The Insolvency and Bankruptcy Code, 2016 (IBC) was brought in to revive companies which were in distress and unable to pay off their debts.

More importantly, it was hailed as a legislation which could remedy the fault lines found in the erstwhile Board Industrial and Financial Reconstruction (BIFR) formed under the Sick Industrial Companies Act, 1985.

The corporate debtor, the creditor and the resolution applicant are the three-legged stool of the Corporate Insolvency Resolution Process (CIRP). Recently, there have been reports highlighting the low recovery rates, with the average loss for creditors being at least three-fourth of the investment made. Reports have also suggested that the average time taken for insolvency resolution is longer than the prescribed 180-day period (extendable to 330 days) and in many cases, beyond the mandatory 330 days period.

While recovery for creditors has been a pertinent question to judge the effectiveness of the IBC, what has been possibly underplayed, if not missed out entirely, is the role of the resolution applicant. After all, the central focus and objective of the CIRP is to revive the company.

The IBC was never promulgated as a substitute for the recovery mechanism. To achieve the goal of resolution of the distressed entity, the focus should be on getting a successful resolution applicant, who can pay off the dues/debts of the corporate debtor and at the same time invest in the distressed entity, to revive it and eventually make it a going concern and a profitable enterprise.

This article seeks to highlight the problems faced by resolution applicants under the current insolvency regime.

The timeline conundrum

One of the major reasons why creditors and prospective resolution applicants saw the legislation as an attractive option was the strict timelines under the Code. Section 12(1) provides that the resolution process may be completed within 180 days from the date of admission of the insolvency initiation application. The same can be extended by another 90 days. With an amendment in 2019, the legislation provided that the insolvency process has to be completed within 330 days. The provisions for extension of CIRP period have also been prescribed under Regulation 40 of the CIRP Regulations.

The timeline as prescribed under the Code has barely been followed. The courts and tribunals have played a significant role in watering down the provision. One such case is that of Svamitva Landmarks & Ors v. Alok Kailash Saksena & Anr wherein the National Company Law Tribunal (NCLT) Bangalore Bench did not consider the resolution plan of a company, which had been approved by the Committee of Creditors (CoC). The Tribunal instead directed the CoC to reconsider the resolution plan submitted by the company along with that of another prospective resolution applicant who had filed the plan after the expiry of the 330-day period.

The order is currently under appeal before the National Company Law Appellate Tribunal (NCLAT) Chennai Bench. Owing to such a decision, it would be natural for a prospective resolution applicant to distrust the timelines as prescribed under the Code.

The worrying effect of EBIX Singapore v. CoC of Educomp

While there are statutory timelines prescribed for the CIRP period, there are no timelines post CIRP. This becomes a worrying situation for the resolution applicant whose plan has been approved, but is pending consideration/approval before an NCLT which is overburdened by an increasing pendency as a result of which it may not be able to approve the resolution plan filed by the successful resolution applicant in a timely manner.

The situation became worse for the resolution applicant after the Supreme Court’s decision in Ebix Singapore Private Ltd v. Committee of Creditors of Educomp Solutions Pvt Ltd, wherein it has been held that a resolution plan submitted by a resolution applicant which has been approved by the CoC cannot be withdrawn or modified.

In that case, the primary argument advanced by the resolution applicant who wanted to withdraw its resolution plan was that massive delays by the Adjudicating Authority in approving the plan had caused grave prejudice to it, since it could not take over the assets of the corporate debtor in the meanwhile. As a result of this, the value of the assets which the resolution applicant had bid for at the time of submission of the resolution plan was different compared to the present day value which had depleted over time and. As a result, the resolution applicant also lost significant time in commencing the commercial operations of the corporate debtor.

The Supreme Court acknowledged the fact that delay in approving a resolution plan would cause grave prejudice. However, it did not allow withdrawal of the plan on the ground that there is no express provision in the Code which allows the same.

It was further held that the legislative intent of the IBC cannot be overridden by the Court to render outcomes which will have grave economic implications. The Bench also noted that inordinate delays cause commercial uncertainty and degradation in the value of the corporate debtor and makes the insolvency process inefficient and expensive. In the end, it merely urged the NCLT and NCLAT to be considerate to the effect of such delays on the insolvency resolution process.

The Ebix judgment failed to take into account the practical ramifications of the delays caused by the NCLTs on the CIRP. The outcome of such a judgment would be that a resolution applicant, whose financial position has changed/dropped in the course of the delayed period, might not be able to revive the corporate debtor out of insolvency.

On the other hand, forcing the resolution applicant to implement the resolution plan at a belated stage might drive it into insolvency, thereby making the entire legislation pointless.

In September 2021, just a few days after the decision of Ebix, the NCLAT decided the case of Suraksha Assets Reconstructions v. Shailen Shah, RP & Anr, wherein withdrawal of a resolution plan was sought on grounds that the NCLT had not approved the same for more than 600 days. The NCLAT relied on the Ebix judgment and held that the despite the massive delay, withdrawal of the resolution plan is not allowed. It thus directed the NCLT to consider the plan approval application within a period of one month.

More than 250 days have passed since the said order of the NCLAT. However, the plan approval application has still not been decided by the NCLT. Meanwhile, the successful resolution applicant is put in a precarious situation as the value of the assets of the corporate debtor seem to be eroding over the course of time.

Haircuts

While massive delays have a detrimental effect for prospective resolution applicants, the NCLTs of late have also started giving undue focus on large haircuts in resolution plans. This has not just caused undue delay, but also undue litigation before various forums, making the entire CIRP inefficient and expensive for resolution applicants.

Recently, the NCLT Delhi in the case of IDBI v. ACIL did not approve the resolution plan submitted by the successful resolution applicant and kept the plan approval application in abeyance on the ground that the resolution plan provided for about 94.25% haircut to the creditors. Another factor was that the amount which the successful resolution applicant was planning to pay was close to that of the liquidation value of the corporate debtor and not the fair value.

The order passed in this case is at odds with the position of law settled by the Supreme Court in Maharasthra Seamless Limited v. Padmanabhan Venkatesh & Ors, wherein it has been held that the resolution plan value can also be lower than the liquidation value, and that the commercial wisdom of the CoC in approving a resolution plan is of paramount importance.

Coming back to the IDBI case, the resolution plan has not been approved till date. This was in fact one of the few instances where the NCLT, despite having a resolution applicant in place, was pushing the corporate debtor into liquidation.

The way forward

Quite Interestingly, the problems faced by resolution applicants are not because of the legislation, but because of the lack of judicial administration and prudence. These, if cured, would not just make the legislation more efficient and effective, but will also have a long-term positive impact on the economy.

More benches to reduce the pendency of case-dockets, stricter compliance with timelines, judicial discipline in following settled principles of law such as upholding the commercial wisdom of the CoC etc, would go a long way in making the legislation an attractive option for resolution applicants.

Shivkrit Rai is a lawyer practicing in Delhi.