Resolution plan can terminate related party contracts: NCLT
A recent NCLT ruling has clarified that the successful resolution applicant (SRA) in a corporate insolvency resolution process has the authority to terminate related party contracts or agreements using the appropriate clauses within the Resolution Plan.
The ruling was made by the National Company Law Tribunal (NCLT) in the case of India SME Asset Reconstruction Company Limited v M/s Medirad Tech India Limited. The NCLT held that the SRA can terminate such contracts even if they require the consent of the members or partners of the corporate debtor.
The NCLT took note of Regulation 39(6) of the Insolvency and Bankruptcy Code (IBC), which states that a clause in a resolution plan that would otherwise require consent of the members or partners of the corporate debtor shall take effect even when no such consent has been obtained.
The NCLT also relied on two Supreme Court judgments in support of its ruling. In State Bank of India v Bhushan Steel Limited, the Supreme Court held that the resolution plan as approved by the Committee of Creditors (CoC) must take effect notwithstanding the requirement of consent of the members or partners of the corporate debtor under the terms of the constitutional documents of the corporate debtor, shareholders’ agreement, joint venture agreement or other document of a similar nature.
In IDBI Bank Vs. Jaypee Infratech Limited, the Supreme Court held that the SRA can legally inculcate a clause in its resolution plan to seek termination of the related party contracts of the corporate debtor.
The NCLT’s ruling is a significant development in the insolvency law landscape and clarifies the authority of the SRA to terminate related party contracts. This ruling is likely to have a positive impact on the resolution of insolvent companies, as it will allow SRAs to take steps to restructure the company’s operations and improve its financial viability.
The ruling is also a victory for creditors, as it gives them greater certainty that their interests will be protected in the insolvency process.
Also See: NCLAT clarifies contentious issues on Jaypee Infratech resolution order
