Debt Resolution Plan: Essentials & Rules

What is a debt resolution plan?

A debt resolution plan is [1] a recovery strategy for a corporate debtor (CD) facing bankruptcy. It is a report that focuses on legal, financial, management, and technical strategies to help the CD get back on its feet and is based on the information memoranda given by the Resolution Professional. It must satisfy the requirements of the Insolvency and Bankruptcy Code, 2016 and receive approval from the committee of creditors (“COC”). Section 5(6) of the IBC states what a ‘resolution plan’ is and defines the term as a plan proposed by the resolution applicant as a plan to relieve the corporate debtor in line with the instructions in Schedule II of the IBC, which deals with insolvency and liquidation of Corporate Debtors, where the minimum default of higher value with a minimising cap at one crore rupees.

Resolution Applicant:

Person who submits [2] a resolution plan to the resolution professional in response to the invitation made under clause (h) of sub-section (2) of section 25 are referred to as resolution applicants under Section 5(25) of the IBC. Clause (h) is under Section 25 (2) that defines the duties of a Resolution Professional (RP), and indirectly holds the criteria of a resolution applicant who should meet the conditions by him with the committee of creditors’ approval, taking into consideration the complexity and size of operations of the corporate debtor’s business and any specifications that may be specified by the board.

Although this broad definition implies [3] that the market would primarily provide resolution plans, creditors and, until very recently, the corporate debtor’s former promoters are also free to put forth resolution plans. Furthermore, the RP is required by law to offer every plan that complies with the standards; therefore, they are not free to choose which plans to bring before the COC. To ensure that only serious applicants submit plans, the COC normally permits the RP to specify eligibility and evaluation standards for resolution applicants. The RP is not specifically forbidden from presenting a resolution plan, but since the RP also has a legal obligation to confirm that a plan complies with the standards, doing so can put the RP in a difficult position.

Non- Eligibility of a Resolution Applicant

Section 29A of the IBC code prescribes conditions [4] that establish the non-eligibility of a resolution applicant. A resolution applicant cannot be an undischarged insolvent under Section 6 of the Provincial Insolvency Act, 1920 and has not discharged their own personal debts. A resolution applicant cannot be a wilful defaulter defined under the Banking Regulation Act, 1949 or when they possess an account that is classified as a non-performing asset at the time the resolution plan is submitted, or an account of a corporate debtor under their management or control, or of which they are the promoter, in accordance with the Reserve Bank of India’s guidelines issued under the Banking Regulation Act, 1949 (10 of 1949), or the guidelines of a financial sector regulator issued under any other law currently in effect, and between the time of such classification and the start of the corporate debtor’s insolvency resolution process, the following time period elapsed for a period of one year. The conditions for the before-mentioned clause are that if the person pays off all past-due sums, interest, and fees associated with non-performing asset accounts prior to submitting a resolution plan, they will be qualified to do so; and if a resolution applicant is a financial entity (An individual who works dominantly in the banking or finance industries/transactions) and, is not connected in any way to the corporate debtor, nothing in this article shall apply to such application.

Other conditions [5] for not being a resolution applicant include being convicted for any offence with prison sentencing under any act mentioned in the 12^th schedule and or for seven years imprisonment under any valid and applicable law at that time. This clause also has its own conditions which include non-applicability to anyone if two years have elapsed ever since the date of their release from prison and the same does not include a financial entity governed by a financial sector regulator if it has converted or replaced debt with equity shares or instruments convertible into equity shares before the bankruptcy commencement date and is a linked party of the corporate debtor. Also, when a resolution applicant has a corporate debtor account that is classified as a non-performing asset and that account was acquired in accordance with a prior resolution plan approved under this Code, the provisions of this clause do not apply to that resolution applicant for a period of three years following the date that the Adjudicating Authority approved that resolution plan.

Conditions include disqualification [6] under the Companies Act, 2013, prohibition by the Securities and Exchange Board from trade in Securities and Exchange Board, 2013, or if the applicant has previously promoted, managed, or controlled a corporate debtor in which a preferential deal, undervalued transaction, extortionate credit transaction, or fraudulent transaction occurred and in respect of which an order has been granted by the adjudicating authority under this code, has signed a guarantee in the creditor’s favour with regard to a corporate debtor for which the creditor has filed an application for bankruptcy resolution under this Code, and the creditor has activated the guarantee, which is still partially or fully underpaid or is subjected to any disability.

