IBC: Successful Resolution Applicant Cannot Back Out After CoC Approves Resolution Plan, Supreme Court Rules
The Supreme Court says that once the CoC approves a resolution plan, the successful resolution applicant cannot reopen negotiations or withdraw by calling the Letter of Intent conditional.
Supreme Court held approved resolution plan cannot be withdrawn.
Once the Committee of Creditors (CoC) approves a resolution plan and issues a Letter of Intent (LoI), the successful resolution applicant (SRA) cannot reopen negotiations or withdraw from the plan by claiming that the LoI was conditional, the Supreme Court has held.
Stressing that such attempts would undermine the Insolvency and Bankruptcy Code's (IBC) time-bound resolution framework, Court said the approved plan becomes binding and irrevocable between the CoC and the SRA.
A Bench of Justices K V Vishwanathan and Vipul M Pancholi said any attempt to describe the LoI as "conditional" in order to back out of the plan is impermissible and contrary to the framework of the IBC.
Court was hearing an appeal filed by Sanjay Dave against the National Company Law Appellate Tribunal's (NCLAT) October 29, 2024 judgment.
Dismissing the appeal, the Bench held that the appellant had adopted an indirect method to renege from the resolution plan.
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"It was a clear subterfuge. Knowing fully well that one cannot withdraw directly from the plan approved by the CoC, an attempt was made in an indirect manner by harping on about certain stipulations as conditionalities to shift the blame on the CoC for the appellant's unwillingness to take the plan forward. This clever ploy has rightly been scotched by the fora below. If such artifices are allowed to succeed, the entire architecture of the IBC would crumble and the laudable objects sought to be achieved by the said Code would become a far cry," the Bench observed.
Court said a plain reading of Section 33(2) of the IBC, particularly the explanation inserted with effect from August 16, 2019, makes it clear that if a successful resolution applicant backs out after making the CoC believe that it would implement the plan, the CoC is entitled to proceed with liquidation of the corporate debtor.
The Bench observed that once the CoC, in its commercial wisdom, rejected the appellant's plan because of his own default and resolved to liquidate the company, there was no reason for judicial interference.
Case Background
The appellant was the promoter and director of M/s Oracle Homes Textiles Limited, an MSME, which was admitted into the Corporate Insolvency Resolution Process (CIRP) on August 9, 2018.
A Resolution Professional (RP) was appointed and issued a Request for Resolution Plan (RFRP) on February 6, 2019. With the National Company Law Tribunal's permission, the appellant submitted a resolution plan.
On May 10, 2021, the appellant was informed that his plan had been approved by the CoC with 99.90% voting in its favour.
A Letter of Intent was issued on May 23, 2021. However, the appellant treated it as a "conditional" LoI and did not accept it within the stipulated time.
A second LoI was issued on June 23, 2021 after the appellant failed to submit the accepted copy of the first LoI. When there was still no acceptance, the RP issued a third LoI on July 23, 2021 on the same terms, specifically requiring the appellant to furnish an unconditional performance guarantee within seven days as required under the RFRP.
Since the appellant again failed to accept the LoI, the RP forfeited his earnest money deposit (EMD) of Rs 1 crore on August 2, 2021 in terms of the RFRP.
After the CIRP period ended on February 21, 2023 without a valid resolution plan, the CoC voted on June 5, 2023 to liquidate the corporate debtor. The decision received 99.61% approval. The RP thereafter sought approval for liquidation before the NCLT.
The NCLT allowed the RP's application and dismissed the appellant's applications. The NCLAT subsequently dismissed all three appeals filed by the appellant.
Was the Letter of Intent really conditional?
The Supreme Court answered this question in the negative.
It held that the clauses relied upon by the appellant did not make the LoI conditional so as to permit him to withdraw from the CoC-approved plan.
According to the Bench, the stipulation that the LoI would be subject to the outcome of pending applications filed by the prospective resolution applicant (PRA) did not convert the LoI into a conditional document.
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Court also noted that the minutes of the CoC meetings clearly showed that the appellant was fully aware of the pending litigation and other conditions before the LoIs were issued.
Similarly, the condition relating to underwriting and risks arising from pending staff and workers' litigation could not be treated as a conditional clause. The Bench pointed out that the appellant himself had agreed to these terms during the 27th CoC meeting.
"The appellant cannot be permitted to blow hot and cold," the Bench observed.
Rejecting another argument raised by the appellant, Court accepted Andhra Bank's submission that the earlier 45-day period granted for compliance was only because of the COVID-19 pandemic. By the time the third LoI was issued on July 23, 2021, that period had already expired. Therefore, prescribing a fresh period of seven days was justified.
The Bench found that the appellant was deliberately delaying implementation of the resolution plan by relying on the alleged conditional nature of the LoI, thereby frustrating the IBC's objective of ensuring a time-bound insolvency resolution process.
It also upheld the forfeiture of the appellant's Rs 1 crore EMD, observing that after becoming the successful resolution applicant, he failed to fulfil his obligations, resulting not only in the expiry of the resolution process but also in compelling the CoC to initiate liquidation proceedings.
Court held that the NCLT and NCLAT had rightly refused to interfere with the CoC's well-informed commercial decision to reject the appellant's plan and liquidate the corporate debtor.
Case Title: Sanjay Dave Vs The Andhra Bank Ltd & Ors
Bench: Justices K V Vishwanathan and Vipul M Pancholi
Date of Judgment: May 27, 2026