The Conundrum in Jhabua Power: Timely Liquidation or Delayed Resolution?

The Insolvency and Bankruptcy Code 2016 (“I&B Code”/“the Code”) was enacted with the purpose of revival/ resolution of a Corporate Debtor (“CD”) in a time bound manner. Being considered to be at a nascent stage, judicial pronouncements play a steering role in the Indian insolvency regime, avoiding any unproctored conduct by the stakeholders and tribunals. Recently, in Flsmidth Private Limited v. Jhabua Power Limited, the NCLT Kolkata bench by an order dated 02.06.2021 allowed extensions/exclusions of approx. 500 days in addendum to the Corporate Insolvency Resolution Process (“CIRP”). This resulted in the CIRP amounting to a staggering number of 826 days since its admission. The order raises questions on the objectives of the code vis-a-vis the time bound resolution of the CD, as envisaged in the resolution process in the Code. 

Is Time Really of the Essence?

Apart from being a creditor-run process, one of the most important distinctions between the I&B Code and its predecessors is that the Code enshrines a far more timely resolution process than the latter. Thus, time bound resolution is considered paramount when CIRP is initiated. Even though The Sick Industrial Companies (Special Provisions) Act, 1985 and other related enactments provided for expeditious processes in letter, they failed miserably to achieve this objective in spirit, leading to a disorderly and delayed resolution timeline. 

Section 12 of the I&B Code provides that the CIRP proceedings shall be concluded within a period of 180 days, allowing room for an extension of upto 90 days at the behest of the Adjudicating Authority (hereinafter “AA”), with the maximum possible duration of upto 330 days. However, the timeline in the present case not only surpasses the statutory limit of 330 days, but exceeds any reasonable prudence with a massive overhaul of approx. 500 days without a definitive prospect of revival in sight.

                        Source: Flsmidth Private Limited v. Jhabua Power Limited

The Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel India Limited s. Satish v. Kumar Gupta & Ors observed that an extension, above the outer limit of 330 days, can be given in exceptional cases at the behest of the AA. However, if the resolution process of the CD exceeds a reasonable quantum of time, then liquidation should be sought as an alternative to unfruitful CIRP. It is a well-established fact that time is of the essence under the scheme of the I&B Code; which has been defied in the present case due to unregulated misuse of commercial wisdom, failure of the RP to perform his duties and subsequent leniency of the concerned AA.

Referring to the present case, the stakeholders along with the AA have adopted an approach of delayed resolution over timely liquidation, resulting in untenable extensions being granted continually, which in turn results in the lapse of CIRP into an indefinite loop. This is precisely how an unfettered exercise of the commercial wisdom  by the Committee of Creditors (“CoC”) and subsequent leniency by the AA renders the CIRP devoid of due process of law.                                                         

The purpose of moratorium under Section 14 is to provide breathing space to the CD in order to be revived smoothly. However, in the present case, as the CD does not seem to be nearing revival in a timely manner the following contentions cannot be overlooked. Firstly, as observed in the case of ArcelorMittal India v. Satish Kumar Gupta, “The longer the delay persists, the more likely liquidation appears to be. Moreover, the liquidation value tends to diminish with time as the cumulative of the assets suffers from the prevalent economic rate of depreciation.”

Secondly, extending the moratorium period by such unreasonable amounts significantly compounds the CIRP costs, which, in turn, depreciates the total amount available to be distributed amongst the creditors. As observed in the case of Dakshin Gujarat VIJ Company Ltd. v. M/s. ABG Shipyard Ltd., if any essential or critical goods are supplied during the CIRP, the cost incurred towards the same shall be accounted towards Insolvency Resolution Process Cost and shall be paid in regular intervals. In the present case, significant costs are borne by the estate as the CD’s power plant requires the supply of essential and critical goods for its operability as a going concern.

Flouting the Going Concern Principle

One of the most sacrosanct objectives of the Code remains to be the ‘going concern’ principle. The Code envisages the resolution of the CD, in a manner which preserves the operations vital to the survival and recovery of the CD when undergoing the CIRP. It is pertinent to note that this settled position of law has been reiterated time and again, most recently by the SC in Gujarat Urja Vikas Nigam, wherein the CD, being an energy service provider, was subjected to insolvency proceedings and subsequent termination of the Power Purchase Agreement that its services were engaged under.

The same view was taken by the Appellate Authority in TCS v. Vishal Ghisulal Jain. Thereunder, the SC noted that “Maintaining the Corporate Debtor as a ‘going concern’ is the soul of the CIRP. Section 14(2A) provides that such supply of goods or services as the IRP or RP considers critical for protecting and preserving the value of the CD, and managing it as a going concern cannot be terminated, suspended or interrupted.”

The AA, in the present case, has cited similar reasons for granting the extensions as being in tandem with the CD being run as a going concern and not be pushed into liquidation merely because the timeline of the CIRP has concluded. However, the AA failed to appreciate that the Code does not allow the process of the CIRP to run afoul of its other objectives, i.e. maximization of asset value, time-bound recovery of the CD, balancing the interests of the stakeholders affected, etc.

Extensions & Exclusions: A Recipe for Delays

The RP is bound by the limits of Section 25, insofar as “to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.” This objective of the Code cannot be solely interpreted without considering the objectives complementing the entire CIRP process devised under the scheme of the Code. The order in question admonishes the RP and CoC for making light of the CIRP timelines to the extent that AA considers the due process of CIRP being ‘relegated to the dustbin’. However, the extensions granted by the AA herein depict a clear departure from their cited reasoning as the AA still granted another sixty-day extension to the parties based on their pleaded ‘likelihood’ of the plan being accepted.

In Swiss Ribbons, the apex court clearly opined that the “timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution”. However, it is pertinent to be noted here that the very objective of the Code to the effect of maximization of asset values is being disregarded, not only by the parties but by the AA also. Every subsequent extension and exclusion would amount to further deterioration of the estate/assets of the CD by way of wastage, depreciation, etc., thereby chipping away at the collective value salvageable.

The authors remain of the opinion that such precedents could give rise to a paradoxical situation. Applying for extensions and exclusions in order to get the resolution plan approved would ultimately lead to the deterioration of assets and the value thereto when a timeline such as one in this case, is to be observed.  Thus, in order to achieve the objectives of the Code in a well-rounded manner, upon conclusion of the CIRP along with reasonable extensions, the CD should be sought to be liquidated as a going concern.

Conclusion

A combined reading of the ArcelorMittal judgment, wherein the Court had deliberated upon the CD being run as a going-concern in a similar vein and the Swiss Ribbons judgment indicates a blatant flouting of the CIRP timelines as provided in the Code, and evidently, a clear abuse of CoC’s commercial wisdom. It is precisely in such instances that the opportunity to set a bad precedent for the nascent yet nurturing insolvency law regime of India arises and should be avoided in the strictest manner possible. The CD herein poses a need to be rid of such delay-riddled procedures and untenable grants by the AA, as the exercise of the commercial wisdom in cases like this often develops into ‘commercial wastage’. Moreover, such blatant flouting of the CIRP timelines leads to wastage of precious judicial time.  Where authorities like the Ministry of Corporate Affairs, via its sub-committee report, and the Central Legislature, are working towards furthering the objective of time-bound resolution, judicial pronouncements such as this disregard the due process of law entirely.

This article has been written by Priyanshu Bhayana and Vishal Bijlani, students at National Law University, Orissa.