IBC And The Pandemic: Is There A Way Out For Resolution Applicants?

(1) Having been submitted under Section 30(1) of the Insolvency and Bankruptcy Code, 2016 (IBC), cleared under Section 30(2) thereof by the resolution professional and pending approval by the Committee of Creditors (CoC), or,

(2) Having been approved by the CoC under Section 30(4) of the IBC and pending approval by the Adjudicating Authority, or,

(3) Having been approved by the Adjudicating Authority under Section 31 of IBC.

The question that may arise, in light of the immensely transformed scenario after Covid19, is whether a resolution applicant, finding his circumstances greatly altered, can legitimately walk out of the resolution plan. This piece provide a possible view on this issue.

A few important provisions of the IBC, are reproduced below:

Section 5. Definitions

(25) "resolution applicant" means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of Section 25;

(26) "resolution plan" means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II;

Explanation.-For the removal of doubts, it is hereby clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger;

12-A. Withdrawal of application admitted under Section 7, 9 or 10.-

The Adjudicating Authority may allow the withdrawal of application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.

30. Submission of resolution plan.-

(1) A resolution applicant may submit a resolution plan along with an affidavit stating that he is eligible under Section 29-A to the resolution professional prepared on the basis of the information memorandum.

(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan-

(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the payment of other debts of the corporate debtor;

(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-

(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under Section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of Section 53,

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of Section 53 in the event of a liquidation of the corporate debtor.

Explanation 1.-For the removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.

Explanation 2.-For the purposes of this clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor-

(i) where a resolution plan has not been approved or rejected by the Adjudicating Authority;

(ii) where an appeal has been preferred under Section 61 or Section 62 or such an appeal is not time barred under any provision of law for the time being in force; or

(iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;

(c) provides for the management of the affairs of the corporate debtor after approval of the resolution plan;

(d) the implementation and supervision of the resolution plan;

(e) does not contravene any of the provisions of the law for the time being in force;

(f) conforms to such other requirements as may be specified by the Board.

Explanation.- For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013 or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law.

(3) The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm the conditions referred to in sub-section (2).

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53, including the priority and value of the security interest of a secured creditor] and such other requirements as may be specified by the Board:

Provided that the committee of creditors shall not approve a resolution plan, submitted before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, where the resolution applicant is ineligible under Section 29-A and may require the resolution professional to invite a fresh resolution plan where no other resolution plan is available with it:

Provided further that where the resolution applicant referred to in the first proviso is ineligible under clause (c) of Section 29-A, the resolution applicant shall be allowed by the committee of creditors such period, not exceeding thirty days, to make payment of overdue amounts in accordance with the proviso to clause (c) of Section 29-A:

Provided also that nothing in the second proviso shall be construed as extension of period for the purposes of the proviso to sub-section (3) of Section 12, and the corporate insolvency resolution process shall be completed within the period specified in that sub-section.

Provided also that the eligibility criteria in Section 29-A as amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ord. 6 of 2018) shall apply to the resolution applicant who has not submitted resolution plan as on the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ord. 6 of 2018).

(5) The resolution applicant may attend the meeting of the committee of creditors in which the resolution plan of the applicant is considered:

Provided that the resolution applicant shall not have a right to vote at the meeting of the committee of creditors unless such resolution applicant is also a financial creditor.

(6) The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.

31. Approval of resolution plan.-

(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan:

Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.

(2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.

(3) After the order of approval under sub-section (1),-

(a) the moratorium order passed by the Adjudicating Authority under Section 14 shall cease to have effect; and

(b) the resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database.

(4) The resolution applicant shall, pursuant to the resolution plan approved under sub-section (1), obtain the necessary approval required under any law for the time being in force within a period of one year from the date of approval of the resolution plan by the Adjudicating Authority under sub-section (1) or within such period as provided for in such law, whichever is later:

Provided that where the resolution plan contains a provision for combination, as referred to in Section 5 of the Competition Act, 2002 (12 of 2003), the resolution applicant shall obtain the approval of the Competition Commission of India under that Act prior to the approval of such resolution plan by the committee of creditors.