Resolution Professional

The Resolution Professional [7] is the last to be discharged and the first to be appointed. The corporate debtor’s regeneration is the Resolution Professional’s main responsibility. Maintaining fairness and transparency throughout the process is crucial for the Resolution Professional. Section 16 of the IBC governs the conditions of such a post to be appointed. Until the formation of the committee of creditors (CoC) and the appointment of a Resolution Professional (RP), an Interim Resolution Professional (IRP) is appointed. The RP works as a liquidator during the liquidation process and as a bankruptcy trustee in the event of personal insolvency. Until an RP is appointed, the IRP oversees running the business. As per Section 22, within 7 days of the constitution of the CoC, its first meeting is held in which they decide whether to appoint the IRP as the Resolution Professional or to appoint another resolution professional. If the Committee chooses to designate the IRP as the RP, they must inform the IRP, Corporate Debtor, and the Adjudicating Authority of their decision. Within 30 days of the Corporate Insolvency Resolution Process starting, the CoC names the RP. The roles of an Insolvency Professional include conducting the Corporate Insolvency Resolution Process as per Section 23 of the IBC, managing the affairs of the corporate debtor as well as executing the powers of the Board of Directors of the Corporate Debtor{Section 17, IBC}, management of the corporate debtor’s assets{Section 18(f), IBC}, discerning control and management of the operations of the corporate debtor{Section 20, IBC} and preparing the Information Memorandum{Section 29 explanation, IBC} as well as constituting the CoC{Section 24(2), IBC} and examining the debt resolution plan{Section 30, IBC}.

Information Memorandum

The most crucial document [8] in the corporate insolvency resolution process is called an “Information Memorandum” (“IM”). It contains information about the corporate debtor, such as a list of creditors and the number of claims admitted, debt owed to related parties, the number of workers and employees and liabilities owed to them, information about material litigation, the most recent audited financial statements, and a resolution plan. When a Resolution Professional is appointed during the Corporate Insolvency Resolution Process, he must carry out several tasks per Section 29 of the Code, including creating the Information Memorandum. In order to help the resolution applicant, create the resolution plan, the resolution professional who developed the IM document offers information on the corporate debtor.

Role of the Committee of Creditors

The CoC has the authority [9] to decide whether or not to adopt a certain resolution plan in an effort to help the corporate debtor. After assessing the resolution plan’s viability and practicality, as well as any additional requirements that may be specified by the Regulations, the CoC may adopt it by a vote of not less than 66% of the financial creditors with voting rights. This decision is made by the CoC’s majority. According to Section 31(1) of the IBC, once a resolution plan has been accepted by the CoC, it is legally obligatory on all parties involved, including guarantors. With such a clause, the corporate debtor’s business will be restarted by the successful resolution applicant. It is inadmissible that the guarantees provided by the former directors of the corporate debtor cannot be included in the resolution plan’s provision that provides for the extinguishment of the guarantor’s claims arising from subrogation.

Timeline with regard to a debt resolution plan

Under section 12 of the IBC, the corporate insolvency resolution procedure (CIRP) timeframe [10] was required to be finished within 180 days after the process’s start date. By a maximum of 90 days, the Adjudicatory Authority may extend the deadline. This 180-day timeframe, however, was shown to be implausible in the Essar Steel CIRP matter, which nearly took over 800 days in CIRP, and the Bhushan Steel timeline, which extended up to 18 months. In the case of JK Jute Mills v. Surendra Trading Company, the NCLAT determined that even the 14-day window given to the adjudicatory authority to accept or deny an application is of a required nature. However, the prestigious Supreme Court ruled that the character of the provisions contained in Sections 7(5), 9(5) and 10(4) of IBC is directory not mandatory. In addition to the 180-day deadline, Section 12 of the IBC allows for a 90-day extension. The IBC Amendment Act, 2019 was additionally introduced to change the time limit to 330 days. Under the change, a proviso was inserted [11] into Section 12(3) of the Code, stating that CIRP must be finished within 330 days of the insolvency’s commencement date, with the time spent in litigation pertaining to the corporate debtor’s Resolution Process being counted toward the deadline. To avoid delays in the Adjudicatory Authority’s decision-making process, the proviso was included. Since the litigation time was included in the 330-day schedule for avoiding excessive delays in the bankruptcy resolution process, it mostly concentrated on the revival of the C.D.

