IBC: Can IRPs And RPs Unilaterally Amend Existing Contracts Executed By Debtors?

Interim resolution professionals (IRPs) and resolution professionals (RPs) run the management and affairs of the debtor during this period and have the important task of preserving the debtor's property and managing its operations as a going concern. They have wide powers to achieve these objectives. A key one is at Section 20(2)(b) of the IBC which empowers IRPs to "enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process". Reading this, a question that arises is whether IRPs and RPs can unilaterally amend existing contracts executed by the debtor before the IBC process, without the counterparty's consent.

Possible Arguments

It can be argued that Section 20(2)(b) permits IRPs to unilaterally amend existing contracts because if the intent was to only permit amendment with the counterparty's consent then there was no need for this power to be expressly mentioned. A counter argument is that the IBC did not need to separately state any powers of IRPs or RPs, since Section 17(1)(b) already empowers IRPs to exercise the powers of the debtor's board of directors. Yet, Sections 20 and 25 provide a list of IRPs' and RPs' powers, like representing the debtor, appointing consultants, raising finance, etc. This suggests that the power to amend contracts, like other powers, is illustrative and merely clarifies that IRPs have authority to agree to amendments of past contracts on behalf of the debtor but does not empower IRPs to unilaterally amend contracts.

The first line of argument seemingly undermines fundamental contract law principles under which validly executed contracts are legally binding. But then, the IBC does override contractual arrangements under some circumstances. Persons supplying essential goods to the debtor during the IBC process are not permitted to terminate supplies. A resolution plan is treated as effective even if it is not consented to by persons whose consent is required under the debtor's charter documents or agreements.

NCLT Hyderabad's view

The IRP's power to amend contracts was analysed by the National Company Law Tribunal (NCLT), Hyderabad in the insolvency process involving the owner of Trident hotel, Hyderabad^[1]. During the process, the RP sought to exercise control over the hotel's operations by dishonouring payments to creditors of the hotel's operator (Oberoi group), auditing the operator's bills and transferring funds into a new bank account. This was in contravention of the existing management agreement between the owner and Oberoi. The NCLT ruled that the management agreement was legally binding and could not have been unilaterally amended by the RP or even the committee of creditors without consent of both parties.

Take-Aways

The NCLT Hyderabad's ruling is sound in law but the issue seems far from settled. Other NCLTs may have differing views especially if an existing contract causes prejudice to the debtor or if the debtor stands to benefit significantly from amending an existing contract. An example could be where significant funds of the debtor are tied up in a security deposit for a leased office space which is underutilised. Here, there could be basis for the RP to argue that it is in the best interests of the debtor to permit amendment or termination of the lease.

In many cases, the contract may itself allow one party termination rights for insolvency related events, but these rights are typically available only to the unaffected party and not the one facing the insolvency event. NCLTs also have special powers to unwind specific kinds of wrongful contracts and transactions such as fraudulent preferences to one creditor or extortionate or undervalued agreements executed by the debtor. In these cases, the IBC allows NCLTs to unwind agreements executed up to 1-2 years before the IBC process and restore benefits to the debtor.

NCLT Mumbai

Interestingly, NCLT Mumbai faced a similar situation recently during the insolvency process of Dighi Port Limited^[2]. Jawaharlal Nehru Port Trust (JNPT) submitted a resolution plan for Dighi which contemplated termination of existing sub-lease contracts executed by Dighi with Veritas group. JNPT argued that the existing contracts were undervalued and not in the interests of Dighi. The NCLT held that it was already examining the undervaluation issue in a separate application and pending such examination, the resolution plan could not unilaterally terminate legally binding contracts that create third party rights.

Here, the undervalued transactions were being examined under the NCLT's special powers which apply in specific situations as described above. And so, it is not clear how the NCLT would have reacted had the debtor been prejudiced outside of these situations.

Summing up

As this discussion suggests, it is not inconceivable for an NCLT to interpret IRPs'/RPs' power to amend contracts in favour of the debtor especially where the debtor's interests are adversely affected. Having said that, protecting the sanctity of contracts is paramount and allowing debtors and IRPs/RPs to dishonour binding legal obligations at will would not only be an unjust legal outcome but would cause loss of confidence in contractual dealings. A workable interpretation would perhaps be one that finds an appropriate balance between these two considerations.

Akshay Sachthey is a Principal Associate at Phoenix Legal who specialises in advising clients on intricate legal and regulatory issues in areas ranging from general corporate to strategic, contentious and pre-dispute matters.Views are personal.