Sub-classification within the class of operational creditors is permissible
NCC Ltd v. Golden Jubilee Hotels Pvt Ltd
December 11, 2024 | National Company Law Appellate Tribunal, New Delhi 2024 SCC OnLine NCLAT 2052
The National Company Law Appellate Tribunal (NCLAT) held that sub-classification within the class of Operational Creditors (OC) in the resolution plan to achieve the revival of the Corporate Debtor (CD) is within the jurisdiction of the Committee of Creditors (CoC) and is permissible within the framework of the Insolvency and Bankruptcy Code, 2016 (Code). This decision reinforces the commercial wisdom of the CoC in structuring resolution plans and ensuring that key stakeholders essential to the business's survival – such as landowners, essential service providers, and regulatory bodies – can be accommodated in the resolution process to facilitate continuity and long-term viability. While this strengthens the viability of distressed companies, operational creditors must recognise the inherent risks in insolvency proceedings, as they may not always receive equitable treatment.
SUMMARY OF FACTS
In the CIRP of Golden Jubilee Hotels Pvt Ltd (CD), various OCs filed claims for the different services or supplies provided to the CD – material, construction of the facade, furniture, interior decorations, and the land.
The land was leased by the Youth Advancement Tourism and Culture Department (YATCL) (now, Telangana State Tourism Corporation Ltd) and the Shilparamam Arts, Crafts & Cultural Society (Society) on two different plots on which the CD's hotels were built and was thus crucial to the revival of the CD.
In the resolution approved by the CoC (Plan), YATCL and the Society were classified as 'Special Operational Creditors' (Special OCs) and their claims stood on a different footing than those of the other OCs, as the Plan provided 100% payment of their admitted claims, while providing nil payment to the other OCs for their admitted claims. On account of the inferior position of OCs in the waterfall mechanism under Section 53, all OCs in the instant case were entitled to nil payment in terms of Section 30(2) of the Code – a safety net provision for creditors not forming part of the CoC – which mandates that the amount allocated to a creditor under the Plan cannot be less than the amount it would have received if the amount available under the Plan/liquidation value was distributed as per the waterfall mechanism under Section 53.
The Plan was subsequently approved by the National Company Law Tribunal, Hyderabad (NCLT). The other OCs challenged the Plan before the NCLAT.
DECISION OF THE TRIBUNAL
The NCLAT observed that while the Code does not create sub-classification within the class of OCs or mention 'Special Operational Creditors', the Code also does not place an embargo on creating such sub-classification in the resolution plan.
In Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta1, the Supreme Court permitted differential treatment within a class of creditors inter se and held that the feasibility and viability of the Plan is left to the wisdom of the CoC and covers all aspects of the Plan including the manner of distribution of funds amongst various creditors; while citing the example of a CoC-approved resolution plan providing full payment to an OC for its electricity dues differential to treatment of other OCs to ensure revival of the CD.
The NCLAT in the instant case noted that instead of allocating nil payment to all OCs, the CoC had allocated certain amounts to the Special OCs to ensure the CD's revival as a going concern, consequently reducing the amount allocated to Financial Creditors. Thus, the CoC, in its commercial wisdom, had consciously decided to take a higher haircut with a view to revive the CD, which is the object of the Code.
Noting this, the NCLAT observed the existence of clear business logic to create sub-classification within the class of OCs, which lies within the domain of CoC's commercial wisdom.
The NCLAT reiterated that the scope of jurisdiction available to the NCLT and NCLAT to examine the CoC-approved resolution plan under Section 31 of the Code is limited within the four corners of Section 30(2) (which was not contravened) and does not remotely include any equity-based jurisdiction to assess the commercial wisdom underlying the Plan.
Collecting funds for the commission of a scheduled offence is not money laundering
Parvez Ahmed v. Directorate of Enforcement
Delhi High Court | December 4, 2024
2024 SCC Online Del 8528
The Delhi High Court held that 'proceeds of crime' that is the core ingredient for the offence of money laundering refers to the funds generated as a result of the commission of the scheduled offence and not funds that are collected for its commission. The High Court also highlighted the primacy of Article 21 of the Constitution of India over the stringent bail conditions under special legislations and the duty of Courts to prevent prolonged incarceration of the accused. This decision reinforces safeguards against premature asset seizures, arrests, and speculative prosecutions, ensuring that funds raised lawfully are not automatically deemed proceeds of crime. It reassures businesses, financial institutions, and civil society while emphasising the need for concrete evidence in money laundering cases. For law enforcement, it underscores the necessity of thorough investigations, preventing misuse of stringent laws and ensuring focus on actual financial crimes.
SUMMARY OF FACTS
Parvez Ahmed, Mohd Ilyas and Abdul Mugeet (accused) were members of the Delhi state unit of Popular Front of India (PFI) and its political front, Social Democratic Party of India (SDPI). The Directorate of Enforcement (ED) initiated money laundering proceedings against the accused under Sections 3 and 4 of the Prevention of Money Laundering Act, 2002 (PMLA) alleging that the accused have collected funds for and on behalf of PFI from unknown sources and have provided fake receipts to show the collection as a legitimate donation in order to use the funds to commit terrorist activities (scheduled offences). Hence, the funds were alleged to be proceeds of crime concealed by the accused as untainted money.
Even after 2 years since the accused were arrested, the case was pending at the stage of supply of prosecution documents to the accused, and trial had not begun as charges were yet to be framed. As such, all the accused sought regular bail before the Delhi High Court under Sections 439 of the Code of Criminal Procedure, 1973.
Separately, the accused were charged by the National Investigation Agency for the offence of conspiracy to commit terrorist activities and related offences under the Indian Penal Code, 1860 and the Unlawful Activities (Prevention) Act, 1967 (UAPA), which are scheduled offences under the PMLA.
DECISION OF THE COURT
The High Court granted bail to all the accused, subject to them furnishing a bond of INR 50,000 each and not leaving the country without the permission of the Trial Court. The Court clarified that for invoking the provisions of the PMLA, funds are deemed to be proceeds of crime only when they are generated as a result of the commission of the scheduled offence and not when the funds are collected for the purpose of its commission. As such, the offence of money laundering was not made out.
The Court noted that the accused had been in prison for more than 2 years with no likelihood of conclusion of trial in the near future owing to the stage of the matter and the volume of prosecution evidence involved.
Highlighting the principles of bail jurisprudence and the fundamental right to personal liberty guaranteed under Article 21, the Court observed that liberty of an accused under trial is paramount and should be curtailed only by a fair and reasonable procedure under law.
The stringent bail conditions under special statutes like Narcotic Drugs and Psychotropic Substances Act, 1985, UAPA and PMLA are subservient to the fundamental right to liberty guaranteed under Article 21, which takes primacy particularly in case the accused has been incarcerated for an unreasonably long period. The High Court highlighted the duty of Constitutional Courts (High Courts and the Supreme Court) to be vigilant in protecting the rights of the accused by reading into such statutes involving stringent bail conditions, the requirement of expeditious disposal of cases.
Dispute Resolution & ADR Newsletter - February 2025
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