REPLACEMENT OF RESOLUTION APPLICANT AFTER APPROVAL OF RESOLUTION PLAN – POSSIBLE?

[Mr. M. GOVINDARAJAN]

Resolution applicant

The expression ‘resolution applicant’ is defined under Section 5(25) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) as a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25 or pursuant to section 54K, as the case may be.

Approval of resolution plan

The role of resolution applicant is very much important in the corporate insolvency resolution process (‘CIRP’ for short).  The objective of the Code is for the revival of the business.  Once the corporate insolvency resolution process is initiated against a corporate debtor by any of the creditor (financial creditor or operational creditor of the corporate applicant itself) the Adjudicating Authority admits the application and appoints the Interim Resolution Professional (‘IRP’ for short).  The IRP will call from the creditors of the corporate debtor through a public announcement.  On receipt of the claims from the creditors a Committee of Creditors (‘CoC’ for short). The CoC will replace the IRP by another insolvency professional as ‘Resolution Professional’ (‘RP’ for short).

On the advice of the CoC the RP will do the CIRP. In the said process the RP will invite from eligible resolution applicants for the submission of resolution plan for the survival of the corporate debtor.  On the receipt of resolution plan, the RP will examine the same select the best one and place before the CoC for its approval.  The CoC will discuss the same elaborately and approve it if the resolution plan complies with the provisions of the Code.

Eligibility of Resolution Applicant

The Code does not prescribe the qualifications of Resolution Applicant who will submit resolution plan.  But Section 29A of the Code prescribes nearly 10 disqualifications.  If the prospective resolution applicant is disqualified under any of the provisions under Section 29A of the Code he will not be eligible for acting as Resolution applicant. 

Replacement of Resolution Applicant – possible?

Once the resolution plan is approved by the CoC the same cannot be modified later.  The commercial wisdom of CoC is upheld by the Tribunal, High Courts and Supreme Court in many cases.  The issue to be discussed in this article is whether the Resolution Applicant may be replaced by another Resolution Applicant after approval of the resolution plan, with reference to decided case law.

Case law

In SWAN ENERGY LTD. VERSUS CHANDAN PRAKASH JAIN, RP OF E-COMPLEX PVT. LTD. & ORS. - 2024 (10) TMI 509 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI, the NCLAT held that the Resolution Applicant cannot be replaced after the approval of the resolution plan.

In the above said case, the Adjudicating Authority admitted an application for CIRP, filed by an operational creditor against the corporate debtor under section 9 of the Code on 09.12.2020.  The Resolution Professional, appointed by the Adjudicating Authority carried out the activities in relation to CIRP.  He invited expression of interest in Form G and request for resolution plan. 

In response to the request one company ‘GSEC Limited’ filed its resolution plan.  Another resolution applicant sought for extension of time for the submission of resolution plan.  The CoC was directed by the Adjudicating Authority to consider the resolution plan submitted by JSPL and also directed to allow the resolution applicants to amend the resolution plans.

The resolution plans were submitted by the appellant, JSPL and Invest Assets Securitization and Reconstruction Private Limited, the third respondent in this appeal.  The CoC approved the resolution plan of the third respondent by 72.97% votes.  The Resolution Professional filed an application before the Adjudicating Authority for its approval.  During the pendency of this application Reserve Bank of India (‘RBI’ for short) issued one circular on 11.10.2022 in which RBI directed that Asset Reconstruction Companies (‘ARC’ for short) are currently not permitted to commence or carry on any business other than that of the securitization or asset reconstruction or the business referred to in Section 10(1) of the SARFAESI Act, without prior approval of the RBI subject to fulfilment of various/ certain conditions.  According to the said circular, the Respondent No.3 who was Asset Reconstruction Company was clearly not eligible to give Resolution Plan or to continue to be Resolution Applicant without prior approval of the RBI.

The respondent No. 3 filed an application before the Adjudicating Authority with the request to substitute its name for the 4^th respondent as resolution applicant.  On 09.04.2023, on request made by Respondent No.3, Adjudicating Authority allowed withdrawal of IA No. 1 of 2023 with liberty to move an appropriate representation before the CoC.  The CoC approved the Resolution Plan with modification that Respondent No.4 may be substituted as Resolution Applicant in place of Respondent No.3 on 05.05.2023.  The Resolution Professional submitted an application for the approval of the said modified resolution plan. 

The Adjudicating Authority directed the Resolution Professional to file the Request for Resolution Plan (RFRP) and to point out the relevant provisions in the RFRP whereby the Resolution Applicant could be changed after Resolution Plan was approved by the CoC.  On 12.09.2023 the CoC examined the feasibility and viability of the plan already approved and the Resolution Plan was again re-approved by the CoC by third time with 100% approval.   The Resolution Professional filed another updated Form-H before the Adjudicating Authority. The Adjudicating Authority, after hearing the parties, passed the impugned order on 04.12.2023 approving the modified Resolution Plan in which the Respondent No.4 was substituted as Resolution Applicant.

