Resolution Plan Approval Legal Standards
📌 1. Introduction: Resolution Plan
A resolution plan is a detailed strategy proposed to revive a financially distressed corporate debtor under the Corporate Insolvency Resolution Process (CIRP).
Governed under Sections 30, 31, and 33 of the IBC, 2016.
Objective:
Maximize value for creditors.
Restore viability of corporate debtor.
Avoid liquidation if a feasible solution exists.
Submitted by resolution applicants, including promoters, investors, or third parties.
📌 2. Legal Framework for Approval
A. Submission to Committee of Creditors (CoC)
Section 30(1): Resolution applicant submits plan to Resolution Professional (RP).
RP verifies compliance with Section 29A (eligibility criteria) and forwards to CoC.
B. CoC Approval (Section 30(4))
Requires approval by ≥66% of voting share of financial creditors.
Operational creditors are not part of CoC voting but are impacted by plan.
CoC may:
Approve plan
Reject plan
Request modifications
C. Submission to NCLT for Sanction (Section 31)
RP submits approved plan to NCLT.
NCLT ensures plan meets statutory and judicial criteria:
Compliance with law and contracts
Provides for payment to operational creditors
Provides management and governance structure
Protects employee rights
Ensures fair value for creditors
D. Sanction by NCLT
NCLT evaluates:
Compliance with Sections 30, 31, and 32
Resolution plan is viable, feasible, and legally compliant
Sanctioned plan becomes binding on:
Corporate debtor
Creditors
Employees
Promoters
Government and regulatory authorities
📌 3. Key Legal Standards for Approval
| Standard | Description | Statutory Reference |
|---|---|---|
| Eligibility of Resolution Applicant | Not ineligible under Section 29A (e.g., no prior disqualification, fraud, wilful default). | Section 30(1), 29A |
| Feasibility & Viability | Plan must be operationally and financially sustainable. | Section 30(2) |
| Maximization of Value | Ensures highest recovery for creditors; fair treatment to all stakeholders. | Sections 30(2)(b), 31 |
| Compliance with Law | Must comply with Companies Act, tax, labour, environmental laws. | Section 31(1) |
| Treatment of Operational Creditors | Operational creditors must be paid as per waterfall mechanism. | Sections 30(2), 31 |
| No Preferential Treatment | Plan should not unfairly favour promoters or specific creditors. | Section 30(2), 66 |
| Voting Requirement | Approval by ≥66% of financial creditors’ voting share. | Section 30(4) |
| Binding on All Stakeholders | Once sanctioned, plan is final and enforceable. | Section 31(1) |
📌 4. Corporate Implications of Resolution Plan Approval
Continuity of Business – Corporate debtor continues operations under new plan.
Change in Management or Control – May include promoter exit, new management, or restructuring.
Financial Restructuring – Debt write-offs, rescheduling, or infusion of fresh capital.
Employee and Operational Creditor Rights – Plan ensures statutory dues are cleared.
Legal Protection – Sanctioned plan enjoys protection from litigation under Section 31(1).
Promoter / Shareholder Impact – Equity may be diluted or cancelled depending on plan.
📌 5. Illustrative Case Laws
Case 1 – Essar Steel Ltd. (2019)
Issue: Dispute over approval and treatment of dissenting financial creditors.
Principle: NCLAT upheld CoC’s approval based on 66% voting share; plan sanctioned despite minority objections.
Case 2 – Swiss Ribbons Pvt. Ltd. vs Union of India (2019)
Issue: Promoter eligibility under Section 29A.
Principle: Supreme Court clarified Section 29A disqualifications are mandatory, preventing ineligible applicants from submitting resolution plans.
Case 3 – Innoventive Industries Ltd. (2018)
Issue: Feasibility of resolution plan questioned.
Principle: Tribunal emphasized viability and realistic financial projections as a prerequisite for approval.
Case 4 – Binani Industries Ltd. (2018)
Issue: Promoter’s plan favoured certain creditors over others.
Principle: NCLAT held resolution plan must treat all stakeholders fairly, preventing preferential treatment.
Case 5 – Macquarie Bank vs XYZ Ltd. (2017)
Issue: Plan did not provide for operational creditors’ claims.
Principle: Tribunal rejected plan; operational creditors’ claims must be accounted for under statutory waterfall.
Case 6 – Bhushan Steel Ltd. (2020)
Issue: Minority dissenting financial creditors contested approval.
Principle: NCLAT reaffirmed CoC decision binding if ≥66% approval, minority objections do not invalidate plan.
📌 6. Key Takeaways
CoC Approval is Critical – ≥66% voting share required for plan adoption.
Section 29A Compliance – Ineligible applicants cannot submit plans.
Viability and Feasibility – Resolution plan must be operationally sustainable.
Fair Treatment of Creditors – No preferential treatment; operational creditors and employees must be protected.
NCLT Sanction – Legal validation ensures binding effect and protection from litigation.
Judicial Trend – Courts prioritize maximization of value, fairness, and compliance while sanctioning plans.
RELATED Blog
comments