Corporate Insolvency Resolution Process Post Covid-19 Case for a Carve-Out in IBC for Resolution Applicants on Account of Force Majeure Event?

Although "maximization of value" is one of the main objectives of IBC, it is equally important to ensure that a company is not liquidated for lack of investors/resolution applicants in view of a force majeure event

The ongoing economic recession in India, like the rest of the world, due to the COVID-19 pandemic and the consequential longest ever complete nationwide lockdown, has not only adversely impacted the financials and cash reserves of Indian companies as well as their ability to service debts, but also severely hampered the chances of revival of corporate debtors which are either presently undergoing corporate insolvency resolution process ("CIRP") or, the CIRP having been concluded, their approved resolution plan is under implementation.

Statutory and judicial relaxation under the Insolvency and Bankruptcy Code, 2016 ("IBC"), in view of COVID-19

• With the announcement of complete nationwide lockdown in India on March 24, 2020, several Micro, Small and Medium Enterprises ("MSMEs") were faced with the imminent threat of going insolvent, which led to the Ministry of Corporate Affairs ("MCA") issuing a notification on March 24, 2020¹, thereby notifying one crore rupees as the minimum amount of default under Section 4 of the IBC.
• Further, the Insolvency and Bankruptcy Board of India ("IBBI") also followed suit by urgently amending the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, vide notification dated April 20, 2020², thereby inserting Regulation 40C which provided for the exclusion of period of lockdown while computing timelines for an activity in relation to CIRP. However, this special provision was made subject to the provisions of IBC.
• A similar amendment was also introduced in the IBBI (Liquidation Process) Regulations, 2016 which provided for the exclusion of period of lockdown while computing timelines in relation to the liquidation process, subject to the provisions of IBC.³
• Further, the full bench of the National Company Law Appellate Tribunal ("NCLAT"), vide order dated March 30, 2020⁴, took suo moto cognizance of the unprecedented situation arising out of the COVID-19 pandemic and ordered for the exclusion of the period of lockdown imposed by the Indian government as well as the respective state governments where the registered office of the corporate debtor may be situated, including any extension(s) in the nation-wide or state-wise lockdown, while computing the time taken for completion of CIRP.
• Subsequently, IBC was also amended⁵, on and with effect from June 5, 2020, to insert Section 10A which provided for the suspension of initiation of CIRP, notwithstanding the provisions of Sections 7, 9 and 10 of IBC, for any default arising on or after March 25, 2020 for a period of 6 months initially (from March 25, 2020), and further extendable to maximum one year.
• MCA, vide notification dated September 24, 2020⁶, extended the operation of Section 10A for a further period of three months, with effect from September 25, 2020, till December 25, 2020.

No statutory rescue/safeguard for the resolution applicants

While, on one hand, several statutory safeguards were introduced to save companies from being dragged into insolvency under IBC on account of defaults in servicing their debt obligations during lockdown, no measures were considered for protecting the interests of successful resolution applicants. IBC, in its existing form, neither has any rescue provision for a successful resolution applicant nor provides a mechanism for protecting the corporate debtor from liquidation, in case of any contravention of or divergence from the terms of the approved resolution plan due to the occurrence of a force majeure event like the COVID-19 pandemic.

The prevailing state of affairs raise a very pertinent question on the recourse available to the successful resolution applicant when it suddenly and unexpectedly finds itself, due to a force majeure event, unable to implement the approved resolution plan, whether entirely or partially. It is important to answer this question by taking into account the interests of the corporate debtor in continuing as a going concern as well as the objectives of IBC, and ensuring that the corporate debtor is not sanctioned for a pre-mature death due to a force majeure event, which will tantamount to defeating the objectives of IBC.

