Supreme Court Upholds Liquidation Order After Failed Resolution Plan Implementation in Insolvency Case (01 March 2021)

Introduction

Date of the Judgment: 01 March 2021
Citation: Civil Appeal No 3299 of 2020
Judges: Dr. Dhananjaya Y Chandrachud, J and M.R. Shah, J.

What happens when a company fails to implement a resolution plan after it has been approved under the Insolvency and Bankruptcy Code (IBC)? The Supreme Court of India recently addressed this critical question in a case involving Kridhan Infrastructure Pvt Ltd. The court examined whether a company should be allowed to continue under a resolution plan even after repeated failures to meet its obligations, or if liquidation is the only remaining option. The judgment was delivered by a two-judge bench consisting of Justice Dr. Dhananjaya Y Chandrachud and Justice M.R. Shah.

Case Background

The case revolves around Tecpro Systems Limited, a company that underwent the Corporate Insolvency Resolution Process (CIRP) under the IBC. Kridhan Infrastructure Pvt Ltd (now known as Krish Steel and Trading Pvt Ltd), the appellant, submitted a resolution plan that was approved by the Committee of Creditors (CoC) on 8 March 2019 with a majority of 89.92%. The National Company Law Tribunal (NCLT) approved the plan on 15 May 2019, and the appellant deposited Rs 5 crores in an escrow account. However, the appellant failed to fulfill further obligations, including equity infusion, despite multiple opportunities over six months. Consequently, on 11 November 2019, the CoC voted for liquidation of the Corporate Debtor, which was allowed by the NCLT on 16 January 2020. The National Company Law Appellate Tribunal (NCLAT) upheld this order.

Timeline

Course of Proceedings

The NCLT initially approved the resolution plan on 15 May 2019. However, due to the appellant’s failure to implement the plan, an application was filed under Section 33 of the Insolvency and Bankruptcy Code, 2016, seeking liquidation of the Corporate Debtor. The NCLT allowed this on 16 January 2020. The appellant then appealed to the NCLAT, which initially granted an opportunity to file an affidavit indicating a timeline for compliance. A revised timeline was agreed upon, requiring an upfront payment of Rs 15 crores within seven days, and a further Rs 50 crores within three months, failing which the initial deposit would be forfeited. The NCLAT dismissed the appeal on 8 September 2020, upholding the liquidation order, noting the appellant’s failure to implement the plan for over eight months.

Legal Framework

The judgment primarily concerns the implementation of the resolution plan under the Insolvency and Bankruptcy Code, 2016. Specifically, Section 33 of the IBC was mentioned, which deals with the initiation of liquidation proceedings. The court also referred to the broader objectives of the IBC, which include resolving corporate insolvencies and not merely recovering outstanding monies. The court emphasized that liquidation is a last resort and that the IBC recognizes a wider public interest in resolving corporate insolvencies.

Arguments

Appellant’s Arguments:

• The appellant argued that liquidation should be a matter of last resort.
• They stated their willingness to abide by the terms agreed upon on 25 February 2020, and to deposit Rs 50 crores within three months.
• The appellant contended that they were unable to raise funds because the term lenders required the company’s status to be changed from “under liquidation” to “active”.
• They proposed to raise funds by mortgaging the assets of the Corporate Debtor.

Respondent’s Arguments:

• The liquidator argued that the appellant had not taken steps to comply with its obligations after the approval of the Resolution Plan in May 2019.
• The liquidator stated that the appellant had been unable to raise funds despite multiple opportunities.
• The liquidator pointed out that the appellant had taken actions towards settling various disputes, including arbitration matters, despite not fulfilling its obligations.

Edelweiss Asset Reconstruction Company Limited (EARC) Arguments:

• EARC supported the appellant, stating that the erstwhile members of the CoC found it in their best interest to allow the Resolution Plan to be implemented.
• EARC requested the court to pass suitable orders to facilitate the appellant in raising the necessary funds.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was whether the appellant should be given further opportunity to implement the resolution plan despite repeated failures, or whether the liquidation order should be upheld.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authority:

• Innoventive Industries Ltd. v ICICI Bank, (2018) 1 SCC 407, Supreme Court of India: This case was cited to emphasize that time is a crucial facet of the scheme under the IBC. The court referred to paragraphs 12-16 of the judgment, which highlight the importance of adhering to the timelines prescribed in the IBC for the resolution process.

Judgment

The Supreme Court dismissed the appeal, upholding the liquidation order. The court noted that the appellant had been given multiple opportunities to comply with the resolution plan, both before the NCLT and NCLAT, but failed to do so. The court also took note of the fact that even after the Supreme Court granted an opportunity, the appellant failed to deposit the required amount. The court held that time is a crucial aspect of the IBC, and allowing indefinite delays would defeat the statute’s purpose. The court ordered the forfeiture of the Rs 20 crores deposited by the appellant and directed that the management of the company revert to the liquidator.

Authorities:

• Innoventive Industries Ltd. v ICICI Bank, (2018) 1 SCC 407, Supreme Court of India: The court followed this authority to emphasize the importance of time in the IBC process.

What weighed in the mind of the Court?

The court’s decision was primarily influenced by the appellant’s repeated failures to comply with the resolution plan despite multiple opportunities. The court emphasized that the IBC process is time-bound and that allowing indefinite delays would defeat its purpose. The court also noted that the appellant’s attempt to raise funds by mortgaging the company’s assets while the company was still under a liquidation order was not acceptable. The court prioritized the timely resolution of insolvency proceedings over giving the appellant further chances to comply.

Logical Reasoning:

Key Takeaways

• Resolution applicants must adhere to the timelines specified under the IBC.
• Liquidation is a last resort, but it will be invoked if a resolution applicant fails to implement the plan despite multiple opportunities.
• The IBC process is time-bound, and delays are not permissible.
• Attempts to raise funds by mortgaging the company’s assets while the company is under a liquidation order are not acceptable.

Directions

The Supreme Court directed the forfeiture of the Rs 20 crores deposited by the appellant and ordered that the management of the company revert to the liquidator.

Development of Law

The ratio decidendi of this case is that a resolution applicant cannot indefinitely delay the implementation of a resolution plan. The Supreme Court has reaffirmed the importance of timelines and the need for a timely resolution of insolvency proceedings. This judgment reinforces the principle that liquidation is a last resort but will be invoked when a resolution applicant fails to comply with its obligations despite multiple opportunities. There is no change in the previous position of law.

Conclusion

The Supreme Court’s decision in Kridhan Infrastructure Pvt Ltd vs. Venkatesan Sankaranarayan & Ors underscores the importance of timely implementation of resolution plans under the IBC. The court’s refusal to grant further opportunities to the appellant highlights the time-bound nature of the IBC process and the need for resolution applicants to be fair and diligent in meeting their obligations. This judgment serves as a reminder that while the IBC aims to resolve corporate insolvencies, it also provides for liquidation as a necessary consequence of non-compliance.