Being aggrieved against this order, the appellant, the resolution applicant filed the present appeal before the NCLAT.  The appellant submitted the following before NCLAT-

• The Adjudicating Authority committed an error in approving a Resolution Plan in which Resolution Applicant, after approval of resolution plan by the CoC on 21.10.2021, has substituted the Resolution Applicant with Respondent No.4 with the approval of the CoC which is clearly contrary to the entire scheme of the Code and the CIRP Regulations 2016.
• The SRA i.e. Respondent No.3 whose plan was approved on 21.10.2021 became ineligible as Resolution Applicant, hence, the process of the CIRP ought to have been initiated afresh by issuance of fresh Form-G inviting the Resolution Applicants to submit the plan.
• After the approval of resolution plan, no new Resolution Applicant can be substituted even after approval by the CoC.
• After the approval of resolution plan the CoC has no jurisdiction or authority to pass a Resolution for modification of approved Resolution Plan by substituting Respondent No.4 as new Resolution Applicant.
• The Resolution Professional also acted contrary to the scheme of the Code and the procedure as prescribed in the CIRP to permit Respondent No.4 to become Resolution Applicant and committed error in placing such modified plan for approval before the CoC and voting.

• The RFRP was filed by the Resolution Professional but no clause in the RFRP could be pointed out where Resolution Applicant could be changed or substituted after plan has been approved.
• The Adjudicating Authority committed serious error in approving such modified Resolution Plan with new Resolution Applicant i.e. Respondent No.4 who had neither filed any EoI nor has filed any Resolution Plan in the process.
• The CIRP of the corporate debtor had come to an end on 14.09.2021.  Thereafter, Resolution Professional held 10^th CoC meetings last being held on 20.10.2023 without any authority or jurisdiction. No meeting of the CoC could have been called after expiry of the period of the CIRP.

The following were submitted on behalf of the CoC-

• There is no modification in the Resolution Plan which was approved on 21.10.2021 except the change of the Resolution Applicant who is none other than the sponsor company of Respondent No.3.
•  Despite there was prohibition in RBI circular, for implementation of the Resolution Plan, Respondent No.3 was fully entitled to nominate an entity.
• The provision of the Resolution Plan clearly permits the Resolution Applicant to implement the plan through its subsidiary including the special purpose vehicle etc.
• The applicant who was unsuccessful Resolution Applicant has no locus to file the appeal.
• A disgruntled PRA whose plan was considered and rejected by the CoC, cannot be allowed to challenge the Resolution Plan approved by the Adjudicating Authority.
• The commercial wisdom of the CoC in approving the Resolution Plan cannot be questioned before the Adjudicating Authority especially by a Resolution Applicant whose plan was considered and rejected.
• There is no material irregularity in the process of the CIRP and the appeal deserves to be dismissed.

The SRA submitted the following before NCLAT-

• The Respondent No.4 has been nominated to implement the plan.
• The Respondent No.4- SRA has made payment of the requisite amount in terms of the approved Resolution Plan.
• New management has taken over the control of the corporate debtor.
• The object of the Code is to revive the business of the corporate debtor which having been revived, no interference is called for in the impugned order.

The NCLAT considered the submissions of the parties.  The NCLAT framed the following questions for its consideration in the present appeal-

1. Whether after approval of the Resolution Plan of a Resolution Applicant by the CoC and filing of application before the Adjudicating Authority for approval of the Resolution Plan which is approved by the CoC, the CoC had any jurisdiction to substitute the SRA with another SRA who was not part of the CIRP process?
2. Whether CoC has jurisdiction to modify a Resolution Plan already approved by the CoC and submitted before the Adjudicating Authority for approval under Section 30(6) of the Code?

The NCLAT analyzed the entire case with the available information and documents.  The NCLAT observed the grounds of appeals as provided in Section 61 of the Code.  Section 61 (3) provides that appeal against an order approving a resolution plan under Section 13 of the Code on the following grounds-

• the approved resolution plan is in contravention of the provisions of any law for the time being in force;
• there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;
• the debts owed to operational creditors of the corporate debtor has not been provided for in the resolution plan in the manner specified by the Board;
• the insolvency resolution process costs have not been provided for repayment in priority to all other debts; or
• the resolution plan does not comply with any other criteria specified by the Board.

The NCLAT observed that the present appeal is covered under Section 61(3) of the Code.  Therefore, he is an aggrieved person and eligible to file appeal.  The NCLAT rejected the contentions of the respondent that the appellant has no locus to file the appeal.