32. Appeal.-

Any appeal from an order approving the resolution plan shall be in the manner and on the grounds laid down in sub-section (3) of Section 61.

Section 60. Adjudicating Authority for corporate persons

(1) …

(2) …

(3) …

(4) …

(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of-

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

61. Appeals and Appellate Authority

(1) …

(2) …

(3) An appeal against an order approving a resolution plan under Section 31 may be filed on the following grounds, namely-

(i) the approved resolution plan is in contravention of the provisions of any law for the time being in force;

(ii) there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;

(iii) the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board;

(iv) the insolvency resolution process costs have not been provided for repayment in priority to all other debts; or

(v) the resolution plan does not comply with any other criteria specified by the Board.

74. Punishment for contravention of moratorium or the resolution plan.-

(1) …

(2) …

(3) Where the corporate debtor, any of its officers or creditors or any person on whom the approved resolution plan is binding under Section 31, knowingly and wilfully contravenes any of the terms of such resolution plan or abets such contravention, such corporate debtor, officer, creditor or person shall be punishable with imprisonment of not less than one year, but may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

238. Provisions of this Code to override other laws.-

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The first question would be: What is a resolution plan in law? A resolution plan is defined in Section 5(26) to mean a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II. A resolution plan is therefore a "proposal" and it is the CoC, which, by way of a vote of not less than 66% of voting share of the financial creditors, has the discretion under Section 30 to approve such a proposal [provided ofcourse it meets the conditions prescribed in Section 30(2) and is not hit by Section 29A] or to reject it even if it meets such requirements but the CoC is not satisfied with its terms. The resolution plan and its approval by the CoC have the trappings of a "proposal" and "acceptance" respectively, as they are known in contract law, and the acceptance by the CoC of a resolution plan could be said to result in a contract. However, the resolution plan, even though approved by the CoC, still needs to pass one more barrier to become binding, which is the approval by the Adjudication Authority under Section 31.

Could a resolution plan approved by the CoC, therefore, be termed as a "contingent contract"? A contingent contract is defined in the Contract Act, 1872 as follows:

31. "Contingent contract" defined. A "contingent contract" is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

Section 32 of the Contract Act provides that contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened and that, if the event becomes impossible, such contracts become void. A resolution plan approved by the CoC cannot be enforced unless and until the uncertain future event, being the approval of the Adjudicating Authority, happens. Therefore, a resolution plan approved by the CoC could be termed as a contingent contract.

If we arrive at the conclusion that it is a contract, the provisions of the Contract Act, 1872 would come into play.

The stages (2) and (3) mentioned in the opening paragraph of this piece, i.e. resolution plan having been approved by the CoC under Section 30(4) of the IBC and pending approval by the Adjudicating Authority, or having been approved by the Adjudicating Authority under Section 31 of IBC, pertain to a concluded contract, whereas stage (1) pertains to an offer and not to a concluded contract.

Stages (2) and (3):

Let us first take the case of stages (2) and (3) to find out whether a resolution applicant at either of these stages can walk out.

For the purposes of this piece, we proceed on the assumption that there is no force majeure clause in the resolution plan (because if there is, such clause must be seen and interpreted to decide whether or not a force majeure event as contemplated therein has occurred). Therefore, it is Section 56 of the Contract Act, 1872 which we need to look at, in cases where the resolution applicant is claiming, on the basis of Covid19 and its aftermath, an impossibility to implement the resolution plan which has no force majeure clause. ^[1]

The main body of Section 56 of the Contract Act, 1872 reads as under:

56. Agreement to do impossible act.- An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful.- A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful.-Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

Illustrations

….

