Effect of approved resolution plan: implementation that effects change of management bars pre-plan penalty proceedings and extinguishes such claims.

An approved and implemented resolution plan that effects change of management extinguishes and freezes pre-plan claims and bars new proceedings against the corporate debtor arising before implementation; accordingly statutory immunity attaching to an approved resolution plan operates to preclude enforcement of penalties and proceedings not provided for in the plan. The tribunal applied the doctrine that restoration and implementation of a resolution plan transfers effective control to new management and, absent evidence that the new management were related to or abetted prior promoters, penalties imposed after implementation cannot be sustained. The impugned penalties were set aside and the appeal allowed.

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Issues: Whether the impugned order imposing penalties under Section 7(1)(a) and Section 7(1)(b) of the Foreign Exchange Management Act, 1999 and related Regulations can be sustained when a resolution plan effecting change of management of the corporate debtor was approved and implemented prior to the impugned order, thereby invoking the immunity provisions arising from the approved resolution plan and Section 32A of the Insolvency and Bankruptcy Code, 2016.

Analysis: The Tribunal examined the timing and effect of the corporate insolvency resolution process (CIRP) initiated on 17.08.2017, the approval of the resolution plan by the NCLT (25/27 June 2019), the restoration of that approval by the Hon'ble Supreme Court on 28.02.2020, and implementation of the approved resolution plan in March 2020. The Tribunal relied upon the legal framework that an approved resolution plan which effects change of management freezes and extinguishes claims not part of the resolution plan against the corporate debtor, and noted the relevance of Section 32A of the Insolvency and Bankruptcy Code, 2016 (as introduced by amendment) and related Supreme Court authorities addressing the effect of approved resolution plans on pre plan claims and proceedings. The Tribunal observed that the impugned order was passed on 28.08.2020 after the resolution plan had been restored and implemented, that the new management had taken effective control, and that there was no material placed on record to show that the new management were promoters, were related to previous promoters, or had abetted the alleged offences. Applying the principles in JSW Ispat and Ghanashyam Mishra regarding the freeze and extinguishment of pre plan claims and the immunity afforded to the corporate debtor pursuant to an approved resolution plan, the Tribunal concluded that the penalties and proceedings imposed by the impugned order could not be sustained.

Conclusion: The impugned order imposing penalties is set aside and the appeal is allowed in favour of the appellant, M/s Orchid Pharma Ltd.

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