What Happens If A Resolution Plan Violates Regulatory Laws?

A resolution plan in the insolvency process under the Insolvency and Bankruptcy Code (IBC) must comply with all applicable laws, including regulatory laws, for it to be approved by the National Company Law Tribunal (NCLT). If the resolution plan violates regulatory laws, such as those relating to environmental compliance, taxation, securities laws, or other statutory requirements, it can face legal consequences, delay, or even rejection.

What Happens If A Resolution Plan Violates Regulatory Laws?

Rejection by the National Company Law Tribunal (NCLT):

The NCLT has the authority to reject a resolution plan if it is found to violate any regulatory or legal provisions. According to Section 30(2) of the IBC, a resolution plan must comply with applicable laws, including taxation, environmental regulations, and securities laws.

If the resolution plan fails to meet the requirements for compliance with regulatory laws, the NCLT may refuse to approve it. This will cause a delay in the resolution process, and the company may continue in insolvency.

Modification of the Resolution Plan:

If a violation of regulatory laws is identified during the approval process but can be rectified, the NCLT may direct the Resolution Professional (RP) to modify the resolution plan. For example, if the plan does not comply with environmental laws, the RP may need to revise it to ensure compliance before resubmitting it for approval.

The Committee of Creditors (CoC) may also be required to approve the modified plan if the changes impact creditor interests.

Involvement of Regulatory Authorities:

In case the resolution plan violates specific regulatory laws, such as securities laws (SEBI guidelines), environmental laws, or other sector-specific regulations, the relevant regulatory authority (e.g., SEBI, RBI, Ministry of Environment) may be involved.

These authorities can issue notices, penalties, or even take legal action against the company or the insolvency resolution process if the plan does not adhere to their regulations.

Insolvency and Bankruptcy Board of India (IBBI) Oversight:

The Insolvency and Bankruptcy Board of India (IBBI) oversees the conduct of insolvency professionals and ensures compliance with the IBC. If a violation of regulatory laws is linked to an insolvency professional’s actions, the IBBI may take disciplinary actions against the professional.

The IBBI has the power to disqualify or remove insolvency professionals for non-compliance with laws and ethical standards.

Legal Consequences for Violations:

• Penalties and Fines: Regulatory authorities may impose fines or penalties for the violation of laws that occur during the resolution process. These can be levied against the company, creditors, or insolvency professionals.
• Criminal Liability: In certain severe cases, where violations of laws are significant (such as violations of securities laws, fraudulent misrepresentation, etc.), criminal proceedings may be initiated against the parties responsible.

Effect on the Creditor’s Rights:

If the resolution plan violates regulatory laws, it can affect the interests of creditors, particularly in cases where the regulatory violation impacts the company’s future operations. For example, if the company is unable to comply with environmental laws due to the resolution plan, it could affect its business continuity, and creditors may not recover their dues as expected.

In such cases, creditors might challenge the approval of the plan in court, or even request a new resolution plan that complies with all legal requirements.

Possibility of Corporate Liquidation:

If a resolution plan cannot be approved because of violations of regulatory laws, the company may end up being liquidated if the insolvency resolution process fails. Liquidation is considered a last resort under the IBC, but it may be triggered if no viable resolution plan is presented.

Legal Actions and Protections:

• Insolvency and Bankruptcy Code (IBC): The IBC mandates that the resolution plan must comply with all applicable laws. Section 30(2) of the IBC requires the plan to comply with the law, and the NCLT can reject any plan that does not meet this criterion.
• Regulatory Compliance: Regulatory bodies like SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India), and environmental or tax authorities ensure that the resolution plan complies with specific laws. They can challenge the approval process if the plan violates sector-specific regulations.
• Judicial Oversight: The NCLT ensures that the resolution plan is legally sound and compliant with all regulations. In case of a dispute, the NCLT has the authority to reject the plan and ask for modifications.

Example:

Imagine a company facing insolvency has its resolution plan approved by the Committee of Creditors (CoC). However, upon review, it is discovered that the plan involves the sale of assets that do not comply with environmental regulations, such as the company’s non-compliant waste disposal systems.

• The NCLT may reject the resolution plan on the grounds of non-compliance with environmental laws.
• The Resolution Professional (RP) will be instructed to modify the plan to ensure it meets all environmental regulations before it can be resubmitted.
• If the issue is not rectified, the company may be forced into liquidation if a new compliant resolution plan cannot be formulated.