Creditors Cannot Cancel Approved Insolvency Plan Over Profit Rise

In an important verdict, the Supreme Court of India on Monday ruled that lenders sitting on a Committee of Creditors cannot backtrack on an approved turnaround proposal merely because the struggling company's financial condition improved later. The judgment, delivered by a bench comprising Justice JB Pardiwala and Justice K Vinod Chandran, affirmed an earlier order of the appellate tribunal rejecting the attempts made by financial creditors to withdraw their consent.

This decision addresses delays that frequently arise during corporate revival proceedings across the country. By strictly limiting the ability of lenders to reopen negotiations once a formal plan is submitted to the adjudicating authority, the top court has reiterated that predictability and strict timelines must govern insolvency procedures in India.

Background

The dispute arose after the Committee of Creditors accepted a resolution plan presented by a consortium of resolution applicants for an amount of ₹172.55 crore. At the time of this initial selection, the corporate debtor was suffering from severe financial strain, partly because the COVID-19 pandemic had hit its toll-collection business very hard.

However, significant procedural delays took place while the proposal was awaiting formal confirmation before the National Company Law Tribunal. During this waiting period, the debtor's cash balance saw an unexpected rise from ₹30 crore to ₹165 crore, substantially improving its liquidity profile.

Seeing these financial changes, the lenders argued that the buyer would receive an unfair windfall benefit without having to put in the expected fresh capital. Seeking to seize higher value, the lenders unanimously resolved to withdraw their consent and wanted to issue a fresh Form G to invite new bids, while the holding entity separately proposed a one-time settlement. Although the tribunal accepted this withdrawal, the appellate tribunal reversed that order, prompting Bank of India and fellow creditors to approach the Supreme Court.

What the Court Said

The Supreme Court dismissed the challenge and upheld the decision that stopped the creditors from abandoning the agreed proposal. The bench observed that the Insolvency and Bankruptcy Code does not contain any statutory mechanism enabling either the lenders or the bidder to unilaterally retract an agreed plan once submitted to the adjudicating authority.

Addressing the specific argument about the debtor's sudden growth in cash, the bench made it clear that commercial fluctuations during proceedings do not allow lenders to nullify existing commitments. The court explicitly noted:

“The improved profitability alone cannot be a reason to refuse approval if the Resolution Plan meets the requirements under sub-section (2) of Section 30.”

The judges also examined the statutory withdrawal mechanism under Section 12A, clarifying that an application for exit cannot be read independently of Sections 30 and 31. The court ruled that any exit from insolvency can happen strictly up to the stage of plan approval by creditors, and not once the proposal has been sent to the tribunal.

The Law Explained Simply

When a company defaults on loans, the corporate insolvency process operates under the Insolvency and Bankruptcy Code to save the enterprise rather than liquidate it immediately. The lenders form a collective body to evaluate revival offers from outside bidders and pick the best commercial plan.

Under Section 30, the selected plan is verified to confirm it complies with fundamental legal protections, after which it is submitted to the tribunal under Section 31 for final certification. While Section 12A allows proceedings to be halted if ninety percent of voting creditors agree, the Supreme Court clarified that this window shuts the moment the creditors formally sign off on a plan and forward it to the judge.

Allowing parties to walk away simply because market fortunes fluctuated would make the entire bidding framework uncertain. Bidders commit significant resources to revive stressed companies, and giving creditors the freedom to scrap agreements would undermine trust in the entire resolution mechanism.

Impact on Common People

This ruling brings substantial stability to the corporate sector, which directly influences employees, small suppliers, and consumers connected to struggling businesses. When corporate resolution processes face endless resets due to renegotiations, thousands of livelihoods hang in the balance, and vendors face severe payment uncertainties.

By ensuring that approved plans cannot be dismissed on a whim, the judgment discourages prolonged litigations that lock up productive economic assets. In the long run, this disciplined approach protects public money held by nationalized banks, helps maintain business operations, and prevents distressed businesses from sliding into total closure.

What To Do in a Similar Situation

• Maintain comprehensive, transparent records of every bid, financial metric, and resolution milestone from the earliest phase.
• Ensure that any exit option or settlement offer is formally pursued strictly prior to the final voting by the creditors.
• Closely examine whether all revival plans satisfy the statutory criteria under the applicable company insolvency laws before submission.
• Avoid altering established commercial agreements solely based on subsequent market fluctuations or sudden balance sheet variations.
• Act strictly within the time limits prescribed by law to avoid expensive appellate litigation before tribunals.
• Consult knowledgeable insolvency practitioners and legal counsel to assess the binding effect of commitments before putting matters to a formal vote.