No Modification in the Resolution Plan Under IBC: SC

• 16 Sep 2021

Why in News

Recently, the Supreme Court (SC) held that the Committee of Creditors (CoC) approved resolution plan under the Insolvency and Bankruptcy Code (IBC) submitted to the National Company Law Tribunal (NCLT) cannot be modified.

• Earlier, in July 2021 the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha.

Key Points

• SC’s Ruling:
  
  • No Modifications: The adjudicating authority cannot allow modifications or withdrawals of Resolution Plans approved by the Committee of Creditors at the behest of the successful Resolution Applicant, once the plan is submitted to it.
  • Timely Completion: Corporate Insolvency Resolution Process (CIRP) carried out under the IBC must be completed within 330 days as laid down by the Code.
    
    • It quoted a report of the Parliamentary standing committee on finance which stated that 71% cases are pending for more than 180 days before NCLT (National Company Law Tribunal).
    • And asked the NCLT and the National Company Law Appellate Tribunal (NCLAT) to stick to this, and should therefore, while deciding IBC matters, respect the deadline keeping in mind the effect of such delays on the insolvency resolution process.
    • Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the IBC.
    • The time limit can be extended only in exceptional circumstances as otherwise, the open-ended process for further negotiations or a withdrawal, would have a deleterious impact on the Corporate Debtor, its creditors, and the economy at large as the liquidation value depletes with the passage of time.
• Insolvency Resolution Process in India:
  
  • Eligibility: Under IBC, companies (both private and public limited company) and Limited Liability Partnerships (LLP) can be considered as defaulting corporate debtors.
    
    • A corporate debtor is any corporate organization which owes a debt to any person.
  • Default Amount: The IBC can be triggered if there is a minimum default of Rs 1 Crore. This process can be triggered by way of filing an application before the NCLT.
  • Resolution Initiation: The process can be initiated by two classes of creditors which would include financial creditors and operational creditors.
    
    • Creditors: A Creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, etc.
    • Financial Creditors: The financial creditor in simple terms is the institution that provided money to the corporate entity in the form of loans, bonds etc. E.g. banks.
    • Operational Creditors: An operational creditor is the entity who has a claim for providing any of the four categories to the defaulted corporate- goods, services, employment and Government dues (central govt, state or local bodies).
  • Appointment of Interim Resolution Professional: As soon as the matter is admitted by the NCLT, the NCLT proceeds with the appointment of an Interim Resolution Professional (IRP) who takes over the management of the defaulting debtor.
  • Committee of Creditors (CoC): A committee consisting only of the financial creditors i.e. the CoC is formed by the IRP.
    
    • Only operational creditors having aggregate dues of at least 10% of the total debt are invited into the meeting of CoC (Operational creditors are not a member of CoC). The operational creditors don’t have any voting power.
  • Corporate Insolvency Resolution Process (CIRP): It includes necessary steps to revive the company such as raising fresh funds for operation, looking for a new buyer to sell the company as a going concern, etc.
    
    • The CoC takes a decision regarding the future of the outstanding debt owed to it. The resolution plan can be implemented only if it has been approved by 66% of the creditors in the CoC.
    • The IBC (Amendment Bill), 2021 introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
  • Liquidation Proceedings: In the event a resolution plan is not submitted or not approved by the Committee of Creditors (CoC), the CIRP process is deemed to have failed. In such a situation the liquidation proceedings commences subject to the order of the tribunal.

Way Forward

• Some of the issues faced in the implementation of IBC can be eased by:
  
  • Conducting timely colloquium for judges of NCLT and increasing interaction between practitioners from various jurisdictions.
  • NCLTs according to higher priority to applications filed in respect of avoidable transactions such as extortionate, preferential, undervalued, and fraudulent transactions.
  • NCLTs discourage frequent adjournments and ensure timeliness of the resolution process.
• Focus should be on sensitizing various government and statutory authorities about the treatment of government and statutory dues under IBC to reduce the scope for litigation and consequent delay in the resolution of companies under corporate insolvency.

Source: IE