The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides a time-bound process that can hopefully result in resolution for a corporate debtor. By avoiding liquidation, the inherent business value in the debtor will be preserved. The approval of a resolution plan, therefore, may be considered a successful outcome of the process.
A resolution plan is a proposal that aims to provide a resolution to the problem of the corporate debtor’s insolvency and its consequent inability to pay off debts. It needs to be approved by 75% of the committee of creditors (“COC”), and comply with some mandatory requirements prescribed in the IBC (that we will explore in a later article). Once approved, the Resolution Professional (“RP”) will send the plan to the National Company Law Tribunal (“NCLT”) after certifying that the plan meets those requirements. If the NCLT is also satisfied that the plan meets the requirements, it will pass an order approving the plan.
Other than the mandatory requirements, the IBC does not restrict the form and manner of a resolution plan. A plan could therefore, involve the purchase of the equity or assets of the corporate debtor, the infusion of additional debt, the de-merger of debtor’s businesses, financial “haircuts” taken by creditors, or the extinguishment of some liabilities. Needless to say, since the plan must be first approved by the COC — a body that comprises all the financial creditors of the corporate debtor, the proposals regarding debts owed to financial creditors will be an important consideration in whether it is approved.
Who can propose a resolution plan?
Since the IBC emphasises maximising the number of resolution solutions, its definition of a “”resolution applicant” is simply, “any person who submits a resolution plan to the resolution professional”. While the expectation from this wide definition is that the market at large will be the primary source of resolution plans, it is also open to creditors, and until very recently, the erstwhile promoters of the corporate debtor, to propose resolution plans. The RP moreover, does not have any discretion regarding which plans to present to the COC – he or she is statutorily bound to present all plans that meet the mandatory requirements. In practice, the COC typically authorises the RP to prescribe eligibility and evaluation criteria for resolution applicants so as to ensure that only serious applicants submit plans.
The RP is not expressly prohibited from submitting a resolution plan, but given that the RP also has the statutory duty to verify whether a plan meets the mandatory requirements, it could lead to a conflict of interest for the RP.
One of the main complaints in the working of the IBC so far has been the allegations that erstwhile promoters have, in collusion with RPs and members of the COC, tried to subvert the IBC process to regain control of the corporate debtor. “Soft” legislative attempts to guide the COC in selecting resolution plans, culminated ultimately in what is commonly referred to as the “anti-promoter ordinance” (although the government has been keen not to portray it as such), which takes the issue out of the hands of the COC altogether. The ordinance sets out eligibility criteria for resolution applicants that would, in most cases, restrain erstwhile promoters from proposing a resolution plan for the corporate debtor.
That the government felt an ordinance was required to address this concern points to a lack of faith in the institutions and processes involved to prevent collusion and corruption. While erstwhile promoters may not be desirable resolution applicants in many cases given the number of cases where creditor fraud and mismanagement of accounts is suspected, they remain a key source of resolution plans. Insolvencies are not caused only by mala fide intentions and actions, but could also be due to other business factors. In some cases therefore, the erstwhile promoters may not only be credible applicants, but the best qualified ones, given their knowledge and emotional connection with the corporate debtor and its business. It remains to be seen whether there are any further changes to the ordinance.
Who can be affected by a resolution plan?
Section 31(2) of the IBC makes the resolution plan, once approved by the NCLT, binding on “the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan”. The term “other stakeholders” here, is unclear.
The term “stakeholders’ has been defined in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 to mean all persons entitled to receive a distribution upon a liquidation of the corporate debtor, but it applies only in the context of those regulations. In any case, people affected under a resolution plan would be wider than in the case of a liquidation, which is only concerned with distribution to various creditors. Other categories of stakeholders, such as customers of the corporate debtor, would be affected by a resolution plan.
The question of who is a stakeholder also assumes importance when considering what can be achieved under a resolution plan. Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 lists some of the measures that may be taken, including the sale of all or part of the assets whether subject to any security interest or not, and the transfer of all or part of the assets of the corporate debtor to one or more persons.
To what extent can a resolution plan can interfere with the pre-existing rights of a third party who does not participate in the CIRP? Take the example of security created by a corporate debtor over its assets in favour of a lender to its group company. Since the lender is not a creditor of the corporate debtor itself, it may not be able to participate in the process of approval of a resolution plan, but at the same time, Regulation 37 suggests that its security can be extinguished and the asset transferred as part of a resolution plan.
Similarly, take the case of a lessee conducting its business on the property of the corporate debtor under a lease granted by the corporate debtor. Given that the corporate debtor’s assets can be transferred as part of a resolution plan, what would be the effect on the lease? Can the resolution plan provide for the termination of the lease? Would such a lessee, or the lender in the previous example, be considered a “stakeholder” upon whom the resolution plan is binding?
It would seem arbitrary that the rights of a third party, without any of the rights and protections available to a creditor in the CIRP process, can be unilaterally modified or extinguished by a resolution plan. It could be debated whether such arbitrariness would place a plan “in contravention of the law”. A fairer interpretation may be that third party rights should be protected when a resolution plan provides for the transfer of assets or extinguishment of security interests – thus, in the above example, perhaps a transfer of the corporate debtor’s property could be made subject to the lessee’s rights to continue to use the property under the terms of its lease. However, the flipside of such a position would be a restriction on the resolution applicant’s use of the property, which may perhaps affect how good a resolution plan it can offer. For the moment, these questions remain unanswered.
Uday Khare is a Partner at Cyril Amarchand Mangaldas.