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Despite the best of intentions towards addressing the preservation of value of businesses, and addressing the ills of financially unviable businesses being allowed to continue over prolonged periods, the Insolvency and Bankruptcy Code, 2016 (IBC) is at times found to fall short in implementation of a resolution plan, both after approval of the resolution plan by the Committee of Creditors (CoC), as well as approval by the Adjudicating Authority.
Despite the resolution plan being approved by the requisite majority, when the application for approval of the resolution plan comes up before the Adjudicating Authority, multiple parties are often found to intervene and try and delay, or even stop, the resolution plan from being approved.
Set out below are some of the challenges that resolution applicants have faced:
- The amount of time taken for the application for approval of the resolution plan to be approved by the Adjudicating Authority. There have been times when this takes over 12-15 months. This delay is due to multiple reasons, including multiple applications filed by various parties to try and delay the hearing of the application, and the constant to and fro of such applications from the NCLT to NCLAT, and in some cases, even upto the Hon’ble Supreme Court.
- Often, it is the erstwhile promoters of the corporate debtor who are responsible for this delay. The pretexts include challenging the constitution of the CoC, offering OTS at the last minute just before the approval, and questioning the constitution of the resolution applicant under Section 29A of IBC.
- There have been instances where even operational creditors hold up the approval of the resolution plan by filing multiple applications, which they then insist be taken up before the hearing of the application for approval of the resolution plan.
- There was a particular instance where one of the banks which had voted against the resolution plan, filed an application challenging the valuation of one part of the business, which resulted in delaying the hearing of an application for approval of a resolution plan for over 6 months. In a rare instance, the Adjudicating Authority was split in its decision on the valuation, and the matter had to be referred to a 3 Member bench, causing further delay in the approval of the resolution plan.
- Another issue that often comes up after the approval of the resolution plan by the CoC is of past statutory liabilities, or claims of operational creditors for the period prior to the approval of the resolution plan. These usually do not survive, and stand extinguished if the resolution plan expressly mentions exclusion of such liabilities. But such claimants area able to delay the approval / implementation of the resolution plan.
- Invocation of the writ jurisdiction of Hon’ble High Courts has also been resorted to by unsuccessful resolution applicants, after approval of the resolution plan by the Adjudicating Authority, in an attempt to scuttle the implementation of the resolution plan.
Despite various decisions of the Hon’ble Supreme Court from Innoventive Industries to K. Sashidhar upto the Essar Steel case, the Hon’ble Supreme Court has consistently laid down the manner in which the law is to be interpreted with regard to the approval of a resolution plan and the primacy given to the commercial wisdom of the CoC. Despite these decisions, the above challenges are being faced in interpretation of provisions of the IBC. Thus, despite the law on the rights of various stakeholders i.e. aggrieved financial creditors, operational creditors, and promoters being clearly enunciated in various Supreme Court judgments, delays are still often seen.
While it is understandable that an applicant has a right to have an application decided, if such applications are to be entertained it may be helpful for a clear timetable to be put in place (i) for filing all such applications, (ii) filing replies to such applications, and the decision on the application being delivered. A timely approval of a resolution plan would greatly benefit the effectiveness of the IBC. Imposing substantial costs on applicants making frivolous applications could also help.
Delays in approval / implementation of a resolution plan impact all the stakeholders, and also have a significant effect on the overall success of implementation of a resolution plan. An objective behind the IBC being value maximisation, such delays actually dilute value, and can even reduce the chance of revival of the corporate debtor and push it towards liquidation, which is not beneficial. The probability of such delays is also likely to be factored into the resolution applicants bid.
Authored by Mr. Nirav Shah, Partner – DSK Legal