The Author, Ajay Sharma is a Graduate of National University of Advanced Legal Studies, Kochi.
Introduction
In India, the outbreak of Covid-19 and the unprecedented lockdown owing to it, have made a huge impact on every individual, industrial sector and business houses. It has completely disrupted the domestic as well as global supply chain and simultaneously, there is a significant drop in demand in every sector. Therefore, corporates are struggling with funds and worry about recovery. To deal with the situation which emerged from COVID-19, governments across the world have come forward to address these adverse times and the government of India has also responded through various measures like financial stimulus, policy responses and amendment in various legislations to mitigate the hit on business.
However, there are high chances that many corporates would go insolvent due to the ongoing crises. Nevertheless to deal with this problem, the government of India has announced several measures through promulgation of ordinance dated 05.06.2020 which suspends Sections 7, 9 & 10 of Insolvency and Bankruptcy Code, 2016 (“IBC”) for any default arising on or after 25th March 2020 for a period of six months. The object of the ordinance is to safeguard the MSME’s who may be pushed into insolvency proceedings on account of default. One of the reasons for the promulgation of the said ordinance is that it would be difficult to find resolution applicants to rescue the corporate debtor if it goes for corporate insolvency resolution process. It seems that the government has taken care of every concerned parties involved in the insolvency process except the resolution applicant. The government has not given any relief to the successful resolution applicants which are struggling to close the bid.
Predicament of Successful Resolution Applicant
Resolution applicants whose resolution plans are approved by the Committee of Creditor (“COC”) under section 30(4) of IBC or approved by National Company Law Tribunal (“NCLT”) under section 31(1) of IBC and pending for implementation are facing the heat on account of COVID-19 because their business too is affected by the ongoing pandemic. It’s becoming difficult for a resolution applicant to implement the approved resolution plan on a scheduled timeline as they face financial problems incepting from disruption in business due to spread of COVID-19.
In the event of non-performance of approved resolution plan, resolution applicant may face double penalty. Firstly, the COC may invoke the performance bank guarantee which has been furnished by the resolution applicant to the resolution professional as per regulation 39(4) and 36(B) (4A) of the IBBI (Insolvency Resolution Process for Corporate Person) regulation 2016 and secondly, section 74 of IBC may also be attracted, which provides for criminal liability for non-performance of approved resolution plan. Section 74 provides that in case of non- performance of approved resolution plan, resolution applicant shall be punishable with imprisonment of not less than one year, but extend to five years or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.
Issues related to the invocation of bank guarantees against resolution applicant
During the pandemic, it has been seen that contracting parties are not able to perform their part of the contract due to various lockdown norms, fear of COVID-19 spread and several other reasons, therefore, the party in whose favor performance bank guarantees has been furnished are approaching courts to invoke them. Under the IBC regime, once the resolution plan is approved by the Committee of creditors under section 30 (4), thereafter resolution applicant shall have to provide a performance bank guarantees (performance security) within specified time and only then can the resolution professional submit the resolution plan before the adjudicating authority i.e. NCLT for its approval.[1] In the existing situation, the implementation of approved resolution plans has become problematic for the successful resolution applicant. The problem intensifies when there is fear of invocation of furnished bank guarantees by the COC. Therefore, many resolution applicants are trying to convince the COC to not invoke bank guarantees which were furnished by them.
Law on invocation of performance bank guarantees
The law relating to encashment of performance bank guarantees is very well settled. Courts abstain from granting an order of injunction to restrain the encashment of bank guarantee because bank guarantee constitutes an independent and distinct contract between the bank and the beneficiary and a bank guarantee casts a duty upon the bank to honour its guarantee as long as it is unconditional and irrevocable. The existence of dispute between the parties to the contract is not a ground for restraining the enforcement of bank guarantees. However, courts have curved out two exceptions to this rule where courts can restrain the encashment of bank guarantees. The first exception pertains to fraud in connection with such a bank guarantee, which would vitiate the very foundation of such a bank guarantee and the second relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm/injury or injustice to one of the parties concerned.[2]
Analysis
As of now, there is no case where resolution applicant has moved an application for the order of injunction to restrain the encashment of bank guarantee because many resolution applicants are negotiating with the COC not to invoke the bank guarantee. However, the fear of invocation of the bank guarantee cannot be ignored. If in future, the COC approaches the court for the invocation of the bank guarantee then the issue before court would be whether the case of the resolution applicant falls under any of the abovementioned exceptions.
In order to restrain the creditor from encashment of bank guarantees, the resolution applicant would have to establish that egregious fraud has been committed while entering into the contract/resolution plan or encashment of bank guarantees would cause irretrievable injury to the resolution applicant. It would be difficult for the resolution applicant to bring a case in the first exception i.e. egregious fraud. However, the possibility of getting a case into the second exception i.e. invocation of bank guarantee would cause irretrievable/irreparable injury to the resolution applicant could not be ruled out because the resolution applicant’s business has been affected due to the lockdown and if it proceeds with the timeline and payment specified in resolution plan then it could cause great injury / irreparable loss to the resolution applicant.
