What Are the Remedies for Creditors if the Resolution Plan Fails?

Under the Insolvency and Bankruptcy Code (IBC), the Corporate Insolvency Resolution Process (CIRP) is designed to facilitate the resolution of insolvent companies through a structured process. If a resolution plan fails to be approved by the Committee of Creditors (CoC) or is rejected by the Adjudicating Authority, creditors have several remedies available to them, including liquidation, further resolution attempts, or other legal actions to recover their dues.

Remedies for Creditors if the Resolution Plan Fails:

Liquidation (Section 33 of the IBC):

If the resolution plan is not approved, and there are no viable options for the revival of the company, the Adjudicating Authority (NCLT) may order the liquidation of the company.

Under Section 33 of the IBC, if no resolution plan is approved within the specified time frame, or if the CoC rejects the resolution plans, the company will move into liquidation.

Creditors will then be entitled to recover their dues from the liquidation proceeds, which will be distributed according to the priority laid out in Section 53 of the IBC.

Secured creditors will have a higher priority, followed by unsecured creditors, including operational creditors, employees, and others.

Further Resolution Attempts (Section 12A of the IBC):

If the resolution process fails, the CoC has the option to allow further attempts at resolving the company’s financial issues. According to Section 12A of the IBC, the CoC may decide to withdraw the insolvency proceedings and allow the company to seek a revised resolution plan.

In this case, the creditors may approve a fresh resolution plan or look for another bidder who can come up with a solution to resolve the insolvency issue.

Creditor Actions Outside the IBC:

If the resolution plan fails, creditors may seek to pursue alternative legal options outside the IBC. These could include:

• Filing lawsuits in courts to enforce their claims if not adequately addressed in the resolution process.
• Arbitration or mediation may also be pursued if there are disputes regarding the resolution process or outstanding debts.

Claim for Compensation:

If the failure of the resolution plan is due to wrongful actions or fraud by the company’s management or other parties, creditors may seek compensation under the relevant provisions of the Companies Act or other applicable laws.

In case of fraudulent activities, creditors may file criminal complaints, seeking remedies for fraudulent misrepresentation or concealment of assets.

Legal Challenges to Resolution Plan Rejection:

If the CoC rejects the resolution plan and creditors believe that the rejection was not in line with the IBC or was done in bad faith, they can file an appeal with the Appellate Tribunal (NCLAT).

The NCLAT will examine the rejection process and determine if it was fair. If it finds the rejection to be unjustified, it may direct the CoC to reconsider the plan.

Appointment of New Resolution Professional (RP):

If the CoC believes that the current resolution professional (RP) is not facilitating the resolution effectively, they may request the Adjudicating Authority (NCLT) to replace the RP. This step could help introduce a new perspective and potentially open the door for a fresh resolution plan to be considered.

Creditors may push for a more proactive RP if they believe that the current RP is not advancing the process or is handling it in a way that’s detrimental to their interests.

Sale of Assets under Section 29A of the IBC:

If the resolution process fails, creditors may push for the sale of the company’s assets as a way to recover their dues. Under Section 29A, the assets can be sold under the guidance of the CoC and the resolution professional, who will work to get the best possible price.

In the case of liquidation, the sale of assets can help creditors recover some portion of their debt, though the amount depends on the remaining value of the company’s assets after securing creditors’ claims are paid.

Restructure or Sale of Business Units:

In some cases, creditors may request the CoC to consider selling parts of the business (rather than liquidating the entire company) to recover dues. This can help avoid the closure of the entire company and potentially preserve employment and business operations.

Example:

Imagine a manufacturing company that has entered CIRP under the IBC, but the CoC rejects the resolution plan put forward by a potential buyer. In this situation:

• The company will move into liquidation if no further resolution attempts are made, and its assets will be sold off to repay creditors.
• The CoC may decide to attempt a further resolution if it believes there is still a chance to revive the company and secure a better plan.
• If creditors believe the resolution plan rejection was unfair, they could challenge the decision with the NCLAT.
• Alternatively, creditors might take legal action outside of the IBC, such as filing lawsuits to recover outstanding debts or seeking compensation if fraud was involved in the failure of the resolution plan.

Conclusion:

If the resolution plan fails under the IBC, creditors have several remedies available, including liquidation, further resolution attempts, legal challenges, or pursuing recovery outside of the IBC. While the CoC plays a central role in determining the next steps, creditors can leverage legal avenues to recover their dues or seek a more favorable outcome. The IBC provides a structured process to handle such situations, but the actual remedy depends on the specifics of the case and the actions of the creditors.