An insolvency resolution plan cannot be withdrawn or modified after it is approved by a Committee of Creditors (CoC), the Supreme Court has ruled, delivering a shot in the arm to bankers struggling to resolve the cases of stressed corporate debtors under the Insolvency & Bankruptcy Code (IBC).
A submitted resolution plan is binding and irrevocable between the CoC and the successful resolution applicant, the court said on Monday, cheering CoCs and other stakeholders in the resolution process that tends to be a long-drawn-out process.
“Since the 330 days outer limit of the CIRP (corporate insolvency resolution proceedings) under Section 12(3) of the IBC, including judicial proceedings, can be extended only in exceptional circumstances, this open-ended process for further negotiations or a withdrawal, would have a deleterious impact on the Corporate Debtor, its creditors, and the economy at large as the liquidation value depletes with the passage of time,” a bench of justices D Y Chandrachud and M R Shah said
“A failed negotiation for modification after submission, or a withdrawal after approval by the CoC and submission to the Adjudicating Authority, irrespective of the content of the terms envisaged by the Resolution Plan, when unregulated by statutory timelines could occur after a lapse of time, as is the case in the present three appeals before us. Permitting such a course of action would either result in a downgraded resolution amount of the Corporate Debtor and/or a delayed liquidation with depreciated assets which frustrates the core aim of the IBC,” the bench said.
A submitted resolution plan is binding and irrevocable between the CoC and the successful resolution applicant in terms of the provisions of the IBC and the CIRP Regulations, the judges said.
The context
Ebix Singapore Private Limited had sought to withdraw the resolution plan it had submitted in 2018 and which had been approved by the CoC of Educomp Solution Limited, an educational services provider,
The National Company Law Tribunal (NCLT) had approved the withdrawal after repeated appeals by Ebix, but the National Company Law Appellate Tribunal (NCLAT) reversed the withdrawal.
The top court included appeals by two other companies while denying the buyer a chance to walk away from the Educomp Solutions sale. One of these was Seroco Lighting Industries Private Limited, whose appeal to modify its approved resolution plan for Arya Filaments Private Limited had been earlier dismissed by the NCLT.
The SC’s observations have to be seen against this backdrop: an average IBC case now takes 460 days or nearly 15 months for resolution. This is an improvement over the average time taken when the Code first came into existence -- nearly 1600 days, or over four years, in 2017.
But even this improved resolution pace is a far cry from what the IBC initially envisaged – 180 days – for resolution of stressed companies and later stretched to 270 days, with 330 days being the “outer limit” for completing a resolution.
‘Value destruction’
There are multiple reasons for delays in the resolution of bankrupt companies but one big reason is the second thoughts that approved buyers begin to have after their bids have been voted on by the CoC and accepted.
One banker, who has been a member of several CoCs, told Moneycontrol that as resolution plans get delayed, the stressed company (also known as the corporate debtor loses customer confidence.
“And if a buyer walks away, this leads to value destruction for the corporate debtor.. I agree that in some cases, the buyer may be backing off for genuine reasons and one of these could be that the value of the corporate debtor has eroded because of inordinate delay in the process of approving the resolution plan. But if a buyer is allowed to walk away in one case, then everyone will come back to renegotiate and the sanctity of the entire resolution process will get destroyed”, the banker said on condition of anonymity.
She welcomed the SC’s stand, saying the CoCs were only keen on entertaining “serious bidders” in the first place so that the resolution process can be accelerated.
In the past, some big IBC cases have been delayed by buyers’ reluctance. Take the case of Amtek Auto Limited, which has been hanging fire since 2017; reports now suggest that after much back-and-forth, the prospective buyer may finally clinch a deal wherein lenders will still have to sacrifice more than 75%, after four years.
In the Bhushan Power & Steel Limited (BSPL) resolution too, delays took place because the buyer, JSW Steel Limited, was apprehensive about its own promoters getting embroiled in investigations by government agencies against promoters of the corporate debtor. BSPL was eventually taken over by JSW Steel this year.
Investigative hurdles
Besides inordinate delays and low levels of recovery for lenders, the IBC process has also been set back by action by investigative agencies such as the Central Bureau of Investigation and the Economic Offences Wing.
The banker quoted above said that investigative actions by government agencies should not hamper the resolution because, after a key amendment in the IBC, only the erstwhile promoters are now liable to be investigated. The corporate debtor remains insulated from the investigations.
To be sure, the SC’s stand that approved insolvency resolutions that are binding is a significant milestone in the five-year journey of IBC. At the same time, sector regulator Insolvency and Bankruptcy Board of India (IBBI) is trying to tie up other loose ends. It has released a discussion paper, for example, to regulate the all-power CoC by devising a code of conduct for creditors.
In the discussion paper, the IBBI has cited some cases for coming forward with the suggestion to regulate the CoC. It has cited the case of BSPL, where the resolution professional (RP) appointed for the company “colluded” with creditors to pay Rs 12 crore to a firm offering legal counsel.
A legal entity working with one of the lenders of fugitive Mehul Choksi’s firm Gitanjali Gems Limited even before the firm came up for bankruptcy resolution was paid 20 times the fee of the RP because of a prior understanding between the parties.
In the Sterling Biotech Limited resolution, “absconding and ineligible promoters” attempted to take over the company in the guise of a one-time settlement. This attempt was made after over 90% of the members of the CoC) formed for the case approved the takeover.
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