This article has been published by Republic World at Successful Resolution Applicants Are Bound to Implement Resolution Plan Within Statutory Timelines or Face Consequences | Republic World

The Insolvency and Bankruptcy Code, 2016 (“IBC”) establishes a comprehensive time-bound legislative framework, which has substantially transformed the resolution of financial distress by streamlining insolvency/ reorganization procedures, prioritising the maximisation of asset value and preserving the corporate debtor’s business as a going concern. An essential feature of the IBC framework is the approval and implementation mechanism of resolution plans aimed at reviving financially distressed companies who have defaulted on their obligations. Despite the detailed approval process envisaged under the IBC, a significant, ongoing issue involves the non-compliance and non-implementation of resolution plans once they have been formally approved.

The transition from obtaining the resolution plan approval to actual implementation often encounters regulatory hurdles, funding challenges, and compliance requirements that can significantly delay or impede the realisation of business/ financial proposals under the resolution plan. These implementation challenges have necessitated judicial intervention to balance the competing imperatives of regulatory compliance and timely implementation of resolution plans, while maintaining the integrity of the corporate insolvency resolution process (“CIRP”) and protecting creditor interests.

The recent judgment of the National Company Law Appellate Tribunal (“NCLAT”) in ‘Taguda Pte Ltd. v. State Bank of India & Anr. (Company Appeal (AT)(Insolvency) No. 351 of 2024)‘ (“Taguda Case”) provides crucial insights into the judicial approach towards non-implementation of resolution plans in a time-bound manner and failure to secure all requisite regulatory approvals within the statutory framework prescribed under the IBC.

Factual Background

The factual background of the case is rooted in the prolonged CIRP of Ushdev International Limited the (“Corporate Debtor”) which commenced in May 2018 upon an application filed by the State Bank of India (“SBI”) under Section 7 of the IBC. The revised resolution plan submitted by Taguda Pte Ltd. (“Successful Resolution Applicant”) in relation to the CIRP was approved by the CoC with 91.06% vote shares in June 2021. The National Company Law Tribunal (“NCLT”), approved the resolution plan vide its order dated February 03, 2022, following which an Implementation and Monitoring Agency (“IMA”) was constituted. However, over the course of several meetings held through 2022 and 2023, the Successful Resolution Applicant failed to implement the resolution plan. The primary justification offered by the Successful Resolution Applicant was the pending approval from the Reserve Bank of India (“RBI”), which it claimed was a condition precedent to resolution plan implementation under Clause 14 of Schedule I of the resolution plan.

In response to this continued non-performance, SBI filed an application before the NCLT, Mumbai (I.A. No. 1857/2023), seeking specific directions for immediate implementation of the resolution plan or, in the alternative, to initiate liquidation. The NCLT, while declining all other prayers, passed a restrained yet firm direction on December 08, 2023, and granted the Successful Resolution Applicant two months’ time to implement the plan (“Impugned Order”). Pursuant to the Joint Lenders Meeting held on February 08, 2024, SBI invoked the Performance Bank Guarantee on February 09, 2024, and decided to file an application for liquidation. Aggrieved by the Impugned Order, the present appeal is filed by the Successful Resolution Applicant challenging the Impugned Order on the grounds that such directions effectively modified the resolution plan which is not permissible under the provisions of IBC and ignored the express condition precedent requiring prior RBI approval before triggering implementation obligations.

In this regard, the NCLAT dealt with inter alia the issue of whether the failure to obtain statutory approvals within the timeline prescribed under Section 31(4) of the IBC rendered the resolution plan unviable, thereby justifying its enforcement through judicial direction or, conversely, justifying the initiation of liquidation proceedings. The IBC provides a clear statutory framework governing the obligation to obtain regulatory approvals post approval of the resolution plan. Section 31(4) of the IBC mandates that resolution applicants must obtain necessary approvals required under any law within one year from the date of approval of the resolution plan by the NCLT.

