RESOLUTION PLANS UNDER IBC - REVIVAL MECHANISM OR PROMOTER TACTICS?

I. INTRODUCTION:

Resolution Plans as part of the Insolvency & Bankruptcy Code, 2016 (‘IBC’) have been a key component driving the corporate restructuring framework in India. A Resolution Plan serves as a document which details out not only the financial components of taking over the Corporate Debtor but also entails stricter compliances of repayment mechanisms to the stakeholders and subsequent revival/restructuring of the Corporate Debtor as a going concern.

The recent judgement of the Hon’ble Supreme Court in Kalyani Transco vs. M/s. Bhushan Power and Steels Ltd. & Ors.[1], is being viewed in peculiar lenses since the Hon’ble Supreme Court has set aside the Resolution Plan submitted by the Successful Resolution Applicant (‘SRA’), JSW Steels, despite the same being approved by the CoC, going against multiple principles of Commercial Wisdom of CoC and finality of Resolution Plan.

This article discusses the legal framework of the Resolution Plans under the IBC and also lays emphasis upon the extent and nature of use of Resolution Plans.

II. LEGAL ANATOMY OF RESOLUTION PLANS AND APPROVAL UNDER THE IBC:

As per Section 5(26) of the IBC, a “resolution plan” means a plan proposed by [resolution applicant] for insolvency resolution of the corporate debtor as a going concern in accordance with Part II[2]. This definition further provides that a resolution plan may also include provisions for restructuring of the corporate debtor, including by way of merger, amalgamation and demerger.

The IBC makes it crystal clear that not everyone is eligible to submit a Resolution Plan. This is enabled through Section 29A[3] of the IBC which lists out persons/entities who are ineligible to submit a Resolution Plan, such as undischarged insolvents, wilful defaulters and promoters of defaulting companies. The primary purpose of such a provision is to ensure that the promoters of the Corporate Debtor, whose inefficient strategies and business decisions drove the Corporate Debtor entity into CIRP, are prevented from buying back the Corporate Debtor at a lower, subsidised valuation and continue their unethical practices by way of an illegal backdoor entry.

The contents and mandatory requirements forming part of a Resolution Plan is detailed out under Section 30 of the IBC, wherein, the Resolution Plan must provide for payment of insolvency resolution process costs; ensure repayment to operational creditors at least equal to the amount they'd receive in liquidation; and comply with provisions of the law and not contravene any other law[4]. The Resolution Plan must also contain certain mandatory clauses/contents such as[5]:

a. Prioritizing payment of insolvency costs over the dues of operational creditors as per the waterfall mechanism under Section 53.

b. The Plan must showcase feasibility and viability of achieving the resolution.

c. The Plan must also include the necessary provisions for implementation and supervision of the Plan.

The Resolution Plan must be submitted to the Resolution Professional, who will verify all the necessary requirements that a Plan should possess under Section 30 of the IBC and place the Resolution Plans so received before the Committee of Creditors (CoC) for their approval. Once a CoC approves a Resolution Plan by at-least 66% vote, the Plan stands approved by the CoC[6].

Once a Resolution Plan has been approved by the CoC by at-least 66% vote, the same will be placed by the Resolution Professional before the Hon’ble National Company Law Tribunal (NCLT) for its approval. The power of the NCLT is only to the extent of checking if the procedural requirements and necessities of a Resolution Plan have been satisfied, and if the answer is affirmative, the NCLT approves the Resolution Plan[7].

The power of the NCLT is restricted by a legal principle, the ‘Commercial Wisdom’ of the CoC. This principle was recognised and upheld by the Hon’ble Supreme Court in multiple cases such as Swiss Ribbons vs. Union of India[8] and Committee of Creditors of Essar Steels vs. Satish Kumar Gupta[9]. In these cases, the Hon’ble Supreme Court has upheld the principle of ‘Commercial Wisdom’ of the CoC and prevented the NCLTs from examining and reversing the decisions taken by the CoC in finalizing the Resolution Plan. The premise of the ‘Commercial Wisdom’ is that the Financial Creditors forming part of the CoC are the best equipped in deciding the terms of the Resolution Plan, and the NCLT will not have any say over the decisions taken by the CoC as part of their Commercial Wisdom.

