The Process of Management Transition Following NCLT Approval of a Resolution Plan

The transition of management following the National Company Law Tribunal (NCLT) approval of a resolution plan is a pivotal aspect of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

This article outlines the procedures, legal requirements, and practical steps involved in the management transition of a corporate debtor.

Introduction to the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC), was enacted to provide a consolidated and efficient framework for insolvency and reorganization in India. The IBC aims to expedite the resolution process, maximize asset value, and fairly balance the interests of all stakeholders.

Under the CIRP, creditors may initiate insolvency proceedings against a defaulting company to either resolve its financial distress through a resolution plan or, failing that, to proceed with liquidation.

Approval of the Resolution Plan by NCLT

Upon receiving approval from the Committee of Creditors (CoC), the resolution plan is submitted to the NCLT for final endorsement. The NCLT’s role is to ensure that the plan adheres to the IBC and relevant laws. Once the NCLT approves the resolution plan, it becomes legally binding on all parties, including the corporate debtor, employees, creditors, and shareholders.

Importance of Management Change

A management change is often integral to the resolution plan for several reasons:

1. Restoration of Stakeholder Confidence: New management is perceived as a mechanism to rebuild trust among creditors, employees, and investors, especially if the previous management was deemed responsible for the company’s difficulties.
2. Effective Plan Implementation: Successful execution of the resolution plan frequently requires management with the expertise to navigate the company towards recovery.
3. Compliance with the Resolution Plan: The new management must ensure compliance with the resolution plan, which may involve restructuring operations, repaying debts, and implementing strategic changes.

Steps Involved in the Management Transition Process

1. Identification of New Management: The resolution applicant identifies a new management team with the requisite qualifications to implement the resolution plan effectively.
2. Approval by the Committee of Creditors (CoC): The CoC reviews and approves the proposed management team. This approval is necessary for the new management to start executing the resolution plan.
3. Submission to NCLT: After CoC approval, the resolution plan, including management changes, is submitted to the NCLT for final approval. The NCLT ensures the plan’s legality and its benefit to all stakeholders.
4. NCLT’s Approval of the Resolution Plan: The NCLT’s order confirms the management change, and the new management assumes control as stipulated in the resolution plan.
5. Transfer of Control: Operational, financial, and legal authority is transferred from the old management to the new management. This may involve appointing new directors and updating the company’s records.
6. Public Announcement: To ensure transparency, a public announcement of the management change is made to inform employees, customers, suppliers, and regulatory authorities.
7. Updating Statutory Records: The new management must update statutory records with the Registrar of Companies (RoC) to reflect the management change, including filing forms like DIR-12 and MGT-14.
8. Implementation of the Resolution Plan: The new management is tasked with implementing the resolution plan, which may include operational restructuring, asset sales, renegotiating contracts, or capital infusion.
9. Monitoring by the Resolution Professional: The resolution professional (RP) may continue to monitor the implementation of the resolution plan to ensure compliance by the new management.
10. Compliance with Regulatory Requirements: The new management must adhere to all regulatory obligations, including periodic reporting to the NCLT, SEBI (if listed), and other relevant authorities.
11. Handling Employee and Stakeholder Relations: The new management must address any concerns from employees and stakeholders, including negotiating new contracts, offering severance packages, or resolving grievances related to the management transition.

Compliance with the Insolvency and Bankruptcy Code

The management transition process must comply with Sections 30, 31, and 32 of the IBC, which govern the submission, approval, and implementation of resolution plans.

Reconfiguring Statutory Master Data of a Corporate Debtor in CIRP

l. Status Change of the Company from CIRP to Active

Upon the NCLT’s approval of a resolution plan, the resolution applicant assumes control over the corporate debtor. To update the company’s status with the Registrar of Companies (RoC), the outgoing Resolution Professional (RP) must file e-form INC-28, including the NCLT order.

Procedure for Status Change:

1. Submission of Application: The resolution applicant must submit an application to the Insolvency and Bankruptcy Board of India (IBBI), including a copy of the approved NCLT order and resolution plan, per MCA General Circular No. 08/2020 dated 06.03.2020.
2. Processing by IBBI: IBBI forwards the application to the Ministry of Corporate Affairs (MCA). Upon verification and satisfaction, the MCA will update the company’s status to “active” on the MCA Portal, generally within 3-4 working days.

II. Reconstitution of the Board of Directors

Following the initiation of CIRP, the existing board of directors is automatically disbanded. After the resolution plan’s approval, the resolution applicant must appoint new directors as per the resolution plan, filing the required forms and documents with the RoC.

