Supreme Court Upholds Liquidation After Successful Resolution Applicant Defaults on Approved Resolution Plan

With this landmark judgment on the Insolvency and Bankruptcy Code, 2016 (IBC), the apex court has declared that the successful resolution applicant is not allowed to back out from the approved resolution plan by raising objections even after it has been accepted. The court upheld the decision of the Committee of Creditors (CoC) to liquidate the corporate debtor as the successful resolution applicant neither submitted the required performance bank guarantee nor fulfilled other terms of the resolution plan. The judgment makes it clear that once a plan is approved by the CoC, its implementation is binding on all and court intervention in creditor's commercial decisions is very limited.

Key Takeaways

• With this landmark judgment on the Insolvency and Bankruptcy Code, 2016 (IBC), the apex court has declared that the successful resolution applicant is not allowed to back out from the approved resolution plan by raising objections even after it has been accepted.
• The court upheld the decision of the Committee of Creditors (CoC) to liquidate the corporate debtor as the successful resolution applicant neither submitted the required performance bank guarantee nor fulfilled other terms of the resolution plan.
• Supreme Court Upholds CoC's Liquidation Decision After Resolution Applicant Defaults The Update The Supreme Court has supported the liquidation of a corporate debtor after the successful resolution applicant failed to deliver the obligations as per the approved resolution plan and also refused to sign the Letter of Intent (LoI).
• Ultimately, the Supreme Court said that the appellant’s conduct, had a direct hand in the collapse of the resolution process, and it left the CoC with no workable alternative, other than liquidation under Section 33 of the IBC.
• The Court has pointed out that an approved resolution plan by the CoC should lead to the successful resolution applicant to start the implementation process rather than reopening of negotiations or the raising of new objections.

Supreme Court Upholds CoC's Liquidation Decision After Resolution Applicant Defaults

The Update

The Supreme Court has supported the liquidation of a corporate debtor after the successful resolution applicant failed to deliver the obligations as per the approved resolution plan and also refused to sign the Letter of Intent (LoI).

The Impact

This decision makes the approved resolution plans binding and the principle that CoC's commercial decisions cannot be challenged just because a resolution applicant changes his stand later is also made clear.

The Action

Resolution applicants when submitting their plans have to carefully evaluate their risk-taking factors as mere withdrawal or non-compliance after the CoC's approval would not only result in the loss of deposits but also lead to the liquidation of the corporate debtor.

Background of the Dispute

The matter came up out of the Corporate Insolvency Resolution Process (CIRP) of Oracle Home Textiles Limited. The appellant, also the promoter and director of the corporate debtor, put forward a resolution plan, but only after securing leave from the NCLT, on the basis of the company’s MSME status. The Committee of Creditors, as it happened, cleared the plan with a very huge voting share, around 99.90%. Still, when the approval was made, the applications by other aspiring resolution applicants were sitting pending before the NCLT. After that, the Resolution Professional issued a Letter of Intent to the appellant. In that LoI it was said that the approved plan would stay dependent on the end result in those pending NCLT applications. The appellant pushed back, saying the LoI was in effect conditional, and not something else.

Then, again and again successive LoIs were sent, repeating the same kind of stand. By the final LoI, the appellant was also told to submit an unconditional performance bank guarantee within seven days, the same thing required under the Request for Resolution Plan (RFRP). The appellant did not comply. As a consequence, the Earnest Money Deposit (EMD) of roughly ₹1 crore got forfeited.

Why the Resolution Applicant Challenged the Process?

The appellant argued that the LoIs somehow imposed conditions which were not really part of the approved resolution plan, and it felt like they added extra things, that should not be there. In the appellant’s view, when the resolution plan was made dependent on the outcome of pending applications by prospective resolution applicants, the LoI was converted into a conditional document, kind of like it never stood on its own. The appellant also had issues with a particular clause that placed the burden for any potential litigation involving employees and workers onto the successful resolution applicant.

