[Supreme Court] No Modifications Are Permitted in the Resolution Plan Once It Is Approved by the CoC and NCLT

Introduction

In UV Asset Reconstruction Company Ltd. v. Aircel Ltd.[i], the issue was whether a successful resolution applicant could be substituted with another entity on the same terms and conditions after the resolution plan (‘Plan’) had been approved by the Committee of Creditors (‘CoC’) and the National Company Law Tribunal (‘NCLT’). The NCLT held that the provisions of the IBC did not permit such substitution for any reason. In this case, the National Company Law Appellate Tribunal (‘NCLAT’) and the Supreme Court upheld this observation/finding.

Brief Facts

• Aircel Limited and its group companies, the corporate debtor (‘CD’), had filed an application under s. 10 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), before the NCLT due to financial difficulties. UV Asset Reconstruction Company Ltd. (‘UV-ARC’) submitted a Plan, which the CoC and the NCLT approved.

• The approved Plan required UV-ARC to obtain approval from the Reserve Bank of India (‘RBI’) for acquiring shares of the CD and for other transactions contemplated in the approved Plan.

• UV-ARC approached the RBI through several letters/correspondence but was unsuccessful in obtaining the required approval.

• The RBI also issued a show cause notice (‘SCN’) seeking the cancellation of the UV-ARC Certificate of Registration under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). UV-ARC challenged the SCN before the Delhi High Court, which granted an interim stay in the RBI SCN proceedings. The RBI maintained that asset reconstruction companies are not permitted to act as resolution applicants.

• Due to the delay and uncertainty in obtaining RBI’s approval, UV-ARC filed an application before NCLT seeking to nominate UV Stressed Assets Management Private Limited in place of itself for the purpose of implementing the approved Plan. The prayer before the NCLT was that there would be no change in the terms and conditions of the approved Plan and that only substitution would be sought owing to the delay in getting approval from RBI.

• The UV-ARC also highlighted the rapid depreciation of idle assets, such as equipment and machinery, due to obsolescence. It underscored that monetising these assets was essential for successfully implementing the Plan. The CD’s monitoring committee also conveyed no objection to the substitution proposed by UV-ARC.

Observations of NCLT

• The NCLT also observed that under the provisions of IBC, the CoC approves a Plan after considering its viability and feasibility before submitting it to the NCLT for approval. The NCLT observed that the Plan in the instant case has undergone the process as mandated by IBC; therefore, it cannot be argued that there is ambiguity in its implementation. The NCLT observed that UV-ARC was fully aware of its status as an asset reconstruction company and whether it was eligible to submit the Plan.

• The NCLT also observed that the IBC contains a step-wise procedure for submitting and approving the Plan, and therefore, the said procedure cannot be circumvented by substituting a new resolution applicant on the same terms and conditions.

• The NCLT also observed that once the Plan has been approved, the successful resolution applicant cannot withdraw or modify it. In this regard, NCLT relied on the Supreme Court's decision in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited[ii].

• The NCLT also noted that the IBC does not specifically provide for the substitution of the resolution applicant, and in the absence of any specific provision, the substitution cannot be allowed.

Findings of NCLAT and Supreme Court

• The NCLAT and the Supreme Court refused to interfere with the NCLT's findings and observations regarding the substitution of the resolution applicant, upholding the NCLT’s order.

Analysis and Conclusion

The observation of the NCLT that the step-wise procedure laid down under IBC for submission and approval of the Plans cannot be allowed to be circumvented by substitution of another resolution applicant on the same terms and conditions is well reasoned. This decision emphasises the need for closer scrutiny of Plans from a regulatory standpoint before their approval by the CoC and submission to the NCLT. If such substitutions are routinely allowed, it may lead to abuse and litigation, contrary to the purpose of IBC.

Interestingly, the NCLAT, in its order, stated that the UV-ARC could make necessary applications before the NCLT to remove the impasse and find a way forward. In the author's opinion, this is exactly what UV-ARC did, and the NCLT refused to interfere with the approved Plan even though no changes in the Plan's terms and conditions were proposed.

However, there may be deserving cases where an approved Plan becomes incapable of execution due to certain regulatory roadblocks. To address such eventualities, it would be prudent to make necessary amendments to the IBC to provide for them and confer powers on the NCLT to make the Plans workable.

End Notes

[i] [2024] 164 taxmann.com 480 (SC) dated 10.07.2024.

[ii] Civil Appeal No. 3224 of 2020.

Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.