Before proceeding further, it is necessary to notice one provision of the IBC, being Section 238, which provides that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. This provision would not come in the way of Section 56 of the Contract Act, 1872 since the latter provision does not appear to be inconsistent with the IBC. Section 56 applies to otherwise binding contracts (which an approved resolution plan would be) and only inter alia makes them void on account of impossibility and there is no provision in the IBC which expressly or impliedly provides that the doctrine of impossibility would not apply to a resolution plan. It is well settled that there should be a clear inconsistency between the two enactments before giving an overriding effect to the non obstante clause. ^[2]

As stated earlier, a resolution plan is a plan "for insolvency resolution of the corporate debtor as a going concern". A resolution plan is essentially a plan to pay the debts of the corporate debtor to an extent, and to take over and run the corporate debtor as a going concern. Therefore, resolution plans are offers worked out by the resolution applicant based on his financial position and availability / possibility of finances as well as the resolution applicant's understanding of the assets and liabilities of the corporate debtor and it future prospects. A resolution applicant's "impossibility" to implement the resolution plan in the aftermath of Covid19, would ordinarily be based on a financial inability or difficulty. I say, ordinarily, because, it is not possible to visualise every repercussion of Covid19 and we could even come across cases of resolution applicants citing inability to implement resolution plans on other grounds.

But taking the ordinary reason of financial inability forward, can Section 56 of the Contract Act be invoked by resolution applicants? It appears not.

The Supreme Court^[3] has consistently held that it is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind and that the performance of a contract is never discharged merely because the circumstances in which it was made are altered or because it may have become onerous to one of the parties.

Therefore, the financial inability of a resolution applicant to implement the resolution plan, on account of Covid19, therefore, may not absolve the resolution applicant from it.

If, however, the resolution applicant is able to demonstrate that Covid19 and it aftermath have resulted in say a literal impossibility to implement the resolution plan or the emergence of a fundamentally different situation which has upset the very foundation upon which the resolution plan was agreed to^[4], then he may stand a chance of being released from his obligation.

If the resolution applicant fails to establish his case under Section 56 of the Contract Act, 1872, he may be liable to pay damages for breach of contract, since a contract the performance of which involves the performance of a continuous duty which the court cannot supervise cannot be specifically enforced.^[5]

Further, the question of criminal liability under Section 74 of the IBC would not arise if the resolution applicant succeeds in proving his case in regard to impossibility, but the resolution applicant would have to be prepared for criminal proceedings being initiated against him under Section 74 and the uncertainty of its outcome based on whether he is absolved or not.

The next issue is: Where and how can a resolution applicant seek such a relief? The only answer to that would be an application under Section 60(5)(c) of the IBC, which confers jurisdiction upon the National Company Law Tribunal to decide any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor. A suit is clearly barred under Section 231 of the IBC. An appeal under Section 32 read with Section 61 of the IBC is only available on the grounds mentioned in the latter provision. An application under Section 12A of the IBC can only be for withdrawal of an application admitted under Section 7 or Section 9 or Section 10.^[6]

An issue which might arise pertains to performance security^[7] which is sought at the time of approval of the resolution plan. Even if a resolution applicant has a case for being absolved from implementation of the resolution plan, he may still find himself tied to it on account of the performance security which had been provided by him and which may be invoked by the CoC on the ground of non-performance of the resolution plan. Assuming such performance securities to be unconditional bank guarantees (as they are most likely to be), it is almost certain that they would be invoked in such circumstances. The likelihood of an injunction against invocation of an unconditional bank guarantee is remote considering the law on the subject, which makes the judicial interference on the basis of the underlying contract^[8] or on the basis of the existence of a dispute between parties^[9] impermissible, but the resolution applicant can, in his application under Section 60(5)(c) of the IBC, seek a suitable relief for refund of that amount.

Stage (1):

Stage (1) pertains to an offer and not to a concluded contract. Section 5 of the Contract Act, 1872, which deals with revocation of proposals and acceptances, reads as under:

5. Revocation of proposals and acceptances.- A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Illustrations:

…

Therefore, it is possible for a resolution application to revoke or withdraw his resolution plan before it is approved by the CoC.