In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [12], the Supreme Court ruled Normally, the duration of the CIRP, including the time spent in the litigation procedure, must be finished within 330 days after the insolvency commencement date. However, in a select number of instances where it can be demonstrated to the Adjudicating Authority and/or Appellate Tribunal under the Code that the corporate insolvency resolution process will be completed in more than 330 days, it would be in the best interests of all parties to prevent the corporate debtor from going into liquidation and that the length of the legal proceedings is largely the result of circumstances for which the fault cannot be placed at the litigants, but rather on the long and delayed process of the adjudicating authority or tribunal, such that relief of period beyond 330 days can be entertained.

In Ashish Chaturvedi Ex-Director, A to Z Barter Pvt. Ltd. v. Inox Leisure Ltd. [13], NCLAT revoked the NCLT order in which the Resolution Professional had requested an extension by excluding the time from the date of the initial order dated 12.12.2018 to the present because the order had not been communicated to him by NCLT. The NCLAT ruled that Speedy captures the essence of how the Bankruptcy Code operates effectively and efficiently. The responsible authorities must, to the greatest extent feasible, follow the model 16 timeline outlined in Regulation 40(A) of the IBBI (CIRP for corporate person) Regulations 2016. The “Adjudicating Authority” has the authority to extend the “Corporate Insolvency Resolution Process” past the time limit specified in Section 12(3) of the Code in exceptional circumstances. Only through an application by the insolvency resolution professional based on the “Committee of Creditors” as described in sub-Sections 2 and 3 of Section 12 of the IBC, 2016, may an extension of time be made.

Procedure for Submission of a Resolution Plan

A Resolution Applicant must submit [14] information in compliance with the Section 30, IBC, 2016, and CIRP Regulations, as well as the RFRP (Request for Resolution Plan) that RP shares after Coc’s approval. Each document must have the applicant’s signature, date, and page number on it in the designated spot. (The Resolution Applicant shall provide any undertakings, authorizations, forms, papers and information accessible in this RFRP that are required by Applicable Law.) The Resolution Applicant or an Authorized Representative of the Resolution Applicant must sign any documents related to the Resolution Plan in the manner described in the relevant format of such document in this RFRP. The Authorized Representative of the Resolution Applicant must sign and stamp all necessary papers, documents, and authorizations. (Each Resolution Applicant shall provide an affidavit in support of the corresponding undertaking to the IBC, 2016 which shall be certified and attested by a notary public.)

A resolution applicant must provide the information asked to demonstrate their competence and aptitude to manage and administer the business to the CoC’s satisfaction. It is necessary to strictly follow any forms, paperwork, or authorizations outlined in the RFRP. The Resolution Applicant must resist from using any brochures or booklets where information is required in certain forms, documents, or authorizations. The Resolution Plan could be deemed non-responsive, if necessary, paperwork, documentation, or authorizations were not submitted properly or if there was a problem with the material that was submitted. Each document, paperwork, or authorization must bear the resolution applicant’s signature and be properly stamped with the company seal.

Essentials and Mandatory Elements of a Debt Resolution Plan

The following conditions [15] are important and essential to draft a valid debt resolution plan,

a) The amount owed to operational creditors must be included in a resolution plan, and they must be paid before financial creditors.

b) A resolution plan must include a declaration outlining how to address the interests of all parties, including the corporate debtor’s operational and financial creditors.

c) A resolution plan must contain a disclosure of any instances in the past where the resolution applicant or any of its associated parties failed to carry out or contributed to the failure of carrying out another resolution plan that had been approved by the adjudicating authority.

According [16] to the Reg-38 of IBBI (CIRP) Regulations, 2016, the mandatory elements of a debt resolution plan also include that the debt resolution plan must specify the length of the plan’s term, its timeline for implementation, the management and control of the corporate debtor’s operations during the plan’s duration, and sufficient measures for monitoring the plan’s execution. The resolution applicant must be able to carry out the resolution plan, and the resolution plan must show that it addresses the default’s underlying cause, is feasible and viable, has provisions for its effective implementation, has provisions for the approvals required and the timeline for the same.

