A bankrupt business resembles an ice cube in summer – each second takes it closer to vanishing point. Assets depreciate, rivals converge, vendors find ways to get out of their contracts, and eventually customers notice, and go elsewhere. This time sensitivity makes it essential that the entire insolvency process be completed with haste. Instead, the corporate insolvency resolution process (CIRP) is structured to feed litigation and delay: competing bidders jostle to have each other disqualified, creditors fight over the valuation of their claims, and the deposed former management works in the background to regain its kingdom by having the process withdrawn. In this context, the recent Supreme Court judgment of Ebix Singapore is noteworthy, as its facts are representative of the Code’s failings.
The Court considered three separate cases, and in each case, bore witness to the unique phenomenon of a bidder succeeding in having its bid approved by the committee of creditors, only to file proceedings to wriggle out of its commitment, citing a delay by the NCLT in affixing its seal to the bid. Of course, the unavoidable paralysis caused by the pandemic exacerbated matters, but it was inevitable that the torturous CIRP would eventually come to this – even winners getting fed up and wanting out. The Court was faced with a hard question – should such applications be allowed?
There is no statutory language that allows a resolution applicant to withdraw its bid. To surmount this obstacle, the bidders relied on frustration and force majeure (well-known principles for discharging the obligations under a contract), their argument being that a resolution plan was analogous to a contract. This was a weak argument, and it was optimistic for the resolution applicants to think that the Court would distort a highly regulated process like the CIRP by allowing the introduction of principles from the law of contract. The Supreme Court refused to permit what it called “unnecessary complexity”. The Court made it clear – if resolution applicants wanted to walk away from their bids, they would have to petition Parliament to get the law amended to allow them to do so. Under the present regime, a bid, once made and voted on, cannot be revoked.
What this irrevocability means is that in future, prospective resolution applicants will either reduce the cost of their bids to account for the massive litigation delays that are de rigueur for the IBC, or, spooked by the uncertainty of committing to a potentially never-ending process, may not bid at all. Unless the Government can liberate the IBC from its current malaise, bidders will remain demoralised and unimpressed, creditors will have to keep taking massive cuts on their loans, and, in the long run, Indians will have to make do with less credit, reduced growth and fewer jobs.