However, a complication may arise here too if there is a stipulation that resolution applicants cannot withdraw their resolution plans for a period of x number of days/months from the date of submission or other such similar clauses and requiring resolution applicants to furnish unconditional bank guarantees or make a deposit along with their resolution plans, which can be invoked or forfeited, as the case may be, inter alia in case of withdrawal of the resolution plan before its stipulated validity period.^[10]

The Supreme Court^[11], in the context of withdrawal of a bid before the expiry of its validity period, has held as under:

"9. …By invoking the bank guarantee and/or enforcing the bid security, there is no statutory right, exercise of which was being fettered. There is no term in the contract which is contrary to the provisions of the Indian Contract Act. The Indian Contract Act merely provides that a person can withdraw his offer before its acceptance. But withdrawal of an offer, before it is accepted, is a completely different aspect from forfeiture of earnest/security money which has been given for a particular purpose. A person may have a right to withdraw his offer but if he has made his offer on a condition that some earnest money will be forfeited for not entering into contract or if some act is not performed, then even though he may have a right to withdraw his offer, he has no right to claim that the earnest/security be returned to him. Forfeiture of such earnest/security, in no way, affects any statutory right under the Indian Contract Act. Such earnest/security is given and taken to ensure that a contract comes into existence. It would be an anomalous situation that a person who, by his own conduct, precludes the coming into existence of the contract is then given advantage or benefit of his own wrong by not allowing forfeiture. It must be remembered that, particularly in government contracts, such a term is always included in order to ensure that only a genuine party makes a bid. If such a term was not there even a person who does not have the capacity or a person who has no intention of entering into the contract will make a bid. The whole purpose of such a clause i.e. to see that only genuine bids are received would be lost if forfeiture was not permitted."

Following the aforesaid decision, in another case^[12], the Supreme Court held as under:

"11. …Thus, even though under Section 5 of the Act a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, the respondent was bound by the agreement contained in its offer/bid to keep the bid open for acceptance up to 90 days after the last date of receipt of bid and if the respondent withdrew its bid before the expiry of the said period of 90 days the respondent was liable to suffer the consequence (i.e. forfeiture of the full value of bid security) as agreed to by the respondent in Para 10 of the offer/bid. Under the cover of the provisions contained in Section 5 of the Act, the respondent cannot escape from the obligations and liabilities under the agreements contained in its offer/bid.

12. The right to withdraw an offer before its acceptance cannot nullify the agreement to suffer any penalty for the withdrawal of the offer against the terms of agreement. A person may have a right to withdraw his offer, but if he has made his offer on a condition that the bid security amount can be forfeited in case he withdraws the offer during the period of bid validity, he has no right to claim that the bid security should not be forfeited and it should be returned to him. Forfeiture of such bid security amount does not, in any way, affect any statutory right under Section 5 of the Act. The bid security was given by the respondent and taken by the appellants to ensure that the offer is not withdrawn during the bid validity period of 90 days and a contract comes into existence. Such conditions are included to ensure that only genuine parties make the bids. In the absence of such conditions, persons who do not have the capacity or have no intention of entering into the contract will make bids. The very purpose of such a condition in the offer/bid will be defeated, if forfeiture is not permitted when the offer is withdrawn in violation of the agreement."

The aforesaid two decisions have been affirmed by a larger bench of the Supreme Court^[13].

It is therefore difficult to contend that the resolution applicant should not suffer the penalty for the withdrawal of the resolution plan despite the terms of agreement contained in its offer to keep the offer open for x number of days/months and to suffer such penalty for failure to do so.

However, here again, what we can perceive is an "agreement" between the resolution applicant and the CoC in respect of the offer (the resolution plan), being that the resolution plan would remain valid for x number of days/months and the resolution applicant would suffer penalty for premature withdrawal. Once again, therefore, we are faced with a contract, a contract to which the provisions of the Contract Act, 1872 apply, such as Section 56 thereof. Could it therefore be argued that even this contract of ensuring validity of resolution plan for x number of days/months and suffering penalty for not doing so can be said to have become void on account of impossibility? Again that would depend on whether the resolution applicant is able to demonstrate literal impossibility or the emergence of a fundamentally different situation which has upset the very foundation of this contract. An extremely uphill task.

As to the remedy, it is only in an application under Section 60(5)(c) of the IBC that these issues can be considered.

Conclusion:

Thus, while it appears that resolution applicants may contend in numerous cases that Covid19 and its aftermath have resulted in the resolution plans having become impossible of performance, the burden upon them to prove this would be very heavy and a mere financial difficulty is unlikely to liberate them from their obligations without consequence.

(The author is an advocate practising in the Gujarat High Court)