Conclusion and Approval of the Debt Resolution Plan

The requirements and schedule for the plan’s execution [17], such as the dates for the payment of CIRP costs, OC, dissident FC, and other stakeholders, as applicable; and obtaining approval under the Competition Commission Act, RBI with regard to ECBs, and SEBI, as appropriate. management and command of the CD’s operations when it was in office. Adequate guidelines [18] for monitoring implementation, during which the resolution applicant may or may not recommend that the monitoring committee include the resolution plan. In conclusion and summary, after the committee of creditors accepts it under Section 30(4) and the Adjudicating Body orders it under Section 31(2) of the IBC, the agreement becomes applicable to the CD and its stakeholders, including the Central Government, the State Government, or any other local authority to whom the CD owes any statutory dues.

The Supreme Court ruled in the case named India Resurgence Arc Private Limited vs. Amit Metaliks Limited and Ors [19], that the Committee of Creditors’ business judgement should largely guide the consideration and adoption of the resolution plan (CoC). According to Section 30(2) of the Insolvency and Bankruptcy Code (IBC), 2016, the scope of judicial review is still restricted. The court would check to see if the resolution plan complies with all applicable laws and any additional conditions the Board may impose. The court ruled that a Resolution Plan that has been approved cannot be challenged by a financial creditor who disagrees with the value of the security interest that it has because all of the aforementioned standards have been properly met. Finally, it was determined that Section 30 of the IBC, 2016only increased the factors for the CoC to consider when exercising its commercial wisdom so that it could make an informed decision about the viability and feasibility of the resolution plan, with the fairness of distribution among similarly situated creditors; and that the business decision made in exercise of the CoC’s commercial wisdom does not call for interference unless creditors belonging to a class are similarly situated.

The Supreme Court also ruled in the case named Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited and Ors [20]. that the claims specified in a resolution plan will be binding on the corporate debtor and its employees, members, creditors, or any local authority, guarantors, and other stakeholders once it has been duly approved by the adjudicating authority pursuant to Sub-section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016. All such claims that are not included in the resolution plan shall stand dissolved upon the Adjudicating Authority’s approval of the resolution plan, and no individual shall be permitted to begin or continue any proceedings with respect to such claim.

Author: Abhishek Gupta, Senior Associate (assisted by Akul Mishra)

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at info@samistilegal.in

END-NOTES:

1. Pandey A, “All about Resolution Plan under Insolvency and Bankruptcy Code, 2016” https://taxguru.in/corporate-law/resolution-plan-ibc-2016.html  accessed January 5, 2023.
2. Ibid note 1.
3. Ibid note 1.
4. Ibid note 1.
5. Staff, “Conducting Corporate Insolvency Resolution Process” https://cleartax.in/s/conducting-corporate-insolvency-resolution-process#:~:text=A%20resolution%20applicant%20should%20submit,memorandum%20to%20the%20resolution%20professional.&text=Provides%20for%20the%20payment%20of,debts%20of%20the%20corporate%20debtor.  accessed January 5, 2023.
6. Ibid note 1.
7. Bhigwade SA, “Role and Duties of Resolution Professional under the IBC, 2016” https://blog.ipleaders.in/role-and-duties-of-resolution-professional-under-the-insolvency-and-bankruptcy-code-2016/  accessed January 5, 2023.
8. Jain A, “Information Memorandum under Insolvency and Bankruptcy Code, 2016” https://taxguru.in/corporate-law/information-memorandum-insolvency-bankruptcy-code-2016-ibc.html  accessed January 5, 2023.
9. Staff, “Elements for a Resolution Plan” <https://www.centrik.in/blogs/elements-for-a-resolution-plan/> accessed January 5, 2023.
10. Brahma K, “Mandatory Timeline of the CIRP in Practice – Fact or Fiction” https://blog.ipleaders.in/mandatory-timeline-cirp-practice-fact-fiction/  accessed January 5, 2023.
11. Ibid note 10.
12. (2020) 8 SCC 531.
13. Company Appeal (AT) (Insolvency) No. 1103 of 2020, decided on 14-2-2022.
14. Ibid note 1.
15. Admin, “Resolution Plan – Meaning, Content, Drafting and Submission” https://www.resurgentindia.com/resolution-plan-meaning-content-drafting-and-submission#:~:text=Section%205(26)%20of%20the,the%20Insolvency%20and%20Bankruptcy%20Code.  accessed January 5, 2023.
16. Ibid note 1.
17. Ibid note 1.
18. Ibid note 15.
19. (2020) 8 SCC 5316.
20. Civil Appeal No. 8129 of 2019, Decided On: 13.04.2021.