Non -implementation of Resolution Plan: remedies available to the Creditors

Most Creditors heave a sigh of relief once the National Company Law Tribunal approves the Resolution Plan (“Plan”). However, the actual trouble for the creditors begin after approval of the Plan. It is increasingly seen that most Resolution Plans are not complied with resulting in loss of time/resources for the creditors and consequent liquidation of the corporate debtor. In such cases, a creditor has the option of seeking for liquidation of the corporate debtor under Section 33(3) of the IBC.

To liquidate or not to liquidate:

In most cases, the Creditors stand to gain more than the liquidation value when the Resolution Plan is implemented making the option of seeking liquidation of the corporate debtor impractical. Thus, the other options available to a creditor are:

  1. Invocation of performance security. 
  2. Seeking Directions from the NCLT.
  3. Contempt Petition. 
  4. Punishment under Section 74(3) of IBC

1. Invocation of performance security:

In order to avoid a situation where the corporate debtor is liquidated, Regulation 36B (4A) of Insolvency Resolution Process for Corporate Persons Regulations, 2016 (“Regulations”) was introduced on 24.01.2019.  Regulation 36B (4A) stipulates that on approval of the resolution plan, the Resolution Applicant shall provide a performance security. Further, if the Resolution Applicant fails to implement the plan, the performance security can be invoked by the COC. Thus, the threat of invocation of the performance security ensures that Resolution Plan is not contravened by the Resolution Applicant. 

However, the ground reality is different as most Resolution professionals/COC in a bid to get the resolution plan approved at the earliest do not insist on a performance guarantee from the Applicants only to realize their folly when the Plan is not implemented. Moreover, the Resolution Applicants are also hesitant to provide performance security as it involves a huge investment in the initial stage of the CIRP. 

2. Seeking Directions from the NCLT:

In the absence of performance security, the Secured Creditor can seek for directions from the NCLT under Regulation 39(9) which stipulates that any creditor aggrieved by the non – implementation of the Resolution Plan can also approach the NCLT for directions. In cases where the Resolution Applicant is refusing to implement the plan due to some dispute with the creditors or for any other reason, the Creditors can approach the NCLT and seek appropriate direction from the NCLT for implementation of the plan.  

3.  Contempt Petition:

Another aggressive measure available to the creditors is to initiate contempt proceedings as the NCLT has the powers to punish for contempt of its orders under Section 425 of the Companies Act 2013. Thus, the aggrieved creditors can initiate contempt proceedings for violation of the Order of the NCLT by which the Resolution plan was approved and held to be binding on all the creditors.

4. Punishment under Section 74(3) of IBC

Section 74(3) provides punishment for contravention of the Resolution Plan i.e. imprisonment of 1-5 years with a fine of Rs.1 Lakh to Rs. 1 crore in the event that a corporate debtor or any of its officers are held to have deliberately contravened the Resolution Plan.

However, the NCLAT in COC of Amtek Auto Ltd., vs Mr. Dinkar T.Venkatasubramanian & Ors has held that such punishment can be awarded only by a special court and that too on an application either by IBBI or the Central Government. Thus, the aggrieved creditor can only make application under Section 74(3) and Section 213 r/w. Section 447 of the Companies Act,2013 to the NCLT and the NCLT can then decided if the matter has to be reffered to IBBI/Central government for further action on the contravention of the Plan.

Conclusion:

While the aim of IBC is resolution, without appropriate legal framework to hold the Resolution Applicant accountable, most companies end up being liquidated even after approval of the Resolution plan as the aforementioned measures are merely arm twisting tactics which do not guarantee  the implementation of the resolution plan.

Published by Hemanth Rao

I am an Advocate practicing in the High Court of Karnataka at Bangalore.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: