Supreme Court Stresses Timely Implementation Of Resolution Plans To Prevent Asset Deterioration Under IBC

Supreme Court Stresses Timely Implementation of Resolution Plans to Prevent Asset Deterioration Under IBC

The Supreme Court bench, comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala, and Manoj Misra, ruled that unnecessary delays in the implementation of a resolution plan under the Insolvency and Bankruptcy Code (IBC) would lead to a decrease in the value of the assets of the corporate debtor. Consequently, the timely execution of the resolution plan is essential and one of the fundamental objectives of the IBC, 2016.

The IBC was enacted to streamline and consolidate laws related to insolvency in India, with the primary goal of resolving corporate insolvency in a time-bound manner. Timely resolution of distressed assets is crucial for preserving and maximizing their value. The Bankruptcy Law Committee, which provided the foundation for the IBC, emphasized the importance of resolving insolvency in a timely manner so that businesses could either be sold as going concern or their assets preserved from depreciation.

The Court referred to the report of the Insolvency Committee, which emphasized that time and speed are essential for the success of the Code. The report also highlighted a critical concern: if ownership and control over the corporate debtor are not established quickly, decisions critical to the debtor’s revival cannot be taken effectively. The Court agreed that delays in appointing effective management result in the rapid depletion of the corporate debtor’s asset value.

The Court further underscored the importance of speed in resolving insolvency, as emphasized in the 2019 judgment of Innoventive Industries Ltd. v. ICICI Bank. There, it was pointed out that one of the key objectives of the IBC is to expedite the insolvency process, reducing the likelihood of assets being depreciated due to delays in the Corporate Insolvency Resolution Process (CIRP) or liquidation.

In the present case, the Court noted that unnecessary delays in implementing a resolution plan would mirror the risks faced during the CIRP, where delays could lead to a rapid depreciation of the debtor's assets. Hence, the Court affirmed that the timely implementation of the resolution plan remains a key goal of the IBC. Limited Power of Adjudicating Authorities to Grant Extensions The bench also examined the rules governing the NCLT and NCLAT, which grant the adjudicating authority the power to extend the timeline for implementing a resolution plan.

Rule 15 of the NCLT and NCLAT Rules, 2016, allows the authorities to extend time limits when necessary for justice. However, the Court stressed that this power should not be exercised mechanically. Multiple extensions, though intended to facilitate the revival of the debtor, could harm the economic viability of the resolution plan and increase the debtor’s debt burden. Can Liquidation Be Ordered Under Article 142 In considering whether it could invoke its plenary powers under Article 142 of the Constitution, the Court referred to its earlier judgment in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited. The Court noted that any request to exercise such powers should be scrutinized closely to ensure alignment with the broader goals of the IBC. The statutory mechanisms in place are designed with a specific role in mind, and the Court should only deviate from prescribed procedures in exceptional circumstances.

Drawing from another recent judgment in Glas Trust Company LLC v. Byju Raveendran, the Court stated that deviations from the procedure should be limited and justified only in extraordinary circumstances. If such deviations are warranted, they should serve the purpose of securing the objectives of the IBC.

In this case, the Court found that the prolonged delay in implementing the resolution plan had led to escalating dues, including CIRP costs, while the appellant was incurring substantial monthly expenditures to maintain the debtor. With the resolution plan now unfeasible, the court determined that liquidation remained a viable last resort. To avoid further frustration of the IBC’s objective—where “time and speed are of the essence”—the Court decided to exercise its powers under Article 142 and directed the corporate debtor into liquidation in accordance with the provisions of the IBC.

Duties and responsibilities of successful resolution applicants (SRAs) and lenders The Court emphasized that once a resolution plan is approved, it is the duty of the successful resolution applicant (SRA) to implement it effectively. The SRA cannot abandon the plan merely because it has become commercially unfeasible after approval. The role of the SRA transcends commercial interest and reflects a commitment to the broader purpose of corporate revival. The SRA is expected to adapt and demonstrate resilience, even in the face of challenges, rather than attributing delays or setbacks to other stakeholders.

The Court further urged lenders to cooperate with the SRA and not obstruct the plan’s implementation with unjustified demands. Lenders must balance their financial interests with the goal of rehabilitation, refraining from using the resolution process for their individual benefit. An obstructive approach from lenders could destabilize the debtor’s recovery efforts. The Court warned that the adjudicating authorities should not entertain unwarranted demands from the SRA that could delay or hinder the timely resolution of the debtor. While the IBC does not specifically address the implementation phase of the plan, the Court noted that this should not be used as an opportunity by SRAs to repeatedly approach the adjudicating authorities for extensions or relaxations.

Moreover, the Court observed that the NCLT and NCLAT should not accede to repeated requests from SRAs seeking relaxation of strict timelines and other terms of the Resolution Plan, as this would undermine the integrity of the Code. The discretion in altering the terms of the approved plan should be exercised minimally, if at all. Consequences for Non-Compliance with the Resolution Plan The Court also highlighted the strict penalties prescribed under Section 74 of the IBC for any wilful contravention of the terms of a resolution plan. Offenders could face imprisonment of up to five years, a fine ranging from one lakh to one crore rupees, or both. Given these severe penalties, the Court stressed the importance of ensuring that SRAs comply fully with the commitments made in the Resolution Plan.

In light of this, the Court recommended that NCLT and NCLAT authorities refrain from allowing SRAs to circumvent the Code’s mandates by granting them undue reliefs or concessions. The integrity of the approved Resolution Plan must be preserved. Suggested Monitoring Mechanism The Court proposed that a monitoring committee be established by the Committee of Creditors (CoC) to oversee the implementation of the resolution plan. The committee shouldinclude the Resolution Professional, along with representatives from both the CoC and the SRA. The monitoring committee would be responsible for ensuring that the plan is implemented as agreed, in compliance with all statutory requirements, and for providing regular updates to the adjudicating authorities, creditors, and other stakeholders.

This committee would be tasked with overseeing the plan’s execution until its completion, ensuring that all necessary legal and financial compliances are met. Quarterly updates should be provided to relevant stakeholders, including the adjudicating authorities, to keep all partiesinformed about the status of the plan's implementation. By implementing such monitoring mechanisms, the Court hopes to enhance the efficiency and integrity of the insolvency resolution process and reduce delays that could further harm the corporate debtor’s prospects of revival.