Resolution Plan and its Withdrawal under IBC: A Legal Conundrum

Introduction
The primary purpose of Insolvency and Bankruptcy Code, 2016 (“IBC”) is reorganisation, revival and resolution of a distressed Corporate Debtor (“CD”) in a time bound manner through Resolution Plan (“Plan”) which inter alia ensures maximisation of value of assets of the CD, promotes entrepreneurship, is in the interest of all the stakeholders and compliant with the IBC. The Resolution Applicant (“RA”), proposing a plan for the CD is also an entrepreneur / business entity, who may witness disruption of business, liquidity issues and may not be able to implement the plan. Considering the current on-going pandemic situation, there is high probability that many entrepreneurs may not find it viable to expand their venture or take over a distressed CD and may be inclined to seek for withdrawal of the plan. However, the IBC and regulations made thereunder, do not stipulate any specific provision allowing withdrawal of the plan, which has made the Tribunals and the Courts in India to render distinct views and findings based on facts and circumstances of each case.

By this article, endeavour is made to provide reader an overview of views taken / orders passed by variousTribunals / Courts across jurisdictions on the subject matter of withdrawal of the plan at various stages during a Corporate Insolvency Resolution Process (“CIRP”).

Current legal position
Interestingly, the issue of withdrawal of the plan was recently considered in the matter of Kundan Care Products Ltd. v. Amit Gupta & Ors.¹, (“Kundan Care”)wherethe National Company Appellate Tribunal (“NCLAT”)rejecting the arguments of the RA “that there is no specific provision under the IBC compelling specific performance of the plan” held that once the plan is approved by the Committee of Creditor (“CoC”) and pending approval before the Adjudicating Authority (“AA”), RA cannot be permitted to withdraw the same inter-alia for the following reasons –

• that there is no provision under the IBC entitling the RA to withdraw the plan approved by CoC;
• the plan incorporates contractual terms binding on the RA unlike contract for personal service which is legally unenforceable;
• the RA is estopped from wriggling out of its liabilities under the approved plan;
• the value of assets of the CD depletes due to the time consumed in the CIRP and if the RA is permitted to walk out, interest of all the stakeholders will be affected.

In the said judgment, the NCLAT, distinguished its own judgement passed in the matter of Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP & Ors.² on the basis of the facts and clarified that in the referred judgment, contravention of Section 30 (2) (e) of the IBC was found to have been established. In the referred judgment, the NCLAT had observed that the AA could not compel specific performance of the plan by an unwilling RA.

Stay of Kundan Care NCLAT judgment by the Hon’ble Supreme Court (“SC”)
However, before the aforesaid Judgment of the NCLAT in Kundan Care could have be implemented in its entirety, the same was stayed by the Hon’ble SC vide its order dated 16th November 2020, thereby granting ad-interim stay to the operation of the impugned Judgment and Order of NCLAT till the next date of listing. Accordingly, the said Judgment of NCLAT will cease to have any binding effect in law till the stay is lifted or the Appeal is disposed off by the SC.

Analysis of certain important pronouncements at various stages of CIRP
Considering that issue pertaining to withdrawal of Resolution Plan is pending adjudication before the Hon’ble SC, it is imperative to analyse certain other judicial pronouncements made in past which are equally important to understand views taken by the AA at the following stages of CIRP, i.e.

1. before approval of the plan by CoC;
2. after approval of the plan by the CoC but before the approval by AA; and
3. after the plan is approved by the AA.

Judgement Highlights

Bright Steel Processors vs. Lohaa Ispaat Ltd.³– NCLT, Mumbai
The Courtallowed MA⁴ seeking direction to refund the Earnest Money Deposit (“EMD”), observing that RA had withdrawn its offer before voting and approval of the plan by the CoC and that without approval of the plan, the EMD could not be forfeited. The Court also observed that if the plan would have been approved, upon withdrawal of the offer, the EMD would have been forfeited. Pertinently, in the present case, the CoC had agreed that if the plan was not finalised, the EMD amount would be returned to the RA.

NCLAT in Deccan Value Investors LP & Ors.
NCLT, Mumbai, in the matter of Deccan Value Investors L.P. and DVI PE (Mauritius Limited) vs. Deutsche Bank AG and Ors.⁵, permitted withdrawal of the plan approved by the CoC given the fact that misleading and incorrect information was provided to the RA which were material to the viability of the plan. The CoC preferred an appeal against the NCLT order before the NCLAT⁶, who upheld the NCLT order. The NCLAT observed that the IBC does not confer any power and jurisdiction on the AA to compel specific performance of the plan by an unwilling RA. The letter and spirit of the IBC mandates the acceptance of only a viable and lawful plan being implemented at the hands of willing RA and the plan approved by the NCLT was violative of Section 30 (2)(e) of the IBC.

