On September 16, 2022, the National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) in the case of Small Industries Development Bank of India (SIDBI) v. Vivek Raheja, [Company Appeal (AT) No. 570 of 2022], was called upon to decide whether the dissenting secured financial creditors are entitled to claim distribution of proceeds under the resolution plan as per value of security interest held by them or as per the debt owed to them (voting share). The NCLAT has held that a decision taken by the committee of creditors (“CoC”) in its commercial wisdom to distribute the proceeds of the resolution plan as per the voting share of the dissenting secured financial creditors is lawful and does not contravene the provisions of Section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 (“Code”).

Brief Facts:

A petition under Section 7 of the Code was admitted against the Corporate Debtor, M/s. Gupta Exim (India) Private Limited by the NCLT, Chandigarh Bench (“NCLT”). In the corporate insolvency resolution process (“CIRP”), CoC was constituted with Punjab National Bank having 97.97% voting share and SIDBI (“Appellant”) having 2.03% voting share therein.

A resolution plan was approved with 97.97% majority with the Appellant dissenting to the approval of the plan. Under the resolution plan, the Appellant (as dissenting financial creditor) was proposed to be paid an amount of Rs. 1,65,47,078 as per its voting share in the CoC (i.e., 2.03%).

The Appellant objected to the distribution of the proceeds under the resolution plan on the basis of value of voting share and filed an interim application before the NCLT seeking a direction that the distribution ought to have been on the basis of liquidation value of security interest held by the Appellant. If the distribution was as per the liquidation value of security interest, the Appellant would have received an amount of Rs. 5,64,97,893.

The NCLT rejected the application and upheld the decision of the CoC of distributing the proceeds of the resolution plan as per the voting share.

Aggrieved by the above decision of the NCLT, the Appellant filed the appeal before the NCLAT.

Issue:

The issue before the NCLAT was whether the Appellant (as dissenting secured financial creditor) was entitled to claim distribution of proceeds of the resolution plan as per value of the security interest held the Appellant or as per the value of debt of the Appellant i.e., voting share in the CoC.

Contentions of the Appellant:

The Appellant contended that it had first charge on 2 (two) assets of the Corporate Debtor and the liquidation value of the security interest charged to Appellant was Rs. 5.64 Crores, equivalent to 6.93% of the liquidation value of the total assets of the Corporate Debtor. The Appellant submitted that the distribution of proceeds of the resolution plan value ought to have been in accordance with the value of the security interest held by the Appellant and not as per the value of the voting share. The Appellant contended that the CoC erred in approving the resolution plan which did not provide for distribution to the Appellant as per Section 30(2)(b) of the Code. It was further argued that Section 53(1)(b) of the Code does not stipulate priority inter-se secured creditors and subordination agreement provisions are required to be respected in the liquidation waterfall under Section 53 of the Code.

Contentions of the resolution professional and successful resolution applicant:

The resolution professional argued that there is no entitlement of Appellant to claim distribution on the basis of value of security interest. The resolution professional submitted that the manner of distribution of the proceeds of the resolution plan was in accordance with Section 30(2)(b) of the Code. The resolution professional inter alia relied on the Supreme Court judgement in India Resurgence Arc Private Limited v. M/s. Amit Metaliks Limited,  (Civil Appeal No. 1700 of 2021), to contend that amounts to be paid to different classes of creditors is essentially the commercial wisdom of the CoC and a dissenting creditor cannot suggest a higher amount to be paid to it with reference to the value of its security interest.

The successful resolution applicant, while supporting the resolution professional, submitted that commercial wisdom/ decision of the CoC approving the distribution under the resolution plan cannot be allowed to be questioned by the dissenting financial creditor.

Decision:

The NCLAT held that the expression “debts owed to a secured creditor” used under Section 53(1)(b)(ii) of the Code is the basis for distribution in the order of priority as provided in Section 53(1) of the Code. The NCLAT held that Section 53(1) of the Code does not contemplate distribution as per value of security of a secured creditor and holding anything to the contrary shall not be in accord with the legislative scheme as delineated in Section 53(1) of the Code.

The NCLAT followed the Supreme Court decision in India Resurgence and a decision of the NCLAT in Union Bank of India v. Resolution Professional of M/s Kudos Chemie Limited, (Company Appeal (AT) Ins. No. 665 of 2022). It observed that CoC, in its commercial wisdom is free to determine what amounts be paid to different classes and subclasses of creditors in accordance with the provisions of the Code and the decision of the CoC to distribute the proceeds of the resolution plan value as per voting share of the secured creditor in no manner contravenes the provisions of Section 30(2)(b) of the Code.

The NCLAT also relied on the Statement of Objects and Reasons of the Insolvency and Bankruptcy Code (Amendment Bill) 2019 by which amendments were brought in Section 30(2)(b) to hold that the entitlement of dissenting financial creditor is to receive liquidation value of their debt and not the distribution as per their security value.

Accordingly, the NCLAT dismissed the Appeal. 

Conclusion:

The decision of the NCLAT, on one hand, is in the interest of insolvency resolution and maximization of the value of the assets of the corporate debtor, since the course suggested by Appellant would lead to more dissents from secured financial creditors leading to more liquidations. On the other hand, it divests the secured financial creditors from their security interest and forces them to settle for the liquidation value of their debt in the event of a dissent. The dissenting secured creditors are thus put at a disadvantage in such a case.

Please find attached a copy of the order.

This update has been contributed by Ranjit Shetty (Senior Partner) and Rahul Dev (Principal Associate).

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