India: Dissenting Financial Creditor Vs. The Committee Of Creditors: Who Prevails?

In a recent decision in India Resurgence ARC Pvt. Ltd. v. M/s Amit Metalinks Ltd. & Anr.¹, the Hon'ble Supreme Court held that a security interest available to a dissenting financial creditor over the assets of the corporate debtor does not give it a right over and above other financial creditors. Thus, the dissenting financial creditor cannot enforce the entire security interest and bring about an inequitable scenario by receiving amounts beyond the receivable liquidation value proposed for the same class of creditors. The present article briefly summarises the findings of the Hon'ble Supreme Court in the decision mentioned above.

Brief Facts

The appellant, in the instant matter, challenged the order of the National Company Law Appellate Tribunal (NCLAT) whereby the NCLAT refused to interfere with the order (Impugned Order) of the National Company Law Tribunal, Kochi Bench (NCLT). The NCLT had vide the Impugned Order approved the resolution plan submitted by Amit Metalinks Ltd. in the Corporate Insolvency Resolution Process (CIRP), which concerned VSP Udyog Pvt. Ltd., i.e., corporate debtor.

The appellant had assigned to it the rights, title and interest carried by Religare Finvest Ltd. as secured financial creditor of the corporate debtor, having 3.94% of voting share in the Committee of Creditors (CoC). During the CIRP, the appellant expressed its reservations on the share being proposed, particularly with reference to the value of the security interest held by it, and chose to remain a dissentient financial creditor. Eventually, the resolution plan received the approval of 95.35% of the voting share of the financial creditors. The resolution plan approved by the CoC was also approved by the NCLT, which found the same to be "feasible and viable". Thereafter, the appellant preferred an appeal against the order of the NCLT under Section 61(1) read with Section 61(3) of the Insolvency Bankruptcy Code, 2016 (IBC).

Decision of the NCLAT

The appellant, before the NCLAT, contended that after the amendment of Section 30(4) of the IBC, the CoC was required to ensure that the distribution took into account the priority amongst the creditors and the value of the security interest of a secured creditor. Hence, the appellant challenged the order of the NCLT as being not in accordance with the law. The NCLAT referred to the decision in Essar Steel India Ltd. v. Satish Kumar Gupta and Ors.² and held that the protection of creditors, in general, was essential. However, it was also imperative that the creditors were protected from each other. Further, the NCLAT observed that the IBC was never meant to read so as to give the creditors with greater rights in a bankruptcy proceeding than what would be enjoyed by them under the general law. Thus, the NCLAT taking note of the principles expounded in the Essar Steel case rejected the appellant's arguments. Aggrieved by the order, the appellant approached the Hon'ble Supreme Court of India under Section 62 of the IBC.

Decision of the Hon'ble Supreme Court

The appellant before the Hon'ble Apex Court once again reiterated its case that the CoC could not have failed to consider the provision contained in Section 30(4) of the IBC, the priority and value of security interest of the creditors while deciding upon the manner of distribution. The appellant also added that the principal reason for its dissent was that against a total admitted claim of over INR 13.38 crores, the resolution applicant had offered the appellant a meagre amount of about INR 2.026 crores. Moreover, such an offer was made in ignorance of the fact that the value of the security held by the appellant was to the tune of more than INR 12 crores.

The Hon'ble Supreme Court at the outset held that the appeal was totally bereft of substance and did not merit admission. The Hon'ble Supreme Court observed that it was beyond a shadow of a doubt that the approval of resolution plan fell within the domain of the commercial wisdom of the CoC, and the scope of judicial review was limited to the four corners of Section 30(2), read with Section 61(3) of the IBC. The Hon'ble Apex Court relied on the decision in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors.³ and other previous decisions⁴ to reiterate that the powers of the adjudicating authority dealing with the resolution plan did not extend to examination of the correctness of commercial wisdom exercised of the CoC. Thus, once it was found that all mandatory requirements were duly complied with, the process of judicial review could not be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction. In other words, the Hon'ble Supreme Court held that every dissatisfaction might not partake the character of a legal grievance meriting an appeal.

Inasmuch as the provisions of Section 30(4) of the IBC were concerned, the Hon'ble Supreme Court held that the NCLAT was correct in holding that the same only amplified the considerations for the CoC while exercising its commercial wisdom to take an informed decision on the feasibility of a resolution plan. The Hon'ble Apex Court, considering the facts, held that the proposal for the payment to all secured financial creditors was equitable, and no case of disregard of priority was made out. If the proposition suggested by the appellant was to be accepted, the Hon'ble Apex Court opined that it would lead to more liquidations than insolvency resolution and maximisation of value of the assets of the corporate debtor. Hence, the appeal stood dismissed.

Comments

The present decision is important because it reinforces the fundamental principle that the IBC was never envisaged as a means to recover dues. Rather, the IBC was aimed at reviving commercially ailing companies and bringing them back to their feet. If every financial creditor were given the option of individually coming up with its grievances, then the object of having a CoC would fail in its entirety. Thus, the decision has correctly held that a dissenting financial creditor cannot seek to enforce a right over and above other financial creditors.

* The author would like to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of Amity Law School, Delhi.

Footnotes

1. India Resurgence ARC Pvt. Ltd. v. M/s Amit Metalinks Ltd. & Anr., Civil Appeal No. 1700 of 2021.

2. Essar Steel India Ltd. v. Satish Kumar Gupta and Ors., 2020 8 SCC 531.

3. Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors., 2021 SCC OnLine SC 253.

4. Essar Steel India Ltd. v. Satish Kumar Gupta and Ors., 2020 8 SCC 531; K. Sashidhar v. Indian Overseas Bank and Ors., 2019 12 SCC 150; Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Ors., 2020 11 SCC 467.

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