When a Repayment Plan Ends Prematurely — Section 118 IBC
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Section 118 IBC deals with the consequences when a repayment plan, approved during the insolvency process, fails to be fully implemented within the stipulated time frame. It essentially ensure that if a debtor, or a personal guarantor in some cases, does not adhere to the agreed-upon repayment schedule, the plan can be terminated, and the creditor can pursue other available remedies, including initiating bankruptcy proceedings.
Statutory Snapshot: What Section 118 IBC Says
A repayment plan for a personal guarantor is considered prematurely terminated if it is not fully implemented within the timeframe specified . If the plan is not completed, it is deemed to have :come to end prematurely”, which triggers further actions, including the possibility of bankruptcy proceedings for the personal guarantor. The resolution professional is responsible for reporting the failure to the Adjudicating Authority (AA), detailing the receipts and payments under the plan, reasons for its premature ending, and the creditors still unpaid.
The AA, upon receiving the RPs reports, will issue an order confirming the premature termination of the repayment plan. Creditors whose claim remain unsatisfied under the terminated plan can then apply for bankruptcy proceedings against the personal guarantor under under Chapter IV, sub‑sec (4) & (2) of Section 121 of the IBC. The AA will also forward a copy of the order to the Insolvency and Bankruptcy Board of India (IBBI) for record-keeping purposes
Why RP Must Track and Report
Section 118 IBC highlight the importance of timely creditor reporting under the IBC.
- Enabling Creditor Rights: Section 121 outlines the procedures for creditors to petition for the bankruptcy of a debtor, and also includes that timely reporting of debt information is crucial for creditors to exercise this right.
- Avoiding Unlawful Recovery-Freezes: Section 118 IBC allows creditors to avoid their recovery actions from wrongly interpreted as postponed due to missed payment, enabling them to move to Chapter IV seamlessly.
Real-World Legal Application
In practice, courts interpret the “deeming” clause in Section 118 IBC strictly, often treating it as a legal fiction to establish a specific legal recourse, like the end of a repayment plan, when certain conditions are met. This means the clause is applied literally, and the stated outcome is assumed to be true based on the specified conditions, even if it might not be factually accurate. This triggers a report to the AA, and creditors who have not been fully repaid then apply for a bankruptcy order. Further courts have affirmed that an application under section 121, as per sub-section (2) of the provision, must be filed “within a period of three months of the date of the order passed by the Adjudiciating Authority” under certain sections, including Section 118 IBC
RP’s Practical Playbook
Resolution professionals (RPs) are required to closely monitor timelines related to the insolvency process, including repayments plans, including:
- Regulation 20 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) emphasises the importance of vigilant deadlines for RPs.
- They must prepare a comprehensive report, including financial activity, missed obligations, and unsatisfied creditors.
- RPs must promptly file a report with the AA, adhering to sub-sections (2) and (3) of Section 118 IBC. This report should detail the receipts and payments made, the reasons for early termination and the status of creditors’ claims.
- As per sections 118 121 of the IBC, RPs should circulate reports and the AA’s order promptly to all bound individuals and IBBI registry.
- RPs need to support the process of section 121 by assisting creditors in trial preparation.
Implications for Stakeholders
- For Debtors: If the debtor does not meet the deadlines outlined in their repayment plan, the AA can declare bankruptcy without requiring further discretion.
- For Creditors: Section 118 offers a clear path to escalate to bankruptcy if repayment plan fails. If the application for a bankruptcy order is not made within the 3 month window, the process of insolvency resolution may be further complicated or delayed. Hence, it is essential for creditors to act quickly within a three-month limit.
Common Challenges and How to Avoid Them
Sections 118 and 120 of the IBC have certain legal and procedural hindrances, such as:
- Partial Misses & “All Persons” Clauses: Under section 118 of the IBC, partial completion is not allowed, and a single default by any participant triggers the deeming clause. The “all persons” clause means that the plan’s success hinges on the collective compliance of all parties involved, thereby, one person’s failure to comply can derail the entire plan.
- Accepting Late Payments: Courts consistently reject “negative parity” defense, which argues that because some debtors pay late, it justifies delaying payments for others. Hence, uniform compliance with the repayment is mandatory, regardless of past practices with other debtors.
Conclusion
Section 118 aims to prevent situations where a creditor’s actions, like sending notices about missed payments, are misinterpreted as a postponement of recovery efforts. Filing the report under section 118 ensures that the creditor’s intent is clear and that they can proceed with recovery actions under Chapter IV, which likely deals with specific mechanisms for recovery under the IBC. In such cases, RP vigilance ensures statutory compliance and fair outcomes. By enforcing strict timelines, Section 118 ensures resolution plans remain binding and failure leads directly into bankruptcy eligibility.
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