Procedure for Director Appointment:

1. Selection of Directors: The resolution applicant must select at least two proposed directors for a private company or three for a public company, obtaining their consent (DIR-2).
2. Resolution: A meeting must be convened to pass a resolution regarding the appointment of directors.
3. Filing with RoC: The following documents must be filed with the RoC:
   i. Application signed by the proposed directors.
   ii. Certified copy of the resolution passed.
   iii. DIR-12 form, duly digitally signed.
   iv. Original consent (DIR-2) from proposed directors, including PAN Card, Aadhaar Card, MBP-1, and DIR-8.
   v. Certified copies of the NCLT order and resolution plan.
   vi. Certified INC-28 form and challan.
   vii. Affidavits from proposed directors and professionals (e.g., Practicing Company Secretary).
4. Director Appointment: The RoC will update the board of directors on the MCA portal, typically within 30 days. The newly appointed director can then appoint or remove additional directors through DIR-12 filings

Restructuring the Capital Base

In compliance with Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016, MCA Circular No. IBC/01/2017 dated October 25, 2017, and relevant provisions of the Companies Act, 2013, the resolution plan may necessitate restructuring the corporate debtor’s paid-up share capital.

Procedure for Capital Restructuring:

1. Application for Extinguishment: File an application with the RoC and MCA (Shastri Bhawan) for extinguishment of existing paid-up share capital, including the NCLT order and approved resolution plan.
2. Capital Record Update: If approved, the RoC/MCA team will update records to reflect zero paid-up capital from the backend.
3. Allotment of New Capital: File e-form PAS-3 to effectuate the allotment of new paid-up share capital as per the resolution plan.

According to MCA Circular No. IBC/01/2017, once the resolution plan is approved by the Adjudicating Authority, no further shareholder/member approval is required.

Filing Pending Annual Returns and Financial Statements

In line with MCA General Circular No. 04/2020 dated 17.02.2020 and MCA Circular 08/2020 dated 06.03.2020, the Insolvency Resolution Professional (IRP)/Resolution Professional (RP)/Liquidator must first file the NCLT order in e-form INC-28, selecting the appropriate section of the IBC 2016.

All e-form filings during CIRP, including AOC-4 and MGT-7, should be conducted by the RP/IPR through an attachment of e-form GNL-2. The resolution applicant must ensure that all pending annual returns and financial statements are filed to maintain compliance and avoid penalties that could impact post-CIRP operations. Options to address filing delays or lapses include holding an Annual General Meeting or seeking extensions from the RoC.

Liability Under GST Regime for Corporate Debtors Undergoing CIRP

1. New Registration for Corporate Debtors: The GST portal now supports “New Registration” for entities undergoing CIRP. The appointed IRP/RP must apply for new GST registration per CBIC Notification No. 11/2020 (dated 21st March 2020), within 30 days of appointment or by June 30, 2020, whichever is later.
2. Registration Process: The IRP/RP must select “Corporate Debtor undergoing CIRP” as the reason for new registration and apply in all States/UTs where the corporate debtor was previously registered.
3. GST Compliance During CIRP: Corporate debtors are responsible for fulfilling GST obligations during CIRP, including filing returns and paying taxes. They must obtain new registration from the date of the IRP/RP’s appointment.
4. Continuing with Old GSTIN: Corporate debtors with no defaults in GST return filings are not required to obtain new GST registration. The IRP/RP can be added as an Authorized Signatory for continued use of the existing GSTIN.

Important Legal Provisions: Section 32A of the IBC

Section 32A of the IBC: This section absolves the corporate debtor from liabilities for offenses committed before CIRP initiation, ensuring that the new management is not held accountable for past misdeeds, provided they were not involved prior to the resolution plan’s approval.

Conclusion

The process of changing management after NCLT approval of a resolution plan is a critical element of the CIRP under the IBC. It involves meticulous planning, adherence to legal requirements, and effective execution to ensure a successful transition that aligns with the resolution plan’s objectives. The new management plays a vital role in guiding the company towards recovery, balancing stakeholder interests, and restoring financial health.

For any queries or detailed guidance on the process, please contact Jain Akshi & Associates, Company Secretaries.

Disclaimer: This article is intended for general informational purposes only. It does not constitute legal advice and should not be relied upon as such. For specific legal advice or consultation, please seek the assistance of a legal professional.