Introduction The Update The NCLT Jaipur decided not to approve a resolution plan which was dependent on the Enforcement Directorate releasing the corporate debtor's only asset from attachment. The NCLT noted that the resolution plan sort of failed to properly engage with the statutory requirements set out in Section 30 of the Code and Regulation 38 of the CIRP Regulations.
The NCLT Jaipur Bench has passed a significant judgment on how far resolution plans can go under the Insolvency and Bankruptcy Code, 2016. In that case, the Tribunal denied approval to a resolution plan whose execution depended entirely on obtaining the release of the only asset of the corporate debtor from attachment by the Enforcement Directorate (ED) at a later time.
The Update
The NCLT Jaipur decided not to approve a resolution plan which was dependent on the Enforcement Directorate releasing the corporate debtor's only asset from attachment. The Tribunal felt the plan was conditional, uncertain, and not capable of being implemented effectively.
The Impact
This decision clearly establishes that resolution plans under IBC must be capable of immediate implementation and cannot rely on uncertain future events which are beyond the control of the stakeholders.
The Action
Resolution applicants and committees of creditors, among other things, should make sure that the plans they propose meet the legal requirements about feasibility, viability, and effective implementation before applying for NCLT approval.
The insolvency process was started when Punjab National Bank filed a petition for initiating CIRP against Tirupati Balaji Enterprises Pvt. Ltd. under Section 7 of the Insolvency and Bankruptcy Code. Later during the process, Shreenathji Realmart Pvt. Ltd. submitted a resolution plan which was approved by the Committee of Creditors unanimously (100% voting share). In the plan, payment to the secured financial creditor was proposed and the revival of the corporate debtor was contemplated.
But, the main issue was that the corporate debtor's sole and valuable property was a plot of land already frozen by the Enforcement Directorate. The resolution applicant envisaged the whole plan on the premise that the attachment would be lifted, and the property would be free to be used for the implementation of the plan. Because of this, the Bench had to decide if a plan like this fulfilled the necessary requirements set out in the Code.
The NCLT noted that the resolution plan sort of failed to properly engage with the statutory requirements set out in Section 30 of the Code and Regulation 38 of the CIRP Regulations. One of the Tribunal’s key worries was that the plan did not, in a real sense, deal with the actual reasons behind the default. In the end, the resolution applicant only suggested that the company needed a kind of overhaul of its assets and working, but they did not really bring a specific roadmap with it, on how exactly the revival would be carried through. The Tribunal said these claims were too general, and they didn’t meet the expectation that a resolution plan should clearly, and specifically, touch upon the causes of the default.
The Tribunal also flagged shortcomings in how feasibility and viability were assessed. Even though the Committee of Creditors had recorded that it considered these aspects, the meeting minutes and the supporting documents did not show any substantive reasoning as to whether the plan could truly be carried out.
The most significant problem, from what was noticed, was the conditional nature of the resolution plan, like it was not really ready to run right away. Under the plan, the obligations of the successful resolution applicant would start only after an “Effective Date.” But that Effective Date was not just tied to NCLT approval in a straight line. Instead, it depended on approval of a sale deed, and more importantly on the removal of the Enforcement Directorate attachment over the corporate debtor’s main, and in this case only, asset. So basically whichever event happened later would kick in and then the whole thing would be pushed forward.
The Tribunal observed that the release of that attached property was highly uncertain, and honestly it was also outside the reach or control of the stakeholders who were taking part in the insolvency proceedings. And proceedings under the Prevention of Money Laundering Act function on their own, separate track. There was no surety about what the result would be, and also no reliable timeline either, which made the situation even more tricky.
Ultimately, the timing of the implementation of the plan, payment obligations, and the overall feasibility of the plan were dependent on something that might never happen. The NCLT has said that a resolution plan cannot be approved if its execution continues to depend on uncertain events, like if it is waiting for something indefinite to be clarified later. The Tribunal further came to rely on the Supreme Court judgment in Ebix Singapore Pvt. Ltd. v. CoC of Educomp Solutions Ltd. where it was pointed out that resolution plans must be pragmatic, usable, and actually deliverable within the structure of the Code, not just remotely possible.
Finally, the Tribunal held that the plan did not have present enforceability, and for that reason it did not meet the statutory test for effective implementation.
The NCLT further observed that the real objective of the plan appeared, sort of, to be getting release of the attached property rather than actually reaching a genuine resolution of the corporate debtor. In the Tribunal’s view, the insolvency process could not be used like some backdoor mechanism to secure de-attachment of assets, under the guise of corporate rescue, you know.
Since the resolution plan was found non-compliant with the mandatory requirements of the Code and the CIRP Regulations, it could not be approved under Section 31. The Tribunal also noted that it lacked jurisdiction to send the entire plan back for reconsideration, because after rejection the Code leaves just one practical course of action. Accordingly, the corporate debtor was ordered to undergo liquidation under Section 33(1)(b) of the IBC. A liquidator was appointed, and then the liquidation process was directed to proceed in accordance with the Code and the Liquidation Regulations.
The ruling seems to underline that just getting approval from the Committee of Creditors, by itself is not enough. Like there’s still an independent step, the Adjudicating Authority has to look at it on its own and make sure the resolution plan actually fits the statutory requirements, no shortcuts.
It also kind of reiterates that conditional resolution plans, tied to uncertain future developments, run into real difficulties under the IBC. In other words a resolution plan has to be implementable right now, and it can’t purely bank on results that insolvency stakeholders can’t really control, or that are hanging on events later. And lastly the judgment shows that CIRP may still proceed even when assets are under attachment. But then any proposed resolution plan must stay workable, meaning it still has to make practical sense, despite those legal entanglements and the complications they bring.
The NCLT Jaipur ruling is affirming the emphasis of the Insolvency and Bankruptcy Code on a resolution plan should be a plausible and practical means of restarting business. A plan which hinges totally on unpredictable future events like getting unclear assets that have been attached by the Enforcement Directorate, cannot meet the criteria of feasibility, viability and implementation. The Tribunal by dismissing the conditional plan and ordering liquidation has underlined that the aim of the IBC is a true corporate resolution and not the ones which are the outcomes of volatile external circumstances
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Key Takeaways
- Introduction The Update The NCLT Jaipur decided not to approve a resolution plan which was dependent on the Enforcement Directorate releasing the corporate debtor's only asset from attachment.
- The NCLT noted that the resolution plan sort of failed to properly engage with the statutory requirements set out in Section 30 of the Code and Regulation 38 of the CIRP Regulations.
- NCLT's Findings on Feasibility and Implementation The most significant problem, from what was noticed, was the conditional nature of the resolution plan, like it was not really ready to run right away.
- The NCLT further observed that the real objective of the plan appeared, sort of, to be getting release of the attached property rather than actually reaching a genuine resolution of the corporate debtor.
- Conclusion The NCLT Jaipur ruling is affirming the emphasis of the Insolvency and Bankruptcy Code on a resolution plan should be a plausible and practical means of restarting business.
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Conditional Resolution Plan Dependent on ED De-Attachment Rejected; NCLT Orders Liquidation+
Introduction The Update The NCLT Jaipur decided not to approve a resolution plan which was dependent on the Enforcement Directorate releasing the corporate debtor's only asset from attachment. The NCLT noted that the resolution plan sort of failed to properly engage with the statutory requirements set out in Section 30 of the Code and Regulation 38 of the CIRP Regulations.