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Mr. Arpit Sinhal
Ms. Batul Barodawala
Mr. Mahim Sharma
Mr. Drushan Engineer
Mr. Atul Kumar Singh

The National Company Appellate Law Tribunal (“NCLAT”), in the case of Industrial Services v. Burn Standard Company Limited and Others (decided on May 13, 2019), held that a resolution plan which shall result in closure of the operations of the corporate debtor is against the scope and intent of the Insolvency and Bankruptcy Code, 2016 (“Code”).

Burn Standard Company Limited (“Corporate Debtor”) is a government owned, West Bengal based wagon maker. Due to consistent losses and erosion of net worth, the Corporate Debtor was referred to Board of Industrial and Financial Reconstruction (BIFR) in the year 1994 under Sick Industrial Companies (Special Provisions) Act, 1985 and was declared as a sick company. Upon enactment of the Code, the Corporate Debtor filed an application under Section 10 of the Code to initiate corporate insolvency resolution process (“CIRP”) against itself.

In an order dated March 6, 2018, the National Company Law Tribunal (“NCLT”), Kolkata approved Corporate Debtor’s insolvency resolution plan, which included INR 417 Crores financial package to pay back creditors and suppliers, and a voluntary retirement scheme of all the employees. The resolution plan submitted by the Corporate Debtor showed that the Ministry of Railways proposed to use the entirety of the abovementioned financial package to repay the dues and shut down the company.

The NCLT, Kolkata while approving the resolution plan stated in its order that “The Resolution Plan in the case in hand is a unique plan which provides no revival of the corporate debtor but to close it by discharging its debts to all stakeholders inclusive of its staff and workmen.”

Aggrieved by the contents of the resolution plan approved by the NCLT, Kolkata, Industrial Services (“Appellant 1”), an operational creditor of the Corporate Debtor, whose claim was not accepted by the resolution professional of the Corporate Debtor (“RP”), filed an appeal against the NCLT, Kolkata’s decision. Further, the Burn Standard Ex-Employee Welfare Association (“Appellant 2”) also filed an appeal against the NCLT, Kolkata’s order, and stated that a resolution plan cannot be used to close the operations of the Corporate Debtor.

1. Whether the resolution plan is against the statement of objects and reasons of the Code?

2. Whether the application under Section 10 of the Code was filed by the Corporate Debtor with malicious intent for any purpose other than for the resolution of insolvency, or liquidation of the Corporate Debtor?

The Appellant 1 contended that the resolution plan is bad in law, as the provisions of Section 29A of the Code are not fulfilled. It was also stated that the procedure prescribed under the Code was not complied with. For example, no evidence was provided to show that the information memorandum was published, as required under Section 25 of the Code or operational creditors or their representatives were called in the meeting of the committee of creditors, as required under Section 24 of the Code. Another contention was that the resolution plan provides for no revival of the Corporate Debtor but closure and retrenchment of all the workmen.

On the other hand, the Corporate Debtor submitted that, being an undertaking of the Indian Railways, it cannot be held to be ineligible in terms of Section 29A of the Code. It was submitted that it is not an undischarged insolvent nor a willful defaulter. Further, its account has not been declared as a non-performing asset.

The NCLAT observed that during the resolution process, and thereafter, the resolution applicant is required to ensure that the company remains as a going concern, but contrary to the provisions of the Code, closure of the Corporate Debtor has been proposed and approved by the NCLT, Kolkata.

The NCLAT referred to the decision of the Supreme Court in the case of Swiss Ribbons Private Limited v. Union of India and Others (decided on January 25, 2019), where it was stated that the primary intention of the legislature in enacting the Code was to ensure revival of the corporate debtor by protecting the corporate debtor from its own management and from a corporate’s death by liquidation. It was also held that the preamble of the Code shows that the Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. The Supreme Court opined that the fact that the preamble of the Code does not even mention ‘liquidation’, it can be stated that liquidation is only available as a last resort, in the event no suitable resolution plans are received.

Therefore, the Supreme Court stated that the Code is a beneficial legislation which puts the corporate debtor back on its feet, and is not a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests.

The NCLAT also referred to its decision in Y. Shivram Prasad v. S. Dhanapal and Others (decided on February 27, 2019) where it held that steps should be taken for resolution at different stages including the liquidation stage to keep the company as a going concern in the interest of the employees, and that liquidation should only happen as a last resort.

In view of the abovementioned precedents, the NCLAT observed that, the resolution plan goes against the object of the Code and the application under Section 10 of the Code was filed with intent of closure of the Corporate Debtor for a purpose other than for the resolution of insolvency. Therefore, the part of the resolution plan which relates to closure of the Corporate Debtor is against the scope and intent of the Code and is in violation of Section 30(2)(e) of the Code, which states that the resolution plan should not contravene any law in force.

The NCLAT, set aside the part of the resolution plan that stated that the Corporate Debtor would be closed, but upheld the rest of the resolution plan. Further, it stated that consequential orders, including the order of closure of the Corporate Debtor and the order of retrenchment issued to the employees of the Corporate Debtor are also to be set aside. The NCLT, Kolkata was directed to make necessary correction in the resolution plan by asking the Corporate Debtor to delete the portion of the resolution plan requiring the closure of the Corporate Debtor. If the Corporate Debtor refuses to do so, the plan approved will be treated to be set aside by the NCLAT and the NCLT, Kolkata will proceed asking the RP to call for fresh expressions of interest and resolution plans and proceed in accordance with law.

Vaish Associates Advocates View
In the instant case, in order to reaffirm the central theme of the Code, which is to ensure revival of the corporate debtor, the NCLAT held that the resolution plan shall ensure that the Corporate Debtor shall remain a going concern. In an earlier case of K. Sashidhar v. Indian Overseas Bank and Others (decided on February 5, 2019), the Supreme Court had held that the NCLT and NCLAT should not question the commercial wisdom of the committee of creditors, but should only examine the resolution plan through the lens of Section 30(2) of the Code, which provides for requirements of a resolution plan. In the present case, the ‘commercial wisdom’ of the banks favored the resolution plan submitted, however the NCLAT overrode the same, as the proposed resolution plan did not fulfil the requirements under the Code.

The ratio decidendi of this case, that the resolution plans must ensure that the company continues to operate as a going concern is important and it can be said that with this judgement, the NCLAT is nailing its colours to the mast. Therefore, resolution plans must provide for the continuation of the corporate debtor as a going concern and the aspiration of the Code, is to ensure revival, not repayment.

For more information please write to Mr. Bomi Daruwala at [email protected]