Section 29A disqualifications, what Section 30(2) requires, the extinguishment of claims not in the plan and the continuing liability of guarantors.
A resolution plan is the proposal under which a company in insolvency is kept alive, sold as a going concern or restructured, with its creditors paid from the proceeds. It is the aim of the corporate insolvency resolution process, and it is the alternative to liquidation. For a creditor, the questions are what the plan must contain, what a creditor is entitled to under it, and how far the plan binds. This note describes the position under the Insolvency and Bankruptcy Code, 2016. It is general information, not advice on a particular plan.
Who may submit a plan
A resolution applicant submits a plan to the resolution professional, who presents those that meet the Code's requirements to the committee of creditors. Section 29A disqualifies certain persons from applying. The list includes undischarged insolvents, wilful defaulters, persons whose accounts have been classified as non-performing assets for a year or more and who have not paid the overdue amounts with interest, persons convicted of specified offences, and persons connected with such persons. The purpose is to stop a promoter who caused the failure from regaining the company cheaply. The Supreme Court upheld the provision in Chitra Sharma v. Union of India (2018) and in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2019).
What a plan must contain
Section 30(2) requires the professional to confirm that each plan:
- provides for payment of the costs of the insolvency resolution process in priority to other debts;
- provides for payment to the operational creditors of not less than the amount they would have received in liquidation, or the amount they would receive if the plan's distribution followed the order of priority in Section 53, whichever is higher;
- provides for the management of the affairs of the company after approval;
- provides for the implementation and supervision of the plan; and
- does not contravene any law in force.
Financial creditors who do not vote for the plan must be paid at least the liquidation value or the amount payable under Section 53, whichever is higher, under the proviso to Section 30(2)(b).
Approval and its effect
The committee approves the plan by a vote of at least sixty-six per cent of the voting share, and the professional submits it to the Adjudicating Authority. Under Section 31 the tribunal approves a plan that meets the requirements of Section 30(2), and on approval it binds the corporate debtor, its employees, members, creditors (including the Central and State Governments and local authorities), guarantors and other stakeholders. In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) and in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021) the Supreme Court held that claims not included in the approved plan are extinguished, so that a successful applicant takes the company free of undisclosed liabilities. A creditor that has not filed its claim during the process may find that it cannot recover afterwards.
Guarantors are not released
Approval of a plan does not discharge the guarantor of the corporate debtor's debt. The Supreme Court held in Lalit Kumar Jain v. Union of India (2021) that Section 31 does not operate to release a personal guarantor from liability under the contract of guarantee, and that a creditor may pursue the guarantor for the balance.
After approval
- The plan is implemented as approved, and the tribunal may supervise it. A failure to implement is a ground on which the committee or a creditor can apply to the tribunal.
- An appeal against the approval lies to the National Company Law Appellate Tribunal under Section 61(3), on the limited grounds that the Code lists: contravention of law, material irregularity in the process, failure to give creditors the amounts the Code guarantees, and similar grounds.
The best position for a creditor is to file a complete claim at the outset, track the plan as it is formed, and be sure that what the plan offers is not less than what the Code requires.
This note is general information on the law at the date of publication. It is not legal advice, and it should not be relied on without advice on the facts of a particular matter.
