India: Time Is The Essence Of The Corporate Insolvency Resolution Process: Supreme Court Of India.

The Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 cannot be allowed to lapse into an indefinite delay defeating the very object of the law.

In its recent judgment in the case of Kridhan Infrastructure Pvt. Ltd. v. Venkestesan Sankaranarayan & Ors.¹, the Hon'ble Supreme Court reflected upon the importance of timelines in the insolvency resolution process. The Apex Court held that is essential to resolve corporate insolvencies and the corporate debtor's liquidation should be the last resort in the broader public interest.  However, the resolution of corporate insolvency could not suffer from an indefinite delay in complete abeyance  of the fixed timelines. The present article briefly examines the findings of the Hon'ble Supreme Court.

Brief Facts

The appellant submitted a resolution plan (Resolution Plan) for a company (Corporate Debtor) that was undergoing the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy, Code, 2016 (IBC). The Resolution Plan was approved by the Committee of Creditors (CoC) on 8 March 2019. The Resolution Plan was further approved by the National Company Law Tribunal (NCLT) on 15 May 2019. The appellant accordingly deposited an amount of INR 5 Crores in an escrow account of the Corporate Debtor. Thereafter, the appellant did not fulfil its obligations under the Resolution Plan despite being given several opportunities over six months. On 11 November 2019, the CoC, through a majority vote, decided that the Corporate Debtor should be liquidated. On 16 January 2020, the NCLT allowed for the liquidation of the Corporate Debtor. The order of the NCLT was further upheld in an appeal by the National Company Law Appellate Tribunal (NCLAT). The NCLAT held that the appellant had failed to implement the Resolution Plan for over eight months and hence declined to interfere with the order of the NCLT.

In an appeal before the Hon'ble Supreme Court on 9 October 2020, the appellant assured that an amount of INR 50 crores would be deposited on or before 10 January 2021. The Hon'ble Supreme Court observing that liquidation should be the last resort, allowed the appellant to fulfil its obligations under the Resolution Plan. Therefore, an order was passed on 9 October 2020 that required the appellant to deposit INR 50 crores before 10 January 2021. On 25 November 2020, while clarifying the order passed on 9 October 2020, the Hon'ble Supreme Court granted the appellant time until 25 February 2021 to act upon its obligations. However, even after three months since the Hon'ble Supreme Court's clarification on 25 November 2020, the appellant made no payment.

The appellant submitted that it would be able to raise funds only after securing a mortgage on the assets of the Corporate Debtor. Therefore, the appellant moved the term lenders for finance. However, the term lenders insisted that the corporate debtor's status must be changed from "under liquidation" to an "active company" and were unwilling to make the funds available otherwise. Hence, the present case.

Findings of the Hon'ble Supreme Court

The Hon'ble Supreme Court of India observed that going by the appellant's arguments, it would not be able to raise funds from the term lenders. It was noted that the term lenders required the corporate debtor to have its status changed from under liquidation to an active company. However, since the order of liquidation was never set aside, the status of the corporate debtor could not be changed.

The Hon'ble Supreme Court took note of the fact that multiple opportunities were provided to the appellant during the pendency of the proceedings before the NCLT and NCLAT to comply with the terms of the Resolution Plan. Similarly, the Hon'ble Supreme Court also gave the appellant time until 25 February 2021 to perform its reciprocal obligations under the Resolution Plan. Regardless, the appellant failed to deposit an amount of INR 50 crores.

The Hon'ble Supreme Court held that time is a crucial facet of the scheme under the IBC. To allow proceedings to lapse into an indefinite delay will plainly defeat the object of the statute. While a reasonable effort to resolve corporate insolvencies is a preferred course, the Hon'ble Supreme Court held that a resolution applicant must be fair in its dealings as well. The appellant, in the instant matter, had failed to abide by its obligations. In view of the same, the Hon'ble Supreme Court saw no reasons to entertain the instant appeal and ordered the management to revert to the liquidator for taking the necessary steps towards liquidation.

Comments

The instant judgment required the Hon'ble Supreme Court to balance two conflicting ideas that arise in insolvency proceedings. On one hand, it is a well-recognised principle that the liquidation of the corporate debtor is the last resort. In a recent decision,² the Hon'ble Supreme Court held that the primary focus of the IBC is to ensure revival and continuation of the corporate debtor by protecting it from a corporate death by liquidation. Therefore, the IBC is envisaged as a beneficial legislation that puts the corporate debtor back on its feet and not mere recovery legislation for creditors.

However, on the other hand, an indefinite delay in resolving corporate insolvency runs contrary to the very aim of the IBC. The timelines within which the resolution process is to occur are to be followed strictly to protect the corporate debtor's assets from further dilution. Moreover, conducting the resolution process on time also ensures that the interests of the creditors and the workers of the corporate debtor are protected by ensuring that the new management can, through its entrepreneurial skills, save the corporate debtor.³

The instant judgment has carefully considered both the ideas mentioned above and passed a well-rounded decision which is a welcome development. The decision enhances the strength of the line of judicial precedents that highlight the importance of adhering to the timelines in the insolvency resolution process.

Footnotes 

1 Kridhan Infrastructure Pvt. Ltd. v. Venkestesan Sankaranarayan & Ors. Civil Appeal No 3299 of 2020.

2 P. Mohanraj & Ors. v. M/s Shah Brothers Ispat Pvt. Ltd. 2021 SCC OnLine SC 152.

3 Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17.

The authors wish to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of Amity Law School, Delhi.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.