The NCLAT observed that the respondent No.3 filed an IA seeking substitution of name of Respondent No.4 in place of Respondent No.3.  IA was subsequently withdrawn by the Respondent No.3, with liberty to move an appropriate representation before the CoC. which was permitted by the Adjudicating Authority vide order dated 19.04.2023.  The NCLAT was of the view that the said order does not clothe the CoC to permit substitution of Respondent No.4 in place of Respondent No.3.  The CoC has approved the Resolution Plan in which Resolution Applicant has been substituted and modified as ‘Westend Investment and Finance Consultancy Private Limited’ which Resolution Plan was approved with 100% vote share and placed before the Adjudicating Authority along with the Affidavit.

The NCLAT considered another contention of the respondent. The Appellant had filed an IA No.68 of 2023 challenging the approval of the Resolution Plan dated 21.10.2021 which was withdrawn on 14.06.2023.  The Appellant is not challenging the approval of Resolution Plan on 21.10.2021.  The Resolution Plan of the Appellant was not approved. The challenge in the present appeal is on the subsequent events and resolution of the CoC culminating into approval of the plan by the Adjudicating Authority in the impugned order. The NCLAT held that the order dated 14.06.2023 can in no manner effect the rights of the Appellant to agitate the issue sought to be raised.

The NCLAT observed that in the order dated 01.09.2023 the Adjudicating Authority has required the Resolution Professional to explain and place the relevant provisions of the RFRP under which Resolution Applicant could be changed after Resolution Plan was approved.  It is not case of either of the Respondents that RFRP permits change of the Resolution Applicant after approval of the Resolution Plan.  Therefore, the conclusion is inescapable that there was no provision in the RFRP by which Resolution Applicant could be changed after approval of the Resolution Plan.

The NCLAT further observed that the Resolution Plan received from a person who does not appear in the final list of Prospective Resolution Applicants (PRAs) cannot be considered. In the present case, there is no dispute that the Respondent No.4 has never submitted a Resolution Plan and he was not included in the list of PRAs. The CoC has no jurisdiction to approve the Resolution Plan treating it to be the plan of Respondent No.4 or to substitute Respondent No.4 as Resolution Applicant.   The applicant who has not participated in any of the stages of CIRP process cannot suddenly be substituted as SRA to implement the plan of Corporate Debtor. NCLAT was of the opinion that the opinion that substitution of Respondent No.4 in the Resolution Plan is contrary to the statutory scheme of the Code read with CIRP Regulations 2016.

The NCLAT then observed that the clauses of the Resolution Plan relied by Counsel for the CoC with regard to infusion of equity which can be infused by Resolution Applicant indirectly or directly through its subsidiary, special purpose vehicle, limited liability partnership nominee of Resolution Applicant into the company from its own fund. The clause for infusion of equity cannot be read to mean that SRA can nominate its nominee as SRA. Infusion of equity is entirely different from Respondent No.4 becoming the SRA.

The CoC, after having approved the Resolution Plan, could not have allowed to modify. There can be only one exception to aforesaid, where Resolution Plan violates any provision of Section 30(2) and the CoC takes a decision to delete the provision which are non-compliant to make the plan compliant. However, that is not an issue in the present case.

NCLAT was of the view that the Adjudicating Authority committed error in approving the Resolution Plan which was modified Resolution Plan substituting Respondent No.4 as SRA.  The order of the Adjudicating Authority is unsustainable and cannot be approved.

The NCLAT noticed despite the CIRP having come to an end on 14.09.2021, the CoC thereafter continued for two years by holding several CoC meeting with object to change that SRA into another entity.

NCLAT was of the view that one more time bound opportunity be given for finding out as to whether any other Resolution Applicants can revive the Corporate Debtor. The NCLAT further directed for issuance of fresh Form-G by the Resolution Professional and complete the entire process within 90 days from the date of order.

Conclusion

Once resolution plan is approved by the CoC followed by the Adjudicating Authority not only the resolution plan cannot be modified but also the resolution applicant cannot be substituted by another resolution applicant.  In UV ASSET RECONSTRUCTION COMPANY LTD. & ANR. VERSUS AIRCEL LTD. THROUGH ITS MONITORING COMMITTEE AND UV ASSET RECONSTRUCTION COMPANY LTD. & ANR. VERSUS DISHNET WIRELESS LTD. THROUGH ITS MONITORING COMMITTEE - 2024 (3) TMI 1334 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB in which the Adjudicating Authority rejected the application for substituting another entity.  On appeal the NCLAT held that when plan of the Appellant as Resolution Applicant was approved, the Adjudicating Authority rightly refused to substitute another Resolution Applicant.