In Standard Chartered v. Heavy Engineering Corporation Ltd & Ors.[3], UP State Sugar Corporation v. Sumac International Ltd[4] and in catena of other judgments, the Supreme Court has made it clear that the “bank guarantee can only be restrained under exception of ‘irretrievable injury” when there are extreme situations. Therefore, it would be interesting to see ‘whether the resolution applicant would be able to bring its case under the latter exception to restrain the COC from invocation of bank guarantee because in recent cases, which deal with the invocation of bank guarantee, courts did not restrain the beneficiary from invocation of bank guarantee.
NCLT’s Position on the issue
In Sunil Kumar Agarwal RP of DIGJAM Ltd. v. Suspended Board of Directors of DIGJAM Ltd. & Ors , ( “DIGJAM” ) while the application for the approval of resolution plan was pending before the NCLT, successful resolution applicant filed an affidavit before NCLT for the revision in resolution plan in respect of time frame for payment to creditors/other stakeholder due to financial stress arising out of current pandemic situation of COVID-19 and the consequent on-going lockdown. On hearing all the concerned parties, the NCLT directed the resolution applicant to approach the COC with revised resolution plan for its approval. After the COC approved the revised resolution plan with terms and the reliance placed upon the object of the IBC, NCLT approved the revised resolution. This order could help some successful bidder to change the payment schedule after the COC approval but it does not resolve the issue which resolution applicants are facing.
In M/s. Astonefield Solar (Gujarat) Pvt. Ltd.[5], while dealing with an application moved by the resolution applicant for the withdrawal of resolution plan which was submitted before this tribunal after the approval of COC, NCLT, Delhi was of the view that the NCLT has no jurisdiction to permit withdrawal of the resolution plan which has been placed before the authority with due approval of the COC. In Maharashtra seamless v. Padmanabhan Venkatesh[6], Supreme Court has already made it clear that once the resolution plan is approved by the adjudicating authority then it cannot be withdrawn by the resolution applicant.
After discussing & analysing these cases, it can be adduced that the resolution plan which has been approved by COC and pending for NCLT’s approval then only can it be revised by the COC. In case where NCLT has approved the resolution plan and it is pending for implementation then resolution applicant does not even have an option for the revision of resolution plan. Thus it creates a problem for resolution applicants who want to revise their plans due to the problem which they are currently facing.
Suggestion
Currently the IBC or IBBI (CIRP) regulation,2016 does not contain any provision which deals with the implementation of the approved resolution plan, excluding criminal liability under section 74 of IBC in case the resolution applicant fails to implement of the resolution plan. In DIGJAM it has been observed that NCLT used its inherent power and referred the revised plan to the COC for reconsideration, which shows that the power lies in the hands of COC and the current regime does not vest any power in the hands of NCLT in this regard. It is true that the Apex court has observed that the commercial wisdom of COC shall prevail but in these extraordinary times, if the adjudicating authority would not have the power to deal with such problems emerging from the current situation then it would shake the confidence of successful bidder /resolution applicant and future resolution applicant as IBC does not provide for any safeguard for the resolution applicant in such extreme conditions.
Therefore, it’s the need of hour that the government amends IBC and provides for a ‘procedure for implementation of approved resolution plans.’ The amendment must deal with both the situations i.e., when the resolution plan is approved by the COC but pending NCLT’s approval and when the plan is approved by both COC and NCLT and pending for implementation.
Conclusion
COVID-19 and the consequent lockdown completely broke the back of the corporates, and the resolution applicants are also part of the same ecosystem. Due to the on-going financial crises, which emerged from the breakdown of businesses, some successful resolution applicants are not in a position to perform the implementation of the resolution plan as per the scheduled time and some are of the opinion that they have overpaid for the bid when they analyse the current market situation. Problem may arise for the corporate debtor and creditor in case the resolution applicant could not implement the approved resolution plan because in such a situation, the corporate debtor could go for liquidation. If the Corporate debtor goes for liquidation then it would not only harm the debtor and the creditor but also go against the basic object of the IBC i.e. Resolution is the rule and liquidation is an exception. Therefore, the government should bring an amendment in IBC and provide a procedure to ‘revise the approved plan’ and ‘implementation of the approved plan’ respectively.
References:
[1] See. Regulation 36B (4A) of IBBI (Insolvency Resolution for Corporate Persons) Regulation 2016.
[2] UP State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568
[3] 2019 SCC Online SC 1638
[4] 1997 1 SCC 568
[5] IB-940 (ND)/2018
[6] Civil Appeal No. 4242 of 2019
