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IBCInsolvency & Bankruptcy CodeAdjudicating Authority Has The Ultimate Power To Reject Or Accept A Resolution Plan Under The Insolvency And Bankruptcy Code, 2016

November 25, 2018by GLC & Partners

The Insolvency and Bankruptcy Code, 2016 (“IBC”) came into force with three main objectives, i.e., “promote entrepreneurship, availability of credit and balance the interests of all the stakeholders”. To achieve and balance all three objectives, it is important that the Resolution Plan (“RP”) accepted by the Committee of Creditors (“CoC”) caters to the need of all the creditors (not balanced towards any specific creditor or set of creditors) and keeps the Corporate Debtor (“CD”) as a going concern by maximizing the value its of assets.

In the case of Rajputana Properties Pvt. Ltd. VS Ultratech Cement Pvt. Ltd., the Appellant’s RP was in favour of a handful of creditors only. It was a biased RP ignoring the Operational Creditors and benefiting only Financial Creditors. This particular RP was approved by the CoC while ignoring another RP proposed by the Respondent which balanced the interest of all the stakeholders and was paying off the liabilities of all the creditors.

The NCLAT held that if any RP which is accepted by the CoC, defeats the objective of the IBC then it shall not be accepted. The Adjudicating Authority has the ultimate power to accept or reject an RP, if it maximizes the value of a set of stakeholders and not of the CD. It is important that the Operational Creditors are not ignored in an RP otherwise, the objective of promoting availability of credit will be defeated (if they deny providing goods and services on credit then the whole economy will get affected). The Court asserted that if any creditor is not a part of the negotiation process then also his liabilities must be met in any solution that comes out of such process. Thus, the RP accepted by the CoC was rejected by the Adjudicating Authority and CoC had to accept another RP which not only benefited Financial Creditors but also Operational Creditors. When appealed to the Hon’ble Supreme Court, it upheld the order given by the NCLAT.

Therefore, CoC shall make sure that the RP that they are accepting, does not only benefit the creditors in the CoC but all the creditors of the CD. An RP should not be considered as a sale or an auction, it is a plan proposed to keep the CD as a going concern. They should make sure that the CD does not bleed (personal recovery) but is kept alive (resolution). Even though, if COC still ignores the benefit of any stakeholder, the Adjudicating Authority can reject that particular RP as it has the ultimate power to do so.