III. EFFECTIVE REVIVALS BY RESOLUTION PLANS:

Ever since the inception of the IBC, the revival of stressed assets has been on the rise. This is facilitated through the Resolution Plan mechanism, which has yielded positive effects to an extent.

As of FY 2023–24, a total of 947 CIRPs had culminated in approved resolution plans. Through these resolutions, creditors recovered approximately ₹3.36 lakh crore. At the time of initiation of these CIRPs, the estimated liquidation value of the assets held by the corporate debtors stood at ₹2.08 lakh crore, while the total admitted claims from creditors amounted to ₹10.46 lakh crore. Consequently, creditors achieved a recovery of 32.10% of their admitted claims and 161.76% of the liquidation value[10].

As per the latest data published by the IBBI, as of December 2024, creditors had recovered approximately ₹3.58 lakh crore through approved resolution plans. At the commencement of these CIRPs, the fair value and liquidation value of the corporate debtors’ assets were estimated at ₹3.36 lakh crore and ₹2.20 lakh crore, respectively, while the total admitted claims by creditors stood at ₹11.39 lakh crore. This translates to a recovery of 162.8% of the liquidation value and 87.58% of the fair value (based on 1,013 cases where fair value was assessed). The haircut for creditors was less than 13% when measured against fair value, and approximately 69% in relation to the total admitted claims. Notably, these figures exclude CIRP costs and do not account for potential future recoveries such as equity stakes, proceeds from corporate and personal guarantees, capital infusion by resolution applicants, and recoveries from avoidance transactions.[11]

IV. TACTICAL AFFAIRS SURROUNDING A RESOLUTION PLAN:

While the object of the IBC was to prevent the erstwhile-promoters of the Corporate Debtor from getting a backdoor entry through the submission of Resolution Plans, the same has not been prevented as such promoters have on multiple instances attempted to buy back their own companies by submitting a Resolution Plan through another related party entity, or in other instances have kept successful resolution plans in abeyance and prevented their implementations by challenging the same before the NCLTs and  NCLATs. Apart from the above-mentioned tactics, there are significant methods employed by the ex-promoters, and sometimes, being hand-in-hand with the Resolution Professionals!! And there have been instances where the CIRP process has been misused by submitting incomplete Resolution Plans and later settling with the CoC. The following judicial precedents highlight certain glaring violations/concerns:

 a. Binani Industries Limited vs. Bank of Baroda and Anr.[12]:

In this case a Resolution Plan submitted by Ultratech Cement which contained better terms and revival process for the Corporate Debtor was not considered by the CoC and the CoC approved the Resolution Plan of Rajputana Properties Pvt Ltd instead which was discriminatory and contrary to provisions of the Code.

 b. Arun Kumar Jagatramka vs. Jindal Steels and Power Limited and Anr[13]:

The Hon’ble Supreme Court clearly laid out the law that promoters of the Corporate Debtor cannot submit a Resolution Plan under the IBC. Moreover, the promoters who are ineligible under Section 29A cannot submit a Scheme of Compromise and Arrangement under Sections 230-232 of the Companies Act, 2013. The ruling of the Supreme Court is important in understanding the concept of ‘backdoor entry’ by the erstwhile promoters/directors of the Corporate Debtor, which will grossly be in violation of the provisions of the IBC.

 c. State Bank of India & Ors. v. The Consortium of Murari Jalan and Florian Fritsch & Anr (Jet Airways Case)[14]:

In the Jet Airways case, the Jalan-Kalrock Consortium (JKC) initially submitted a seemingly viable resolution plan. However, the plan's weaknesses became apparent over time due to funding delays, failure to meet key conditions, and difficulties in obtaining regulatory approvals like the air operator’s certificate (AOC). The CoC had shocking approved the said Plan under which the creditors would be able to recover only 5% of the debt due, meaning the Resolution Applicant played a tactical role in trying to purchase the Corporate Debtor at super substandard rate wherein the creditors would get a 95% haircut. This shortcoming became clear when JKC did not fulfil its financial obligations, leaving creditors with limited options to enforce the plan's timely execution.

