NCLT: Automatic waiver of legal proceedings is not permitted in a resolution plan February 28, 2020
Published in: Between The Lines
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The National Company Law Tribunal, Ahmedabad Bench (“NCLT”) in the case of Bhavi Shreyansh Shah, Resolution Professional for VS Texmills Private Limited v. Canara Bank and Others (decided on January 01, 2020) held that as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) automatic waiver of legal proceedings by/ against a corporate debtor is not allowed in a resolution plan.
An application was filed by Reliance Commercial Finance Limited, which was a financial creditor of V S Texmills Private Limited (“Corporate Debtor”) under Section 7 of the IBC seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The application was admitted on January 09, 2019, and Bhavi Shreyansh Shah was appointed as an interim resolution professional, who subsequently became the Resolution Professional (“RP”) in the first meeting of the Committee of Creditors (“CoC”) on February 06, 2019. In the third meeting of the CoC, which was convened on March 14, 2019, it was agreed to invite Expressions of Interest (“EoI”) from potential resolution applicants.
Pursuant to the invitation for EoIs, the RP received two EoIs, one from Chamaria Fashions Private Limited (“Chamaria”) and the other from Vikash Enterprises. Thereafter, Vikash Enterprises withdrew from the process, leaving Chamaria as the only interested potential resolution applicant. Revised resolution plan dated June 20, 2019 was discussed by the CoC in its fifth meeting where they sought improvement of the plan and accordingly, Chamaria was given a chance to rectify the resolution plan. It was also resolved by the CoC to extend the CIRP period and accordingly, an interlocutory application was preferred by the RP, pursuant to which the adjudicating authority by its order dated July 12, 2019 extended the CIRP for another 90 days beyond the initial 180 days. The CoC approved the Resolution Plan dated June 20, 2019 which was modified by addendums, the last being an addendum dated September 11, 2019 with majority voting share of 92.44% of the CoC in favour of the same.
The core issue identified while approval of the NCLT of the resolution plan submitted was sought by the RP was whether automatic waiver of legal proceedings against/ by a corporate debtor can be permitted in a resolution plan.
Observations of the NCLT
The NCLT held that to decide the issue it will be pertinent to notice the very object of the IBC, which is resolution. It held that on glancing at the preamble of the IBC it can be ascertained that the IBC aims to promote resolution over liquidation. The purpose of resolution is for maximization of value of assets of the corporate debtor and thereby all creditors. As per the provisions of the IBC, the first objective is resolution. The second objective is maximization of the value of assets of the corporate debtor. The third objective is promoting entrepreneurship, availability of credit and balancing interests. Therefore, these objectives of the IBC are sacrosanct. It was observed that the IBC only allows for liquidation on the failure of the corporate insolvency resolution process and facilitates and encourages resolution. As held by the Supreme Court of India in the case of Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Others (decided on October 04, 2018) if there is a resolution applicant who can continue to run the corporate debtoras a going concern, every effort must be made to ensure that this is made possible.
Subsequently, the NCLT analysed its own powers and functions with regards to a resolution plan and cited the decision of the Supreme Court of India in K. Sashidhar v. Indian Overseas Bank and Others (decided on February 05, 2019), where it was held that the NCLT has no authority to analyse and evaluate the commercial decision of the CoC to enquire into justness of the rejection of the resolution plan by dissenting financial creditors.
Decision of the NCLT
The NCLT held that on perusal of the resolution plan, it was found that the resolution plan met the requirements of Section 31 (approval of resolution plan) read with Section 30(2) (examination of resolution plan by resolution professional) of the IBC. The application was allowed however, the NCLT held that Clause e of Chapter IV of the resolution plan would not be allowed since it relates to the subject matter of the various competent authorities, each having their own jurisdiction. The clause is reproduced below:
“All business permits required by the Corporate Debtor to conduct its business and which have not been granted, cancelled, terminated, revoked, suspended or not renewed; having been granted or reinstated, as the case may be, at no additional costs to the resolution applicant or Corporate Debtor… ”
It was further held that the approval of the resolution plan does not mean automatic waiver or abatement of legal proceedings, if any, which are pending by or against the corporate debtor as those are the subject matter of the concerned competent authorities having their own jurisdiction to pass any appropriate order as the case may be. The resolution applicant, on approval of the plan may approach those competent authorities for appropriate reliefs sought for in Clause e of Chapter IV of the resolution plan. It was further held that the matters referred to in Clause e of Chapter IV of the resolution plan are the subject matter of the concerned appropriate competent authorities, and that the resolution applicants have the liberty to approach them for any concession, relief or dispensation as the case may be.
Vaish Associates Advocates View:
The NCLT, in declining to allow automatic waiver of legal proceedings to be a part of the resolution plan has decided on what was a grey area of the law, specifically on the powers of a resolution plan to decide on points such as business permits or licenses that have been previously cancelled, terminated, revoked or suspended for any
Business permits are a very wide-ranging topic, and for certain permits/ licenses, the company in question may have to demonstrate that they can meet certain benchmarks in order to achieve the same. Therefore, the NCLT has rightly held that such licenses should not be granted as a matter of right just by inclusion into the resolution plan, and that each company should apply for the same independently.
It also held that with respect to waiver of legal proceedings, all pending matters cannot be terminated at the stroke of a pen, and that each competent authority would have the power to pass judgements as it deems fit.
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