“Morality is what the queen expects from the hive, not from herself.”
–Marty Rubin
In any corporate insolvency resolution process under IBC, there are at least three stakeholders-the corporate debtor, the creditors and the purchaser (also known as the resolution applicant). The purchaser offers what it believes is the right price for the corporate debtor and then the Committee of Creditors (“CoC”), determines if that price is acceptable to them or not. To any lay person, this would seem like the CoC and the purchaser are almost at the same pedestal and, once there is a handshake between them, there should be no turning back. Post the handshake, the standards of conduct applicable to both the parties should be the same. However, the recent judgement of the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in Bank of Maharashtra Stressed Asset Management Branch v. Videocon Industries Ltd. & Ors., CA(AT) (Ins.) No. 503 of 2021 (“Videocon judgement”) dismantled this simple construct.
Before we delve into the Videocon judgement, let us first understand what is the standard of conduct applicable to the purchaser. In Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited & Anr., Civil Appeal No. 3224 of 2020 (“Ebix judgement”), the Hon’ble Supreme Court held that once the resolution plan has been submitted to the Adjudicating Authority, it cannot be withdrawn by the purchaser. The rationale provided for the same was as under:
“147 The IBC is silent on whether a successful Resolution Applicant can withdraw its Resolution Plan. However, the statutory framework laid down under the IBC and the CIRP Regulations provide a step-by-step procedure which is to be followed from the initiation of CIRP to the approval by the Adjudicating Authority. Regulation 40A describes a model-timeline for the CIRP that accounts for every eventuality that may arise between the commencement of the CIRP and approval of the Resolution Plan by the Adjudicating Authority, including the different stages for pressing a withdrawal of the CIRP under Section 12A. Even a modification to the RFRP is envisaged by the CIRP Rules and is subject to a timeline.The absence of any exit routes being stipulated under the statute for a successful Resolution Applicant is indicative of the IBC’s proscription of any attempts at withdrawal at its behest. The rule of casus omissus is an established rule of interpretation, which provides that an omission in a statute cannot be supplied by judicial construction. …Further, only such words can be supplied to the statute which would have certainly been inserted by the Parliament, had the omission come to its notice. ……In the absence of any provision under the IBC allowing for withdrawal of the Resolution Plan by a successful Resolution Applicant, vesting the Resolution Applicant with such a relief through a process of judicial interpretation would be impermissible. Such a judicial exercise would bring in the evils which the IBC sought to obviate through the back-door.” (emphasis supplied)
In sharp contrast to this reasoning, the Hon’ble NCLAT has held that the CoC can review any of its decisions, including the decision to approve a Resolution Plan. This means that post submission of a CoC approved resolution plan to the Adjudicating Authority, the CoC has the liberty to change its mind and seek withdrawal of the resolution plan. The NCLAT held:
“38. The CoCs are the best judge to analyze, pick up and take prudent commercial decision for the business but they are also subjected to test of prudence in order to ensure fairness and transparency.
39. The level of haircut being unprecedented and involving large public interest involving thousands of crore of public money requires perhaps deep thinking and cool calculation by the CoC and as a result of which perhaps, they have taken cognizance of certain judicial wisdom in a true spirit and accordingly wishes to review their own decision. In any case, when they are reviewing their own decisions the same has to go through the deliberation, public grudge, loss of public money and perhaps revaluation.
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41. In the judicial forum once an order is passed by a particular authority for, an example, by the Adjudicating Authority, it cannot review its order or judgment except as permitted under Section 420(2) of the companies Act, 2013 r/w Rule 154 of the NCLT, Rules 2016. The same judicial authority can only rectify any mistake apparent from record either its own motion or brought to its notice by the parties. So the power of review under judicial arena lies with the higher judiciary. While in case of commercial decision of the ‘Board of Director’, the same approving authority can review its own decision within the frame work or boundary of the law laid down.
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45. All these reflect that power to reconsider any decision is within the domain of CoC and even Hon’ble Apex Court in Catena of judgment held that the commercial wisdom of the CoCs is non justifiable and hence, it is in the domain of CoC, particularly, if at a later stage, it finds in public interest and the amount of loss which the public exchequer is to bear with such unprecedented haircut in such a large fund employment, it is in the fitness of thing that the proposal can be remanded back to the CoC, particularly, in view of their own affidavit to review their decision. The CoC is not functus –officio on the approval of the Resolution plan and accordingly, the judicial precedents clearly established that the Adjudicating Authority and this Tribunal is competent to send back the Resolution plan to the CoC for reconsideration.” (emphasis supplied)
Let us examine this reasoning in a little more detail:
- It is true that the CoC is “subjected to a test of prudence in order to ensure fairness and transparency”. However, the principles of fairness and transparency are applicable to the entire process of insolvency resolution. Fairness will also include certainty of the process, including the approval of CoC. It is extremely unfair to all stakeholders, and specially the purchaser if after the approval of CoC, it is informed that the CoC had a change of heart for whatever reason.