Reasoning and Analysis

In its detailed judgment, the NCLAT rejected the contention that the Impugned Order amounted to a modification of the resolution plan. The NCLAT held that the Impugned Order did not alter any terms of the resolution plan but merely granted a final opportunity to the Successful Resolution Applicant to fulfil its commitments within a defined window, especially in light of the inordinate delay that had already occurred. The direction, according to the NCLAT, was well within the scope of judicial oversight to ensure effective implementation of a duly approved resolution plan.

As per Clause 3.1 of the Request for Resolution Plan (RFRP) and Section 31(4) of the IBC, the Successful Resolution Applicant was unequivocally responsible to obtain all necessary statutory and regulatory approvals, and such approvals were to be obtained within one year from the date of approval by the NCLT, or within the period prescribed under applicable law, whichever is later. Accordingly, the Successful Resolution Applicant was required to implement the resolution plan by February 08, 2024.

The NCLAT observed that the RBI approval had not been obtained even after three years of the NCLT’s approval of the resolution plan, far exceeding the statutory limit of one year. It was also noted that the IMA minutes dated February 06, 2024, recorded the Successful Resolution Applicant’s request for one week’s extension, followed by a revised request for one month. However, the Successful Resolution Applicant failed to formalise its commitments and requests for time extension. Accordingly, the NCLAT held that the Successful Resolution Applicant repeatedly failed to adhere to commitments, and its offers to deposit the amount offshore appeared to be merely tactical.

The NCLAT also considered the affidavit filed by Punjab National Bank, which detailed the steps taken to obtain RBI approval and highlighted certain transactions which were in contravention of the Foreign Exchange Management Act, 1999 (“FEMA”), by the Corporate Debtor. Accordingly, the Corporate Debtor was required to submit a compounding application pursuant to such FEMA violations. The NCLAT held that such regulatory issues only reinforced the failure of the Successful Resolution Applicant to secure timely approvals and could not serve as an excuse for breaching statutory obligations.

Referring to the decision of the Hon’ble Supreme Court of India in the matter titled ‘Independent Sugar Corporation Ltd. v. Girish Sriram Juneja & Ors. (C.A. No. 6071/2023)‘, the NCLAT underlined that statutory requirements concerning regulatory approvals are mandatory and cannot be diluted. Further, the NCLAT reiterated that resolution plans establish the commercial bargain between the CoC and the resolution applicant with the intention to create legal binding arrangements, and the implementation of the same is critical to preserving the integrity of the insolvency framework.

In light of the foregoing, the NCLAT held that (i) the Successful Resolution Applicant had failed to implement the resolution plan within the prescribed or extended period; (ii) that no further indulgence was warranted; and (iii) that liquidation proceedings must follow. The appeal was accordingly dismissed, with a direction to the NCLT to decide the pending liquidation application against the Corporate Debtor within three months.

IMPLICATIONS AND CONCLUSION

The Taguda Case establishes important precedents for the enforcement of resolution plan implementation under the IBC. The reasoning adopted by the NCLAT reinforces that approved resolution plans create binding legal obligations that cannot be circumvented by citing regulatory approval delays or other implementation challenges. It underscores the importance of adhering to statutory timelines for obtaining regulatory approvals. Delays, even if attributed to external regulatory processes, cannot indefinitely stall the implementation of a resolution plan. The successful resolution applicant bears the ultimate responsibility for securing all necessary approvals and ensuring compliance with the resolution plan. Failure to do so can result in the invocation of bank guarantees and liquidation of the corporate debtor. However, the judicial authorities need to be observant if the delay is attributable to the party or there is a lack of action/ decision making by the relevant statutory authority, in each case.

There is limited judicial tolerance for delays and excuses in the implementation of resolution plans, which signals a shift towards greater discipline and finality in the CIRP, in line with the objectives of the IBC providing certainty and time-bound resolution to insolvency proceedings. The NCLAT reaffirms that liquidation is the inevitable outcome when resolution fails due to non-implementation, especially in cases where the CIRP has already been unduly prolonged.

As India’s insolvency regime continues to evolve, the Taguda Case is in the right direction inter alia providing valuable guidance on balancing the need for regulatory compliance read with meeting the statutory timelines for implementation of resolution plans.