There was another challenge connected to the performance bank guarantee requirement. The appellant said that the CoC had earlier agreed to allow forty-five days for furnishing that guarantee, so cutting the timeline down to just seven days was improper, and they treated that as wrong on its face. On the basis of all these objections, the appellant asked for reissuance of an unconditional LoI and for restoration of the forfeited EMD, without conditions, basically.

Supreme Court's Findings

The Supreme Court, actually, rejected the various arguments raised by the appellant, without much detour. The Court observed that simply saying the LoI would stay subject to the outcome of pending judicial proceedings, did not really mean it was conditional. It felt, quite naturally, that whatever decision the NCLT takes will bind the parties anyway, whether or not that kind of wording was already written in so many words. The Court also noted that the appellant had shown up for several CoC meetings, and in those meetings the pending applications, along with the connected matters were discussed quite openly.

So, according to the Bench, the appellant was fully aware of what was going on when the plan got approved. The Bench went a step further and pointed out that the appellant had in fact agreed, in discussions before the CoC, to take the risks linked to employee-related litigation. Once the appellant had accepted those terms earlier, it could not later turn around and challenge them. On the basis of well established principles like acquiescence and estoppel, the Court held that a party cannot approbate and reprobate. In other words, a resolution applicant who has taken the benefits of the process cannot later refuse the responsibilities, once compliance becomes unavoidable. The Court further leaned on its earlier ruling in Ebix Singapore Pvt. Ltd. v. Committee of Creditors of Educomp Solutions Ltd. where it was held that after the CoC approves a resolution plan, the resolution applicant cannot go looking for modifications or try to withdraw.

Forfeiture of EMD and Liquidation

The Supreme Court held that the forfeiture of the ₹1 crore EMD, was properly justified and basically fully warranted, in the end. The RFRP, in particular, had made it clear that if the performance guarantee was not furnished within the stipulated time period, or if there was any other non-compliance with the resolution procedure, then forfeiture of the EMD could follow. Material evidence which was placed before the Court also indicated that the appellant had, in fact, agreed in a CoC meeting to provide the performance guarantee within seven days. Still, the appellant didn’t actually comply with that promise, and the timeline just kept moving.

So the CIRP period ultimately lapsed, and no implementation of a workable resolution plan ever happened. After that, the CoC chose to liquidate the corporate debtor with roughly 99.61% voting support.

Ultimately, the Supreme Court said that the appellant’s conduct, had a direct hand in the collapse of the resolution process, and it left the CoC with no workable alternative, other than liquidation under Section 33 of the IBC.

Impact on Insolvency Resolution

The ruling supports the continuation of one of the major objectives of the Code i.e. time-bound resolution. The Court has pointed out that an approved resolution plan by the CoC should lead to the successful resolution applicant to start the implementation process rather than reopening of negotiations or the raising of new objections. This judgment also confirms the notion that under the IBC, the commercial wisdom of the CoC holds the highest rank. It is not expected from the courts to reconsider the business decisions of creditors unless there is a blatant breach of law.

In fact, the Supreme Court, by endorsing liquidation and disallowing efforts to circumvent contractual obligations, has strongly indicated that tactics to delay and objections ground by the appellant after approval will not be considered.

Conclusion

The Supreme Court’s ruling, serves as this pretty important reminder that resolution plans approved by the CoC are binding, and they cant really be treated as if they were tentative arrangements or something, sort of temporary. A successful resolution applicant, has to comply with all obligations that come through the resolution process, including furnishing performance guarantees and then also accepting the fallout of commercial risks.

And in the same breath, by upholding the forfeiture of the EMD and the later liquidation of the corporate debtor, the Court kind of reaffirmed the sanctity of the insolvency framework, along with the primacy of the CoC’s commercial wisdom. This judgment, overall strengthens confidence in the resolution process because it makes sure that approved plans cant be undermined by delayed objections, or by attempts to withdraw after acceptance.

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Official External Resources

Use these primary/official sources to verify rules, forms, fees, timelines and regulatory updates before publication.

• Ministry of Corporate Affairs (MCA)
• National Company Law Tribunal (NCLT)
• Supreme Court of India