Wind World, IBC And The Doctrine Of Frustration

Wind World (India) Ltd., an insolvent wind power company which owns farms across seven states, faced a problem that many will identify with. Long delays in its resolution process even under the supposedly time-bound Insolvency and Bankruptcy Code.

Except in this case, the frustration became the legal ground on which the resolution applicant—Suraksha Asset Reconstruction Company—was allowed to withdraw from the process. Suraksha received the court’s approval to withdraw its resolution plan under what it is referred to in the legal world as the ‘doctrine of frustration’ under Section 56 of the Indian Contract Act.

On Sept. 8, the Ahmedabad bench of the National Company Law Tribunal allowed Suraksha ARC to withdraw its resolution plan for Wind World without incurring any charges. The committee of creditors and the the resolution professional now find themselves back to square one. They have 15 days to finalise the paperwork for another round of bids to be invited and another 75 days to arrive at a new plan.

Financial creditors led by State Bank of India have claims worth over Rs 4,700 crore against Wind World, while the operational creditors have an additional Rs 1,200 crore worth claims. Suraksha ARC’s plan involved Rs 600 crore worth upfront payment and another Rs 500 crore to be paid out over time to creditors.

Shailen Shah, resolution professional for Wind World, lead lender State Bank of India and Suraksha ARC did not respond to queries emailed on Sept. 10.

The Doctrine Of Frustration

The Indian Contract Law allows for the voiding of a contract if neither parties have defaulted on their obligations. Section 56 of the act allows this if for reasons beyond either party’s control, clauses in the contract are impossible to perform.

This is the essence of the ‘doctrine of frustration’.

In its order, the Ahmedabad NCLT said since the resolution plan is a financial contract governed by the IBC, delays due to complications of the law can also be considered as a ‘reason beyond the control of the bidders or the creditors’.

“In the background of the facts of the present case, in our opinion, due to inordinate delay in approval of such resolution plan, object of the resolution plan has frustrated,” the tribunal noted in its order.

The order acknowledged the role of the legal process in the delays to the resolution process.

“At this stage we cannot escape from our contribution in the delay in disposing of the application filed by RP due to structure of processes which the adjudicating authority (the NCLT) has to follow and the administrative constraints,” the bench said in its order, adding that the bar must ensure that frivolous litigation does not create impediments in resolution processes.

The Ahmedabad bench also said there is a need for additional rules to be in place to stop litigation and pleadings by the borrower and other stakeholders to ensure speedy transmission of the insolvency proceedings.

“The NCLT in its order has identified inordinate delay in disposal of judicial proceedings as an event that may lead to impossibility and hence a resolution applicant may be released from performance obligations. This is an important development of jurisprudence in that context,” said Babu Sivaprakasam, senior partner, Economic Laws Practice. There is a dire need to recognise and expeditiously deal with frivolous applications so that such delays can be avoided, he added.

Bankers to Wind World, of course, disagree with the direction the case has taken.

The committee of creditors had already asked its legal team to mount a challenge at the National Company Law Appellate Tribunal, a senior banker involved with the case said on the condition of anonymity.

A second banker confirmed this, saying Suraksha ARC’s claim that Wind World’s business has deteriorated does not hold, since the company’s finances have actually become more stable under insolvency. According to the second banker, who also spoke on the condition of anonymity, the 90 days allotted by the NCLT is too short of a time period to finish a bidding process and find a new bidder.

The Slow Moving Wheels Of Insolvency

In itself, Wind Word is one of over 3,911 cases admitted under the IBC since it came into effect in 2016. Its story is exceptional only in that it reflects the collective pain of creditors and resolution applicants grappling with delays under a framework which was to help bring in time bound resolution for stressed assets.

Data from the Insolvency and Bankruptcy Board’s quarterly bulletin showed that half of the 2,108 ongoing resolutions have been going on for more than 270 days.

Rajat Sethi, partner, S&R Associates, said the NCLT’s decision in the Wind World matter follows a certain logic that the resolution applicant cannot be bound forever by the resolution plan, irrespective of how long the approval process takes. “I expect the lenders will appeal so this will not be the last word on the subject. However, I think this ruling has a good likelihood of being upheld,” Sethi said.

According to Suharsh Sinha, partner, AZB, in cases of inordinate delays, renegotiation with the bidder, where commercially feasible, is a better approach, rather than restarting the entire process.

“If a bidder has to wait over a year for the NCLT to approve a plan then it is natural to expect change in underlying commercials and the macro situation. So bidders are not unjustified in seeking a reduction in pricing. But the larger point is that we need reforms in the IBC to ensure that frivolous applications are nipped in the bud and the sanctity of the timelines is maintained. Or else, lenders may not find IBC an efficient recovery tool,” Sinha said.