Insolvency is an inevitable part of the collective human experience in all organised communities. In the event that a company is unable to fulfil its obligations and multiple creditors are owed money, there would be a race for diligence by these creditors to pursue their own interests and recover as much of the owed money as possible. The Insolvency & Bankruptcy Code, 2016, provides for a structured mechanism to distribute the proceeds from a company’s insolvency and, thereby, seeks to prevent such a race.
Under the code, the insolvency resolution process of a company concludes with the approval of the resolution plan by the National Company Law Tribunal. If the resolution plan is not approved, the corporate debtor will proceed to liquidation and eventually be dissolved. As part of this process, prospective applicants are invited to submit what are called as ‘resolution plans’ for taking over the company in distress. This is intended to facilitate proposals from persons interested in commercially viable but insolvent businesses to rescue such entities, creating value for all stakeholders in the process.
Such a resolution plan must conform to the criterions in the code and meet such other conditions specified by the Insolvency and Bankruptcy Board of India. Once the resolution plan is approved by a committee of creditors, it is presented to the adjudicating authority for approval.
Similar to the review of an arbitral award by a court under the Arbitration & Conciliation Act, 1996, the code includes a process in which the jurisdiction of the NCLT to review a resolution plan is limited. After approval from the NCLT, the plan is binding on the company and its employees, members, creditors, guarantors and other stakeholders.
As such, the approval of a resolution grants the company a new beginning and resolves, once and for all, the financial position of the company as it stood on the day of the plan’s approval, in order to allow it to have a ‘clean slate’ for the future. The successful resolution applicant then starts running the business of the debtor without pre-insolvency liabilities hanging over its head. The concept of ‘clean slate’ is not unique to India and is accepted in jurisdictions such as Australia as well.
The Supreme Court’s recent judgement in Kalyani Transco vs Bhushan Power and Steel Limited (May 2) has fundamentally challenged this notion of finality. By rejecting JSW Steel’s resolution plan, under which ₹19,700 crore has already been disbursed to the creditors basis an earlier order, and ordering liquidation, the court exposed what it termed efforts to “cover up gross violations of the provisions of the IBC and of the Regulations 2016, at every stage of the CIR proceedings”.
This unprecedented intervention raises critical questions about the balance between procedural compliance and commercial certainty in insolvency proceedings. While these procedural lapses were serious and definitely deserved judicial intervention, the court’s decision to unwind a substantially implemented resolution plan also sets a precedent for future cases.
There have been suggestions from certain quarters that successful resolution applicants, in matters where the plan has been implemented substantially, should be provided compensation or a penalty for any statutory violation, instead of having the entire plan overturned.
The tension between procedural compliance and transactional finality highlighted in Bhushan Steel calls for consideration of the “equitable mootness”, a prudential doctrine in US bankruptcy law. Developed by federal appellate courts, it recognises there comes a point in bankruptcy proceedings where the court should abstain from reviewing the merits of a confirmed reorganisation plan, even if legal errors occurred, because the plan has been substantially consummated and unwinding it would be inequitable.
Equitable mootness would address systemic problems, especially the prolonged delays in the judicial approval process, while preserving constitutional safeguards. For resolution applicants, it would provide crucial commercial certainty through reduced post-implementation challenge risks, enabling better asset valuations and encouraging more aggressive bidding. The doctrine would particularly benefit complex multi-party reorganisations where unwinding would affect numerous innocent stakeholders.
The framework would strengthen credit recovery by reducing disruption to ongoing operations and preserving the going-concern value. Market development benefits include sophisticated resolution financing availability, greater institutional investor participation, and robust distressed asset market development. These improvements would enhance the code’s effectiveness in achieving its twin objectives of debtor rehabilitation and creditor value maximisation.
While the importance of time-bound resolution process under the code has been repeated in several Supreme Court judgements, Bhushan Steel's case is a classic example of delay in proceedings that affects commercial certainty. Until effective provisions are introduced in the code for time-bound decisions concerning resolution plans, the courts should lean towards applying this doctrine. Pertinently, the doctrine would not eliminate judicial review but would require courts to balance the harm from procedural violations against the disruption from unwinding implemented plans.
Challenges to resolution plans should ordinarily be entertained only within a reasonable period post-approval, with a strong presumption against intervention after substantial implementation. Even where procedural violations are established, courts should weigh the gravity of violations against the disruption from remedial action, considering whether alternative remedies (such as damages) might suffice. Innocent third parties who have altered their position based on approved plans should not suffer due to procedural lapses by insolvency professionals or adjudicating authorities. The aim should be to reinforce, not undermine, the Committee of Creditors’ commercial wisdom by ensuring their decisions, once implemented, gain finality.
While it is not perfect, the doctrine of equitable mootness represents a mature approach to balancing competing interests in insolvency proceedings. While Bhushan Steel emphasised procedural compliances, the disruption from unwinding its plan demonstrates the need for principled limits on judicial intervention. By incorporating equitable mootness, the code can provide greater certainty while maintaining essential procedural safeguards.
R Venkatavaradan and Saai Sudharsan Sathiyamoorthy | Advocates, Madras High Court
(Views are personal)