By Vijpreet Pal and Sanskar Modi, third-year students at NLIU, Bhopal.
Before the enactment of the Insolvency and Bankruptcy Code (Amendment) Bill of 2019 (‘2019 Amendment’), there were no provisions to guide the Committee of Creditors’ (‘CoC’) discretionary power in the approval of the resolution plan. However, the 2019 Amendment demystified the distinction between the secured and unsecured creditors under the resolution plan and illustrated distinct provisions for dissenting Financial Creditors. The Amendment added, “the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor,” to Section 30(4) of the Insolvency and Bankruptcy Code (‘IBC’).
However, this amendment gave rise to the conundrum that whether the secured financial creditors can challenge the approved resolution plan by arguing that enforcement of the entire security interest is their prerogative and henceforth they must be awarded a higher amount. The Honorable Supreme Court (‘SC’) in the recent case of India Resurgence Arc Private Limited vs. Amit Metaliks Limited & Another resolved this dubiety by holding that it would be against the objectives of IBC if the secured creditor is allowed a higher amount than entitled under the approved resolution plan on the basis of security interest available to him over the corporate debtor’s assets. The Court basically tried to create a balance between the established principle of sanctity of the commercial wisdom of CoC and the interests of the dissenting secured creditor post 2019 amendment. This article shall briefly delineate upon the misconstrued understanding of the 2019 amendment. It will also examine the inequitable scenario which would be created if the financial creditors are awarded higher amount than proposed in the resolution plan for the same class of creditors.
Background to the dispute
The appellant company i.e India Resurgence Arc Pvt. Ltd. was the secured financial creditor of the corporate debtor i.e. Amit Metaliks Ltd. (respondent). In the Corporate Insolvency Resolution Process (‘CIRP’) commenced against the respondent, the appellant expressed his dissatisfaction on the share being proposed with reference to the value of security interest held by it and remained a dissentient financial creditor. However, the resolution plan proposed by the resolution applicant got appreciably approved by the CoC with 95.35% votes. Since all the mandatory compliances prescribed under Section 30 of the IBC were fulfilled and entitlements of all the stakeholders were taken care of, the National Company Law Tribunal (‘NCLT’) Kolkata approved the resolution plan. On an appeal before the National Company Law Appellate Tribunal (‘NCLAT’), the appellate tribunal relying upon the judgment of Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar & Ors.(Essar) observed that the amendment to Section 30(4) falls into the exclusive domain of the CoC and therefore, it is a discretionary, a non-mandatory power conferred upon the CoC to take into account the security interest like considerations.
Aggrieved by the NCLAT’s ruling, the appellant challenged it before the SC. The major contention of the appellant was the failure on the part of CoC to consider the value of security interest even after the amendment made to Section 30(4). The appellant urged that the value of the security possessed by him was INR 12 Crores, still he was offered the minimal amount of INR 2.026 Crores against the admitted claim of the amount INR 13.38 Crores.
It was strongly postulated by the appellant that Section 30(4) manifestly requires the CoC to consider the waterfall mechanism (if a company is being liquidated, secured financial creditors must be first paid the full extent of their admitted claim before any sale proceedings are distributed to any other unsecured creditor) as laid down under Section 53(1), including the value of the security interest created by the secured creditor and CoC cannot shut their eyes to the value of security interest while considering the viability and reasonableness of the proposed resolution plan.
Judicial Review of the Resolution Plan confined to Section 30(2)
The Honorable SC on the issue regarding judicial review of the approved resolution plan held that it is undisputed that the scope of judicial review of the commercial wisdom of CoC is limited within the mandatory requirements mentioned under Section 30(2) of the IBC.
Placing reliance on K. Sashidhar vs. Indian Overseas Bank & Ors., the court noted that the legislature while enacting the IBC has knowingly not provided any ground to challenge the commercial wisdom of the CoC before the Adjudicating Authority (‘AA’) and that the decision of CoC’s commercial wisdom has been made non-justiciable. Further, relying upon Jaypee Kensington Boulevard Apartments Welfare Association and Ors vs. NBCC (India) Ltd. & Ors (Jaypee Kensington), the court observed that the powers of the AA dealing with the resolution plan do not extend to examine the correctness of the commercial wisdom exercised by the CoC. AA by exercising its power under Section 30(2) is only authorized to examine that the resolution plan does not contravene any of the provisions of law and it confirms other requirements like payment of IRP Cost, payment of Debts of operational creditors, payment of debts of dissenting financial creditor, management of affairs of corporate debtor after the approval of resolution plan and implementation and supervision of resolution plan. It is not vested with the power to assess the resolution plan on the basis of qualitative analysis and therefore, the dissatisfaction of every secured creditor like the appellant cannot take a legal character under the IBC.
