Rhia Marshall & Vatsala Khandelwal

In a recent decision of the National Company Law Appellate Tribunal issues relating to whether the act of seeking extensions to re-assess or negotiate the terms of an approved resolution plan by a successful resolution applicant, invites contempt, and whether amendments could be made to an approved resolution plan at the request of the successful resolution applicant, were adjudicated upon.

Factual Background

Amtek Auto Limited (‘Amtek’) was subject to a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Amtek had originally been directed to undergo liquidation by the National Company Law Appellate Tribunal (‘NCLAT’) but the Supreme Court stayed the NCLAT’s order and permitted the invitation of fresh resolution plans. Pursuant to an invitation of expression of interest, Deccan Value Investors LP (‘DVI’) submitted a resolution plan which was approved by the National Company Law Tribunal, Chandigarh bench, (‘NCLT’) by its order dated 9 July 2020. While approving the plan, the NCLT rendered the precondition of DVI for a long-term lease ‘infructuous’.

In September 2020, DVI invoked the force majeure clause, citing the ongoing pandemic that had worsened Amtek’s performance, seeking to terminate the resolution plan. DVI filed an application before the NCLAT inter alia seeking an extension to assess the impact of Covid-19 on the plan and Amtek, with a prayer to withdraw its submission of the resolution plan. The committee of creditors filed a contempt petition before the Supreme Court pursuant to DVI’s attempt at withdrawing the approved resolution plan. The Supreme Court noted that several extensions had been granted to the resolution professional to invite and evaluate resolution plans. Though DVI had not specifically asked for any extensions or directions from the Court in this regard, such extensions had extended to benefit DVI in its assessment of Amtek and the subsequent submission of its resolution plan. The Supreme Court dismissed the application and directed the NCLAT to decide on the objections, while categorically stating that any further attempts on part of DVI to “wriggle out of its obligations” would invite action for contempt.

Subsequently, DVI preferred another application before the NCLAT challenging the original order of the NCLT approving the resolution plan and concluding that the precondition in respect of the long-term lease is infructuous. DVI argued that the NCLT’s order was in excess of its jurisdiction and urged that the NCLT cannot waive a pre-condition as it does not have the power to re-write a resolution plan. Accordingly, the NCLAT has delivered its decision in the matter of Deccan Value Investors L.P. v. Dinkar T. Venkatasubramanian.

The Decision

The NCLAT held that the IBC does not permit negotiations or discussions after a resolution plan has been approved by the committee of creditors and that DVI “would not be permitted to backtrack and seek exit from its Resolution Plan on any pretext whatsoever.” It was further held that the ground for challenge of the original NCLT order, is wrongly construed as a conditionality to the approval of the resolution plan, when in fact it was a condition precedent to the implementation of the resolution plan. The NCLAT stated that once approved, the resolution plan is binding on all stakeholders, including the successful resolution applicant, who is then bound to take necessary steps to implement such resolution plan, on the terms set out therein.

However, in dismissing the appeal of DVI, the NCLAT underlined the NCLT’s limited power to intervene when adjudicating a challenge to a resolution plan approved by the committee of creditors and reiterated that the NCLT is only to ascertain if the fundamental requisites of a plan are met. The NCLAT also refused to initiate contempt proceedings, championing that contempt jurisdiction is to be exercised sparingly.

Our Thoughts

In the context of the ongoing pandemic, resolution applicants have found it increasingly infeasible to adhere to the resolution plans submitted by them owing to the adverse effect on their initial valuation of businesses. The interpretation of the NCLAT in separating the conditions required for the approval and conditions required for implementation of a resolution plan, may pave way for successful resolution applicants to plead inability to perform in accordance with an approved resolution plan pursuant to a force majeure event.

In the past, there have been cases wherein successful resolution applicants have sought modification of approved resolution plans citing inter alia unfeasibility owing to efflux of time. In one such instance, in the matter of Sunil Kumar Agarwal, RP of Digjam Limited v. Suspended Board of Directors, Digjam Limited and Others, modifications to the extent that timelines were concerned, were permitted, as no revision to the terms of the plan was sought. In the case of Deccan Value Investors L.P v. Deutsche Bank AG in the matter of State Bank of Indiav. Metalyst Forgings Ltd, NCLT Mumbai permitted the withdrawal of resolution plan after approval of the committee of creditors because the information supplied to the resolution applicant was found to be incorrect and misleading. NCLT Mumbai stated that “the IBC neither confers the power or jurisdiction on the Adjudicating Authority to compel specific performance of a plan by an unwilling resolution applicant” and that “the letter and spirit of the Insolvency and Bankruptcy Code mandate the acceptance of only a viable and lawful resolution plan being implemented at the hands of a willing resolution applicant.”

In the matter of Kundan Care Products Limited v. Amit Gupta, The absolute withdrawal of an approved resolution plan has been rejected by the NCLAT, on the ground that the approved resolution plan is binding on all stakeholders once the NCLT passes an order under section 31 of the IBC, and therefore, the successful applicant is not at liberty to withdraw the plan to the detriment of all other stakeholders. This order of the NCLAT has been stayed by the Supreme Court. It will be interesting to see how the Supreme Court deals with the issue of whether an approved resolution plan can be withdrawn by the resolution applicant.

Undoubtedly, a withdrawal of an approved resolution plan would severely impact the stakeholders due to the disruption of the entire corporate insolvency resolution process of a corporate debtor and the resultant wastage of financial resources, further depreciation in the value of the corporate debtor’s assets, and the opportunity cost of denial of other resolution applicants. However, the question which arises here is whether an unwilling resolution applicant, after being forced to go ahead with a bargain that it no longer considers viable, be trusted with the revival of a corporate debtor.

For more information please contact:

Rhia Marshall, Partner, Disputes, [email protected]

Murtaza Somjee, Partner, Disputes and Insolvency, [email protected]

Vatsala Khandelwal, Associate, Disputes and Insolvency, [email protected]