Insolvency Law

Other points to consider to devise a resolution plan

05.08.2021 by Abir Roy

Once the Resolution Professional makes an invitation for expression of interest, as per the criteria decided by the CoC under Section 25(2)(h), Resolution Applicants submit their respective resolution plans to the RP as per the conditions laid down in the invitation for Expression of Interest.

While a resolution plan is made to conform with the criteria laid down by the CoC under Section 25(2(h), which would necessarily differ from case to case based on the complexity and scale of operations of a particular corporate debtor, each and every resolution plan must conform to the criteria laid down under Section 30(2) in order to ensure that a resolution plan is presented by the RP before the CoC for its consideration.

It is only when the resolution plan conforms to the requirements of Section 30(2) that it is presented to the CoC for its approval. Even after an approval given by the CoC to any particular resolution plan under Section 30(4), the NCLT is again required to confirm if the requirements under Section 30(2) have been satisfied while considering such an approved resolution plan.

Under Section 30(2), a resolution plan must necessarily provide for the payment of the insolvency resolution process costs, in priority to the payment of all other dues. The plan must also provide for the payment of the operational debts which should in no case be lower than the liquidation value. The plan must also ensure that it provides for the management of the affairs of the corporate debtor and the implementation and supervision of the Plan. The plan must also show the cause of default and how the plan addresses the cause of default. A resolution plan must not contravene any of the provisions of law, which includes the provisions of the Code.

The CIRP Regulations provide for certain criteria and directions in order to ensure that a resolution plan satisfies the conditions mentioned under Section 30(2). Regulation 37 of the CIRP Regulations provides an illustrative and inclusive list of measures as may be necessary for the insolvency resolution of the corporate debtor for maximization of the value of its assets. Under Regulation 37, a resolution plan submitted by the prospective resolution applicant must provide for such measures which may include transfer or sale of assets, or part thereof, whether subject to security interests or not. The plan may provide for either satisfaction or modification of any security interest of a secured creditor and may also provide for reduction in the amount payable to different classes of creditors.

A resolution plan may also provide for payments to be made by the guarantors of the corporate debtor. As such, in the case of Essar Steel, while relying on its earlier judgment in the case of SBI v. Ramakrishnan, the SC has clarified that a resolution plan binds all stakeholders including guarantors.

Regulation 38 also provides for a list of mandatory contents of a resolution plan. A resolution plan must contain, inter alia, a provision that the amount due to operational creditors shall be given priority in payment over financial creditors. It must then provide for the term of the plan, management and control of the business of the corporate debtor during such term, and its implementation. It must also demonstrate that it is feasible and viable, and that the resolution applicant has the capability to implement the said plan. Importantly, under Regulation 38 (1A), a resolution plan is required to include a statement as to how the plan has dealt with the interests of all stakeholders, including financial and operational creditors.

However, a common issue that has been raised by operational creditors from the inception of the Code is that the liquidation value being nil in most cases, such operational creditors are often short-changed during the process.

In Swiss Ribbons Case, the SC has clarified that a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than liquidation value.[1] Further, in Essar Steel, the SC has also noted that a concomitant reading of the various provisions of the Code and the CIRP Regulations evince the importance given to ensuring that the corporate debtor is kept running as a going concern during the insolvency resolution process.[2] What is seen from these decisions is that the SC has noted that the priority in payment and the minimum guaranteed quantum of such payment, being the liquidation value, would show that the Code has attempted to balance the interest of all stakeholders, including the operational creditors. In Swiss Ribbons, the SC had noted that empirically the interest of the operational creditors have been safeguarded in the resolution plans.

In Essar Steel, while adverting to the requirement under Regulation 38(1A), which provides that a resolution plan must contain a statement as to how it has dealt with the interest of all stakeholders, the SC has specifically mentioned that a resolution plan which provides only for the liquidation value to the operational creditors, which may be nil in most cases, would not balance the interest of all stakeholders.[3] Therefore, a resolution plan must provide for a minimum payment of dues to operational creditors, which in any case cannot be less than the liquidation value.

Recently in the case of Ghanashyam Mishra and Sons Private Ltd v. Edelweiss Asset Reconstruction Company,[4] the SC while upholding the ‘clean slate theory’ said that no creditor is allowed to initiate any proceedings to recover claims, once the resolution plan is approved by the adjudicating authority. All claims which are not part of the resolution plan will stand extinguished. The logical explanation and intent behind this explain that there should be a clean slate facilitated to the resolution applicant when he starts and no surprise claims come up afterwards. The linked reason is also that when after calculation resolution plan is submitted, the unaccounted claims doesn’t make the plan go haywire and defeat the whole process.

The SC also seized the opportunity to determine the interplay of section 230 of the Companies Act and ineligibility of person to propose resolution plan under IBC. It held that a person who is ineligible to submit resolution plan under Section 29A of IBC, is also barred from proposing a scheme in the nature of a compromise or arrangement under Section 230 of Companies Act.[5]

[1] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., Writ Petition (Civil) No. 99 of 2018, ¶ 46.

[2] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. Civil Appeal No. 8766-67 of 2019, ¶ 45-46.

[3] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. Civil Appeal No. 8766-67 of 2019, ¶ 46

[4] Ghanashyam Mishra and Sons Private Ltd v. Edelweiss Asset Reconstruction Company, Civil Appeal No. 8129 of 2019.

[5] Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Anr., Civil Appeal No. 9664 of 2019.