The CoC accountable for equitable treatment of similar class creditors
The appellant reiteratively contended that the CoC has not prioritized its claims as per the amended provision of Section 30(4) which obligates the CoC to take into account priority and value of security interest of the secured creditor. The Court clarified this issue by referring to the Essar ruling which observed that the amended provision of Section 30(4) only amplified the considerations for the CoC while exercising its commercial wisdom so as to make an informed decision regarding the feasibility and viability of the resolution plan. The business decision of the CoC does not call for interference unless creditors belonging to a similar class are denied fair and equitable treatment. Similar reasoning could be traced from the case of Hero Fincorp Limited v. Ravi Scans Private Limited & Others wherein the NCLAT ruled that IBC does not provide any discrimination among financial creditors on the ground of their dissenting status, post the 2019 amendment made to Section 30(2)(b).
In the instant case, the court noted that the proposal for payment to the dissenting financial creditor (appellant) is equitable and is at par with the percentage of payment proposed to other secured financial creditors. Therefore, the dissenting secured creditors like the appellant cannot suggest a higher amount to be paid by relying on the value of the security interest held by them.
Amended S. 30(2)(b)- Not a panacea for the dissenting Financial Creditors
The SC further observed that the amended provision of Section 30(2)(b), on which the excessive reliance has been placed by the appellant, only states that the dissentient financial creditor shall be provided with the payment of a debt which shall not be less than the amount paid to such creditors in accordance with the waterfall mechanism enshrined in Section 53(1).
The Insolvency Law Committee Report of 2018, which lead to 2019 amendment, has also observed that providing priority to the dissenting financial creditors will not be prudent as it may encourage financial creditors to vote against the plan and may consequently hinder resolution. The objective behind the 2019 amendment was never to provide the enforcement of the entire security interest available with the secured creditors. The only intention was to grant security to dissenting financial creditors who may be cramped down by the secured creditors holding majority votes, overpowering dissenting financial creditors and giving them nothing or next to nothing for their dues.
Such creditors are only allowed to receive payment to the extent of their entitlement and that would satisfy Section 30(2)(b) of the IBC which mandates that a dissentient secured creditor be provided with a certain minimum amount which shall not be less than the amount paid to such creditors in the event of liquidation.
As a result, the Court while dismissing the appellant’s claim observed that any dissenting secured creditor like appellant cannot interfere in the CIRP process by urging a higher amount to be paid with reference to the value of their security interest.
The ruling of the Court, henceforth, leads to two main observations-:
- Commercial Wisdom of CoC can’t be interfered.
The commercial wisdom of CoC is amenable to judicial review as long as it goes in consonance with the basic provisions and objectives of the IBC.
- Equitable Treatment among the creditors is the main objective.
The Resolution Plan submitted under Section 30 does not advocate equal treatment among all the creditors, rather it obligates a fair and equitable treatment.
Therefore, the interest of the dissenting secured creditor like appellant can’t be satisfied under the guise of ‘Security Interest’ and the commercial wisdom of CoC prescribing the equitable treatment of creditors shall prevail in such cases.
The instant judgment gives an important observation on the issue when the commercial wisdom of the CoC in respect of the distribution of assets is challenged by the secured financial creditor. The Court while answering in favor of the commercial wisdom of CoC noted that a resolution plan under the IBC cannot be challenged by a dissenting financial creditor just on the ground that he is entitled to a higher amount based on the value of security interest. If the reasoning as contended by the appellant were to be accepted, the process will witness more liquidation than resolution with every secured financial creditor choosing to dissent. Therefore, by reiterating the principles of ‘limited judicial review’ and the ‘supremacy of the commercial wisdom of CoC’ after the approval of the resolution plan, the Court has bolstered the objectives of the IBC which is balancing the interest of all the stakeholders by maximizing the value of assets of interested persons.