ors. 5, whereby the SC while upholding the order of Appellate Authority, held that "The word 'or' in the said sub-regulation should be read as 'in addition to' and not 'to the exclusion of'. This means that the resolution professional may, if envisaged in the request of the resolution plan, can allow under the said sub-regulation, modification of the resolution plan received, albeit only once. However, this will not have any effect on and bar recourse to the challenge mechanism when adopted by the Committee of Creditors to enable resolution applicants to improve/better their plans."
In the matter of Ashdan Properties Private Limited V. Mamata Binani,6 Adjudicating Authority while dismissing the application filed by the applicant seeking direction for the CoC to withdraw the opportunity for enhanced financial offers provided to all resolution applicants, after negotiations with the applicant, held that that the CoC is well within its rights under the RFRP and Process Note to call for revised offers from all the resolution applicants. It is pertinent to note that the CoC's constant bid to maximize the value of Corporate Debtor has yielded results in so far as the bid amount, despite final round of negotiation having concluded, was further enhanced by the applicant itself. The bench further held that it is for the CoC to decide whether they want to approve a Resolution Plan or renegotiate with all the resolution applicants in order to obtain an enhanced offer for the CIRP of the Corporate Debtor.
It is evident from the above that the primary objective of inserting Regulation 39(1A) is not to curtail the CoC's right to negotiate with resolution applicants to maximize value, but rather to ensure the timely resolution of corporate debtor. Judicial forums have consistently emphasized that the CoC, exercising its commercial wisdom, may permit multiple revisions and employ more than one round of challenge mechanisms to enhance bids and improve resolution outcomes. This flexibility is crucial for adapting to evolving circumstances and ensuring a fair and effective insolvency resolution process. Thus, the regulation aligns with the overarching goals of the Code by promoting transparency, efficiency, and stakeholder confidence in India's insolvency framework while maintaining the time-bound nature of the resolution process.
Footnotes
1 Civil Appeal Nos. 1811¬1812 of 2022
2 Jindal Stainless Ltd. v. Mr. Shailendra Ajmera, Resolution Professional of Mittal Corp. Ltd. & Ors., Comp. App. (AT) (Ins.) No. 1058 of 2022
3 Company Appeal (AT) (Insolvency) No. 132, 133 & 134 of 2023
4 Company Appeal (AT) (CH) (Ins) No. 37/2023
5 Vizag Minerals and Logistics Private Ltd. v. Ravi Shankar Devarakonda and Ors. C.A. No. 005430 / 2023
6 Ashdan Properties Pvt. Ltd. v. Mamta Binani ((RP of Rolta India Ltd.) & Ors) (Company Appeal (AT) (Insolvency) No.464 of 2024)
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