 d. Kalyani Transco vs. M/s. Bhushan Power and Steels Ltd. & Ors.[15]:

Recently, in the matter of Bhushan Power and Steels Ltd., the Hon’ble Supreme Court set aside the Resolution Plan submitted by JSW Steels, despite the same being approved by the CoC, going against the principle of Commercial Wisdom of the CoC. The Hon’ble Supreme Court has in its 105-page judgement stressed upon factors such as ‘mandatory compliances for a Resolution Plan under the Code’, ‘failure in implementing the terms of the approved Resolution Plan’, ‘unwarranted use of commercial wisdom of CoC in approving a Resolution Plan which was in absolute contravention of the provisions under the Code’ and ‘NCLAT exceeding its jurisdiction in accepting the appeal and permitting modification’.

The above judicial rulings are a precedent to show the glaring abuse of the Resolution Plan by the erstwhile promoters, who at times work hand-in-hand with the Resolution Professionals and the CoC.

V.    POSSIBLE SUGGESTIONS TO PREVENT THE MISUSE OF PROVISIONS OF IBC:

a. Stricter Scrutiny by Adjudicating Authorities: While respecting the ‘commercial wisdom’ of the CoC, the NCLT must retain limited but effective oversight to ensure that approved resolution plans strictly comply with the IBC, particularly in cases of procedural lapses or plans that are facially non-compliant.

b. Enhanced Due Diligence on Resolution Applicants: A more robust mechanism to vet Resolution Applicants, including tracing beneficial ownership and financial capabilities, must be implemented to prevent indirect or disguised promoter participation through related entities. Additionally, the IBBI must also serve as an agency to ensure no past relationship between the Resolution Applicant and the Resolution Professional.

c. Independent Oversight Mechanism: Appointing an independent monitoring committee post-approval can ensure that the plan’s implementation is transparent and aligned with the Code’s objectives.

d. Amendments to Strengthen Section 29A: Periodic review and expansion of Section 29A’s scope can help close existing loopholes being exploited by defaulting promoters.

VI.   CONCLUSION:

While the resolution plan framework under the IBC has successfully revived and rescued several stressed assets, the recent judicial developments and tactical misuse by certain promoters highlight pressing systemic vulnerabilities. The IBC’s success stems not only on financial recoveries but also on restoring ethical corporate governance and trust in the insolvency resolution process. A balanced approach must be adopted focusing on preserving creditor autonomy while reinforcing legal safeguards which will be crucial to ensuring that the IBC remains a robust revival mechanism and not serve as a tool for backdoor entries by the dismissed management of the Corporate Debtor.

REFERENCES:

[1] Kalyani Transco vs. M/s. Bhushan Power and Steels Ltd. & Ors, Civil Appeal No. 1808 of 2020

[2] Section 5(26), The Insolvency & Bankruptcy Code, 2016.

[3] Section 29A, The Insolvency & Bankruptcy Code, 2016.

[4] Section 30(2), The Insolvency & Bankruptcy Code, 2016.

[5] Regulation 38, IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

[6] Section 30(4), The Insolvency & Bankruptcy Code, 2016.

[7] Section 31, The Insolvency & Bankruptcy Code, 2016.

[8] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India, (2019) ibclaw.in 03 SC.

[9] Committee of Creditors of Essar Steels vs. Satish Kumar, (2019) ibclaw.in 07 SC.

[10] The Quarterly Newsletter of the Insolvency and Bankruptcy Board of India, Vol. 33, October-December 2024.

[11]Ibid at point 10.

[12] Binani Industries Limited vs. Bank of Baroda and Anr., Company Appeal (AT) (Ins) No. 82 of 2018

[13] Arun Kumar Jagatramka vs. Jindal Steels and Power Limited and Anr., (2021) ibclaw.in 46 SC

[14] State Bank of India & Ors. v. The Consortium of Murari Jalan and Florian Fritsch & Anr, Civil Appeal 5023-5024 of 2024

[15] Supra at point 1