CONDITIONS OF IBC RESOLUTION PLAN NOT TO BE INTERFERED WITH

[Dr. Sanjiv Agarwal]

When a resolution plan is approved by NCLT or NCLAT, as the case may be, Successful Resolution Applicant (SRA) is under an obligation to fulfill all conditions precedent to such approved plan and any deviation or adjustment therein is not permissible.

Section 30 of IBC Code, 2016 on submission of resolution plan and section 31 of IBC Code, 2016 providing for the approval of resolution plan are relevant for this purpose.

According to section 30 of IBC Code, 2016, a resolution applicant may submit a resolution plan along with an affidavit stating that he is eligible under section 29A to the resolution professional prepared on the basis of the information memorandum. The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan-

1. provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the payment of other debts of the corporate debtor;
2. provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-

1. the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or
2. the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Further, it provides for the management of the affairs of the corporate debtor after approval of the resolution plan along with the implementation and supervision of the resolution plan.

The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm the conditions. The committee of creditors may approve a resolution plan by a vote of not less than sixty-six percent of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed.

The resolution applicant may attend the meeting of the committee of creditors in which the resolution plan of the applicant is considered but shall not have a right to vote at the meeting of the committee of creditors unless such resolution applicant is also a financial creditor. The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.

According to section 31 of IBC Code, 2016,  if the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors (COC) under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan. Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.

In STATE BANK OF INDIA AND ORS. JC FLOWERS ASSET RECONSTRUCTION PRIVATE LTD. AND PUNJAB NATIONAL BANK VERSUS THE CONSORTIUM OF MR MURARI LAL JALAN AND MR FLORIAN FRITSCH AND ANR - 2024 (1) TMI 1021 - SUPREME COURT where as per resolution plan, Successful Resolution Applicant (SRA) was obligated to fulfil certain conditions precedent and make payments i.e. infuse funds in tranches but NCLAT allowed SRA to adjust last tranche of payment against Performance Bank Guarantee (PBG) issued by SRA, it was held that infusion of last tranche substituted with such adjustment at interlocutor was not permissible, and, therefore, order of NCLAT was directed to be modified in part and SRA was directed to deposit last tranche of amount.

As per the factual matrix, the respondent’s resolution plan was approved by COC of the corporate debtor and later by NCLT subject to conditions precedent. Accordingly, the Successful Resolution Applicant (SRA) was required to infuse funds and was obligated to recommence operations as an aviation company subject to fulfilment of five conditions precedent.

The SRA claimed that all conditions precedent had been duly fulfilled and communicated to the lenders of the corporate debtor, affirming compliance with all prerequisites, but the lenders took a position to the contrary. On SRA filing an application seeking a determination in accord with its position and, the NCLT allowed the said application, permitting the SRA to take control and management of the corporate debtor. The bank (lenders) filed an appeal challenging order of the NCLT and the NCLAT rejected the said appeal by declining to stay the order of the NCLT.

The court observed that infusion meant that the third tranche has to be paid in the same manner. Adjustment of the PBG was not permissible. It was held that NCLAT was not justified in holding, in its order dated 28 August 2023, that the last tranche of Rs 150 crores which was to be paid would be adjusted against the PBG. The SRA having deposited the first two tranches each of Rs 100 crores must comply with the remaining obligation of depositing Rs 150 crores (to make up a total payment of Rs 350 crores). Having by its conduct accepted the terms set up by SBI it must be obligated to comply with the entirety of its obligations. It must do so in strict compliance with the time schedule.

The lenders argued in the appeals that there has been a failure on the part of the SRA to comply with the conditions precedent. If the SRA were to comply with the terms as envisaged in SBI’s affidavit dated 16 August 2023, evidently issues pertaining to compliance with the conditions precedent were not to be pressed thereafter. In order to furnish this SRA a final opportunity to comply and consistent with the above position, court issued the following directions:

1. The SRA shall peremptorily on or before 31 January 2024, deposit an amount of Rs 150 crores into the designated account of SBI, failing which the consequences under the Resolution Plan shall follow;

2. The PBG of Rs 150 crores shall continue to remain in operation and effect, pending the final disposal of the appeal before NCLAT, and shall abide by the final outcome of the appeal and the directions that may be issued by NCLAT; and

3. Whether or not the SRA has been compliant with all the conditions of the Resolution Plan as well as of the conditions set out in paragraph 8 of the affidavit dated 16 August 2023 shall be decided by the NCLAT in the pending appeal.

The apex court therefore, modified the NCLAT order and the permission which was granted to the SRA to adjust the last tranche of Rs 150 crores against the PBG shall stood substituted by the said directions. The appeal was disposed of in said terms concluding that conditions precedent could not be adjusted or interfered with.