- The Hon’ble NCLAT observes that “[t]he level of haircut being unprecedented and involving large public interest involving thousands of crore of public money requires perhaps deep thinking and cool calculation by the CoC and as a result of which perhaps, they have taken cognizance of certain judicial wisdom in a true spirit and accordingly wishes to review their own decision.” However, these cool calculations are required to be made prior to approval of the resolution plan. Members of the CoC take their own time in getting approval from higher authorities so it cannot be anyone’s case that such a decision of accepting a large haircut was a spur of the moment decision. A large cut is often accepted when the creditors realise that the other alternative, i.e, liquidation of the company will fetch even lesser proceeds. The less said about the public interest factor the better. Avoiding a certain corporate death of the company is the best a banker can do for public interest. When a company is not forced to liquidate its assets, it pays back to the economy and society by creating jobs, engaging with suppliers and service providers and by paying at least the indirect taxes. This is the most public interest you can really squeeze out of a dying company.
- The Hon’ble NCLAT then proceeds to compare the CoC with a Board of Directors and at times with an authority (we are assuming regulatory or statutory, though it never really makes a distinction). As per the Hon’ble NCLAT, if a Board of Directors can change its mind, the CoC can too. However, once an agreement is entered into by a company on the basis of a resolution by the Board, even the Board of Directors cannot pull out of the same without facing the consequences under law. The comparison of CoC to an authority is even more flawed, CoC may be the creation of a statute but it is not an authority under the IBC. It is a mere stakeholder in the process. The approval by the CoC under Section 30(4) of the IBC is not an approval by any authority but a consensus building mechanism so that all financial creditors are consulted prior to reaching an understanding regarding the sale of the company. The “approval” or rather the acceptance of the purchaser’s offer by the CoC is contingent only on approval by the Adjudicating Authority. It is true that the process of such offer and acceptance is not governed by the contract laws but the provisions of the IBC. However, the sanctity of this understanding between CoC and the purchaser cannot be subjected to ever changing stances of the CoC or to public outcry, however low the resolution plan amount may be. Once the purchaser’s offer is accepted by the CoC, neither party can change its mind or put additional conditions.
- In fact, the Ebix judgement is very clear that once the resolution plan is approved by the CoC, neither party has scope to rethink or negotiate the resolution plan. It provides:
“112. While the above observations were made in the context of a scheme that has been sanctioned by the Court, the Resolution Plan even prior to the approval of the Adjudicating Authority is binding inter se the CoC and the successful Resolution Applicant. … We have further discussed the statutory scheme of the IBC in Sections I and J of this judgement to establish that a Resolution Plan is binding inter se the CoC and the successful Resolution Applicant. The Resolution Plan cannot be construed purely as a ‘contract’ governed by the Contract Act, in the period intervening its acceptance by the CoC and the approval of the Adjudicating Authority. Even at that stage, its binding effects are produced by the IBC framework. …
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113 …The binding effect of the Resolution Plan has the consequence of preventing the CoC or the Resolution Applicant to renege from its terms after the plan has been approved by the CoC through a voting mechanism.
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125 … This Court in Amtek Auto (supra), had curbed a similar attempt by a successful Resolution Applicant who had relied on a force majeure clause in its Resolution Plan to seek a direction compelling the CoC to negotiate a modification to its Resolution Plan. The Court held that there was no scope for negotiations between the parties once the Resolution Plan has been approved by the CoC. …
152 The binding nature, as between the CoC and the successful Resolution Applicant, of the Resolution Plan submitted for approval by the Adjudicating Authority is further evidenced from the fact that the CoC issues a LOI to a successful Resolution Applicant stating that it has been selected as the successful Resolution Applicant and its Plan would be submitted to the Adjudicating Authority for its approval. The successful Resolution Applicant is typically required to accept the LOI unconditionally and submit a PBG. Sequentially, the issuance of an LOI is followed by its unconditional acceptance by the successful Resolution Applicant. In Amtek Auto (supra), this court … observed that, “[t]o assert that there was any scope for negotiations and discussions after the approval of the resolution plan by the CoC would be plainly contrary to the terms of the IBC.
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204 … A submitted Resolution Plan is binding and irrevocable as between the CoC and the successful Resolution Applicant in terms of the provisions of the IBC and the CIRP Regulations. …” (emphasis supplied)
This would mean that post approval of the resolution plan by the CoC, the purchaser and the CoC are at an equal footing and are both bound by the resolution plan so approved. It is quite disheartening to note that instead of making the rules of the game clear and bringing certainty to the entire process, the Videocon judgement has made the rules even more confusing. If public outrage can enable the CoC to rethink its approval of a Resolution Plan, the prospective purchasers will shy away from picking up such stressed assets and many more Corporate Debtors will go into liquidation.
The Videocon judgement ignores the law laid down in the Ebix judgement and is against the principles of stare decisis. However, till the Videocon judgement is overruled, the position for the stakeholders in any corporate insolvency resolution process under IBC will be:
- The purchaser cannot withdraw from the process once the plan is approved by CoC;
- The CoC, on the other hand, can withdraw at any point before the approval of the Adjudicating Authority.