National Company Law Tribunal/NCLT ("Adjudicating Authority"/"AA") acts as a rescue operator for the resolution applicants

In the absence of a statutory provision answering the aforesaid question, the role of the Adjudicating Authority has become crucial in determining whether genuine and bonafide relaxation(s)/concession(s) can be granted to the successful resolution applicant in the implementation of resolution plan, or whether a resolution applicant can be permitted to withdraw a resolution plan, by citing force majeure event, which is pending approval of the Adjudicating Authority. Some of the matters mentioned hereunder prove that the Adjudicating Authority has proved to be a savior for the genuine resolution applicants:

• In the CIRP of Digjam Ltd., the resolution applicant whose plan had been approved by the Committee of Creditors ("CoC"), viz. Finquest Financial Solution Pvt. Ltd, had sought concession in respect of time frame for payment to the creditors of Digjam Ltd., in view of the financial difficulties arising out of the COVID-19 pandemic and the consequential lockdown. The Adjudicating Authority, Ahmedabad bench had, in its order dated May 27, 2020⁷, observed that there was no material change in the resolution plan except the aforesaid concession sought, which was found to be genuine and bonafide in view of the prevailing unprecedented situation. The bench also relied upon RBI's Developmental and Regulatory Policy dated March 27, 2020 ("RBI Policy") to observe that the concession sought by the resolution applicant was genuine and bonafide and hence, deserved to be allowed, especially when such concession did not change the nature and character of the resolution plan.
• In the CIRP of Shaifali Rolls Ltd., Fincast Founders and Engineers Pvt. Ltd. (consortium resolution applicant) had filed an application, under Section 60(5) of IBC⁸ read with Rule 11 of the NCLT Rules, 2016⁹, seeking relaxation of the scheduled timelines for payment under the AA-approved resolution plan and exclusion of the period of lockdown in the timelines for the conclusion of the said resolution plan. It is noteworthy that the resolution applicant had already paid a major chunk of the amounts stipulated under the resolution plan within prescribed period and sought extension of timelines for payment of the remaining amount only. The Adjudicating Authority, Ahmedabad bench had, vide its order dated July 22, 2020¹⁰, allowed the present application as a majority of the financial creditors and the successful resolution applicant had arrived at a consensus and unanimously agreed on the extension of timelines for making payment of the remaining amount to the financial creditors, as well as extension of the overall timelines, for completion of the entire resolution plan, by four months. The bench also cited the RBI Policy while allowing the present application.
• The Adjudicating Authority, Mumbai bench, in the CIRP of MarutiCotex Limited, was adjudicating upon an application filed by the successful resolution applicant seeking, inter alia, relaxation in the AA-approved resolution plan in terms of extension for a period of 90 days for making payments to the creditors of the corporate debtor. The bench, vide order dated September 7, 2020¹¹, granted the aforesaid relief and extended the timelines, till November 26, 2020, for making payments in terms of the AA-approved resolution plan, in view of the prevailing extraordinary situation due to COVID-19 pandemic and the fact that the successful resolution applicant had already brought in substantial amounts for the implementation of resolution plan.
• Recently, the Adjudicating Authority, Principal bench, New Delhi, vide order dated October 15, 2020, had ordered for the liquidation of ELHPL Private Limited (corporate debtor)¹², basis the application filed by the resolution professional under Section 33 of IBC, after the sole resolution applicant had withdrawn its resolution plan due to COVID-19 pandemic and the consequential lockdown, even as the application filed under Section 30(6) of IBC, seeking AA's approval over the resolution plan, was pending before the bench.

Conclusion

In the absence of a statutory provision clarifying the recourse available to successful resolution applicants in case of any contravention of/divergence from the terms of the approved resolution plan or withdrawal of the CoC-approved resolution plan due to the occurrence of a force majeure event, it has been heartening to see the positive, realistic approach of the Adjudicating Authority. However, since the order(s) passed by the Adjudicating Authority is an ad-hoc measure instead of a permanent fix, prescription of a statutory framework in this regard would be a welcome step. Although "maximization of value" is one of the main objectives of IBC, it is equally important to ensure that a company is not liquidated for lack of investors/resolution applicants in view of a force majeure event.