The author is Bharat Manwani, second year student at Gujarat National Law University.
The Corporate Insolvency Resolution Process (CIRP) comprises three stages; the first stage concludes with the approval of a Resolution Plan by the Committee of Creditors (CoC) whereas the third stage concludes with such Resolution Plan being approved by the Adjudicating Authority. Both the first and third stages are explicitly governed by through the conditions laid down in the Insolvency and Bankruptcy Code 2016 (IBC), through which the relationship of the parties is clearly determinable. However, there exists a lack of clarity with regards to the relationship between the successful resolution applicant and corporate debtor during the second stage of the CIRP process.
The second stage lies at the interim, where the plan has already been approved by a CoC but awaiting approval by the Adjudicating Authority. The Courts have previously had the chance to review the nature of a Resolution Plan at the second stage, but have not arrived at a consensus regarding its nature. By ascertaining the nature of the Resolution Plan, we could easily determine the source of legal force on the plan and whether it is the IBC or contract law. The Supreme Court and NCLAT have attempted to answer this exact question in the case of Ebix Singapore Pvt Ltd. and the case of Piramal Capital & Housing Finance respectively. However, the authorities have failed to come up with a straightforward answer to the nature of a Resolution Plan during the second stage of the CIRP.
In this article, the author attempts to argue that the nature of a Resolution Plan is to be ascertained in the form of a contract, which in turn would benefit several successful resolution applicants and further the object of the code. By way of interpreting a Resolution Plan in the form of a contract, successful resolution applicants would have access to various remedies such as restitution, novation, liquidated and unliquidated damages, which aren’t specifically available to them at the second stage, as per the conditions laid down in the IBC. The claim that the nature of a Resolution Plan is in the form of a contract is based upon the fact that the Bankruptcy Law Reforms Committee Report of 2015, a pre legislative text that was utilized in the formation of the IBC, refers to the Resolution Plan as a ‘binding contract’ and ‘binding agreement’ on several occasions. Additionally, this article provides a brief overview of the CIRP process and explains how the stages are analogous to the formation of a contract. Moreover, it refers to the bankruptcy laws of several foreign jurisdictions that have established the nature of a Resolution Plan to be in the form of a contract, such as the United Kingdom, the United States of America and Singapore.
Intention of the Legislators
The Ministry of Finance constituted the Bankruptcy Legislative Reforms Commission (BLRC) on 22 August 2014. The Committee issued two volumes of reports along with a draft insolvency bill. Through their draft bill, they suggested a harmonized legislation for resolving both corporate and personal insolvencies, which later came to be known as the Insolvency and Bankruptcy Code 2016. Their reports and draft bill are essentially a pre legislative text which was unreservedly incorporated into the IBC. The BLRC in Volume 1 of its report has referred to the Resolution Plan as a ‘binding contract’, ‘binding agreement’ on numerous occasions. In Paragraph 5.3.3, the committee has remarked the following, “The RP must ensure that the solution agreed upon by majority vote in the creditors committee is presented as a binding contract signed by the majority to the Adjudicator within the time limit available.” (emphasis supplied) Furthermore, in Paragraph 5.3.4, the committee has instructed the Resolution Professional (RP) to submit a “binding agreement” before the prescribed date or otherwise proceed with the liquidation process. Apart from this, there have been several other mentions in the BLRC Report which indicate the clear intention of the commission characterizing the Resolution Plan in the form of a contract. Such characterization would supposedly enable the Resolution Plan to have a binding effect which would consequently prevent a CoC to renege from the conditions stipulated in the Resolution Plan.
CIRP's resemblance to formation of a contract
The rationale for ascertaining a Resolution Plan in the form of a contract also arises from the fact that the entire CIRP process resembles the formation of a contract. When a Request for Resolution Plan is issued by the corporate debtor, it corresponds to an invitation to offer. The response to such request is the submission of a Resolution Plan, which in turn resembles an offer made. Subsequently, such offer being accepted and approved by the CoC through their voting mechanism bears resemblance to the acceptance of an offer. The terms of a Resolution Plan are nothing but a commercial bargain between the resolution applicant and the CoC, which is combined with the intention to establish a binding legal relationship. The commercial bargain between the parties suggests the fact that an agreement has reached through negotiation, that has been facilitated with the element of contractual freedom.
Foreign Jurisprudence on the nature of a Resolution Plan
The argument that a Resolution Plan is in the nature of a contract is further strengthened by the interpretations of foreign jurisdictions. For instance, the Singapore Court of Appeal has confirmed a Resolution Plan to have a “contractual scheme”. This verdict relied on the fact that the legislation in Singapore, more particularly the Companies (Amendment) Act of 2017, postulates the arrangement to have the effect of a binding contract.
The United States of America follows an identical interpretation of such Resolution Plans. A Resolution Plan is characterized as a contract and the violation of its provisions enable the parties to seek contractual remedies, as was held in the landmark case of In re Hoffinger Indus, Inc. Additionally, Section 1141 of the United States Bankruptcy Code has been a useful aid in determining the binding effect of a Resolution Plan, and it has been further held that “the plan proponent and has the same effect as contract.”
In the United Kingdom, the power to propose a Company Voluntary Arrangement (CVA) which is much like a Resolution Plan, is provided through the UK Insolvency Act 1986. Section 5(2)(b) of the same Act dictates that once a CVA is approved by creditors having a voting share of at least 75% of total creditors, then all parties are bound by the provisions of such CVA. Professor Roy Goode in his authoritative book titled “Principles of Corporate Insolvency Law” has remarked that “the wording of s.5(2)(b) has led the courts to characterize the relationship between the parties to a CVA as essentially contractual in nature and its scope and effect are determined by its terms, which fall to be interpreted by application of the ordinary principles of contractual interpretation.” (emphasis supplied) This interpretation has been further strengthened by subsequent rulings of the English Court of Appeal, wherein they have held that such CVAs establish contractual obligations and are subject to the usual principles utilized in the interpretation of contracts.
In the case of Ebix Singapore Pvt Ltd. vs Committee of Creditors of Educomp, the Supreme Court of India held that a submitted Resolution Plan cannot be regarded as a contract. However, in light of the fact that the BLRC report itself has made references to indicate otherwise, the CIRP process illustrated to be analogous to the formation of a contract along with interpretations made in foreign jurisdictions, it is clearly evinced that a submitted Resolution Plan is in the nature of a contract. By ascertaining the nature of a Resolution Plan in the form of a contract, the Courts could entitle successful resolution applicants to have access to a host of remedies in the second stage of the CIRP such as restitution, novation, liquidated and unliquidated damages. Additionally, it would help determine the relationship of the successful resolution applicant and the corporate debtor, and provide clarity on the expected conduct of involved parties during the second stage. This would fill the gap in the current Insolvency and Bankruptcy framework, enabling the growth of credit markets in India.