NCLAT: CoC has no power to substitute successful resolution applicant once approved

Introduction

Recently, the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) in Swan Energy Ltd. v. Chandan Prakash Jain, RP of E-Complex Pvt. Ltd. & Ors. considered whether the Committee of Creditors (“CoC”) of a corporate debtor have the powers to substitute a successful resolution applicant (“SRA”) with another, once the resolution plan has been approved. Moreover, would the CoC have powers to modify the resolution plan to carry out such a substitution once already approved. In this article, we discuss the said judgement of the NCLAT.

Brief Facts

E-complex Pvt. Ltd. (“CD”) was put to corporate insolvency resolution process (“CIRP”). In furtherance of this, the resolution professional of the CD (“RP”) issued the request for resolution plans. Upon consideration, Invent Assets Securitization and Reconstruction Pvt. Ltd. (“Invent Assets”), an asset reconstruction company (“ARC”) emerged as the SRA since the CoC approved the plan with majority votes (“Resolution Plan”).

Pursuant to the same, RP applied to the NCLT for approval of the Resolution Plan. Meanwhile, a circular issued by Reserve Bank of India (“RBI”) on 11 October 2022 restricted ARCs from engaging in any business beyond securitization and asset reconstruction without prior approval of the RBI. Owing to the same, Invent Assets became ineligible to be a resolution applicant.

Consequently, Invent Assets approached the NCLT requesting substitution of itself with its sponsor company, Westend Investment and Finance Consultancy (“Westend”) as the SRA. The said application was withdrawn with the leave to make the same request before the CoC. The CoC unanimously approved the substitution of Westend in place of Invent Assets and modified the Resolution Plan to that extent (“Revised Resolution Plan”). Accordingly, the RP approached the NCLT for approval of the Revised Resolution Plan. Upon certain changes suggested by the NCLT, the Revised Resolution Plan was approved.

Aggrieved, Swan Energy Pvt. Ltd., one of the unsuccessful resolution applicants (“Swan Energy”) filed the present appeal before the NCLAT challenging the substitution of Invent Assets with Westend and modification in the Resolution Plan in this regard.

NCLAT Ruling

Maintainability of the appeal by Swan Energy, unsuccessful resolution applicant

The NCLAT noted that the appeal filed by Swan Energy does not challenge the commercial wisdom of the CoC exercised while approving the Resolution Plan and rejecting its resolution plan. On the other hand, it challenges the process of substitution of Invent Assets stating that the same is contrary to the Insolvency and Bankruptcy Code, 2016 (“Code”) and the relevant Regulations. It was contended by Swan Energy that once Invent Assets became ineligible, the process should have run afresh, inviting fresh resolution plans as per the Code and relevant Regulations. Accordingly, the NCLAT held that the appeal by Swan Energy is maintainable.

CoC’s powers to substitute the SRA / modify the Resolution Plan

The NCLAT considered the provisions of the Code and the relevant Regulations and held that the same has been breached by the CoC and the RP. It was held that an entity who has not submitted a resolution plan and was not in the list of prospective resolution applicants cannot be considered for substitution. In the present case, by allowing the substitution, the CoC has essentially allowed Westend to become the SRA whose plan now stands approved. This is despite the fact that Westend had not submitted the resolution plan in the first place.

Further, the NCLAT rejected the contention of Invest Assets that the Resolution Plan allows such a substitution in light of the fact that it provides for Westend to infuse money in the CD. It was observed that such a provision cannot be read to mean that an SRA can nominate its sponsor to be the SRA.

Lastly, it was held that the Resolution Plan does not contain any provision for change or substitution of the SRA. Accordingly, it could not have been allowed and NCLT wrongfully approved the Revised Resolution Plan.   

Consequently, the NCLAT held that CoC does not have the power to substitute Westend in the place of Invent Assets and carry out modification in the Resolution Plan. Accordingly, the process will start afresh and fresh resolution plans shall be called for by the RP.

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