Maharashtra Seamless Limited (MSL) vs Padmanabhan Venkatesh – SC⁷
The SC held that the plan approved by the AA cannot be allowed to be withdrawn by the RA. The NCLT, Hyderabad Bench had approved the plan⁸. The Promoter⁹ and the Indian Bank¹⁰ assailed the NCLT order before the NCLAT on the ground of mismatch in the liquidation value and plan. The NCLAT observed that if the RA fails to undertake payment of the additional amount within 30 days, the NCLT order approving the plan would be set aside. The RA preferred an appeal before the SC on the ground that the NCLAT exceeded its jurisdiction in directing mismatch in the liquidation value and the plan. However, the RA in the IA sought for refund of EMD and withdrawal of the plan. Taking cognisance of the aforesaid facts, the SC held that the exit route prescribed in Section 12-A is not applicable to the RA and only applies to applicants invoking Sections 7, 9 & 10 of the IBC. The SC also observed that the object behind prescribing valuation process is to assist the CoC to take decision on the viability of the plan. Once the plan is approved by the CoC, the statutory mandate of the AA under Section 31(1) of the Code is to ascertain that the RA meets the requirement of sub-sections (2) and (4) of Section 30 thereof. The SC further held that having appealed against the NCLAT order with the object of implementing the plan, the RA cannot be permitted to take a contrary stand by seeking withdrawal of the plan. The SC stated that it is not engaging in the judicial exercise of determining the question as to whether after having been successful in a CIRP, an applicant altogether forfeits right to withdraw from such process or not.

Committee of Creditors of Educomp Vs. Ebix Singapore Pte. Ltd & Anr.¹¹ NCLAT
The NCLAT set aside the NCLT, Delhi order which inter alia allowed withdraw of the plan approved by the CoC on the ground that an unwilling RA would not be able to implement the plan with cost of Rs.1 lakh. The NCLAT held that Ebix had accepted the conditions of the plan and after that, it is not open for them to take a “topsy turvy” stance and withdraw the approved plan. The NCLAT set aside the NCLT order allowing withdrawal. The said order is under challenge before the SC.

Aashish Jhunjhunwala & Ors Vs. Kshitiz Chhawhharia & Anr.¹² – NCLAT
The NCLAT was considering the appeal against NCLT, Kolkata Bench’s Order¹³ whereby the NCLT approved the plan with some modifications. In Appeal before the NCLAT, the RA sought withdrawal of the plan, which was already approved by the NCLT, claiming drop in the market valuation on account COVID-19. The NCLAT upheld the NCLT order and held that the RA cannot be permitted to withdraw the plan on account of COVID-19 as the plan was approved much prior to the effect of COVID-19 and till then, the RA had already committed default in not implementing the plan.

Conclusion
Given the fact that the SC is seized of the subject matter for withdrawal of the plan and the stay has been obtained, until the SC settles the legal conundrum pertaining to withdrawal of the plan, distinct views and /or orders may continue. However, the determining factors would consist of facts, circumstances and stage at which the plan is being withdrawn. Cases referred in the article reflect that the plan withdrawals have been permitted where CoC approval is not received. However, when the plan has been approved by the CoC and pending the AA’s approval, the jurisdiction of the AA is limited to the extent of verifying if the plan is compliant with the IBC and the AA may not interfere with the CoC’s decision unless there exist some glaring error apparent, which would require the AA to invoke its inherent powers under Rule 11 of the National Company Law Tribunal Rules 2016. Therefore, from the aforesaid judgments, it appears that a successful RA cannot be permitted to seek withdrawal of the plan post approval of CoC, until the same is in contravention to the provisions under the IBC code or suffers from any procedural infirmity, as held in Deccan Value (supra). Further, if the plan is permitted to be withdrawn post approval, the same will have cascading effect on ongoing CIRP decreasing value of assets of CD and would also be unfair to other Resolution Applicants who were deprived of participating in the CIRP of the CD. It is therefore advisable to the RA, who seeks to withdraw the plan to find out amicable solution by taking a unanimous decision along with the plan and the CoC. As in such cases, the CoC’s consent would play a major role. Additionally, the parties involved in the CIRP since inception, may consider contemplate such events and accordingly make provisions in the bid document, letter of intent, the plan which can be acted upon at the relevant time. Also, the parties being aggrieved by the orders passed by NCLT, NCLAT may consider filing an Appeal before the SC after analysing the merits in their case, to stay the effect and implementation of adverse orders.