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27 December 2018

Evolving Framework Governing Resolution Plans Under IBC

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The Supreme Court on 19.11.2018, dismissed an appeal against the NCLAT order.
India Corporate/Commercial Law
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The National Company Law Appellate Tribunal ("NCLAT"), while approving the revised resolution plan submitted by Ultratech Cement Limited in the insolvency resolution process initiated against the corporate debtor- Binani Cement Limited1, has laid down certain principles that a resolution plan should comply with. These include, inter alia that:

  1. Functionally, the resolution plan shall resolve insolvency, maximise the value of assets of the corporate debtor, and promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders. The resolution plan is not a sale, or auction, or recovery or liquidation but a resolution of the Corporate Debtor as a going concern.
  2. A resolution process under IBC is not an auction. Feasibility and viability of a 'Resolution Plan' are not amenable to bidding or auction. It requires application of mind by the 'Financial Creditors' who understand the business well.
  3. A resolution process under IBC is not recovery. Recovery is an individual effort by a creditor to recover its dues through a process that has debtor and creditor on opposite sides. The 'I&B Code' prohibits and discourages recovery
  4. A resolution process is not a liquidation. The IBC does not allow liquidation of a Corporate Debtor directly and permits liquidation only on failure of the resolution process.
  5. The IBC aims to balance the interests of all stakeholders and does not maximise value for financial creditors. Therefore, the dues of operational creditors must get at least similar treatment as compared to the due of financial creditors.
  6. Any resolution plan if shown to be discriminatory against one or other financial creditor or the operational creditor, can be held to be against the provisions of IBC

The Supreme Court on 19.11.2018, dismissed an appeal against the NCLAT order. The NCLAT order is significant since it clarifies the underlying principles that a resolution plan should comply with. In this article, we provide a detailed analysis of the facts and the reasoning laid down by the NCLAT.

Factual Background

The Hon'ble NCLAT was deciding a set of appeals from various orders of the National Company Law Tribunal, Kolkata Bench ("NCLT") in connection with the corporate insolvency resolution process of Binani Cement Limited (Corporate Debtor), which are summarized as follows:

  1. Binani Industries Limited (Corporate Debtor), a group company of Binani Cement Limited approached the NCLAT against the order of NCLT remitting to the resolution professional its proposal for settlement;2
  2. Binani Industries Limited preferred another appeal against the order of NCLT refusing to accept its proposal for repayment of the dues of the financial creditors and close the corporate insolvency resolution process.3
  3. Rajputana Properties Private Limited, resolution applicant, preferred an appeal against the order of the NCLT whereby liberty was granted to the committee of creditors to consider the settlement plan proposed by the Binani Industries Limited.4
  4. Rajputana Properties Private Limited preferred another appeal against the order of NCLT whereby the application filed for approval of the resolution plan submitted by Rajputana Properties Private Limited was not accepted.5

Facts as noted by the NCLT, which were before NCLAT are as follows:

  1. Approval of the resolution plan submitted by Rajputana Properties Private Limited:

The committee of creditors in its meeting on 14th March, 2018 by a vote of 99.43% approved the resolution plan submitted by Rajputana Properties Private Limited. However, 10.53% of the committee of creditors, who were corporate guarantee beneficiaries of the Corporate Debtor, while voting in favour of the resolution plan recorded protest alleging that they had not been dealt with equitably when compared with other financial creditors.6 They alleged that they were forced to vote in favour of the resolution plan since the resolution plan had provided that the dissenting creditors will be paid only liquidation value, which would have been nil.7

  1. Highlights of the resolution plan submitted by Rajputana Properties Private Limited:

The resolution plan submitted by Rajputana Properties Private Limited provided for repayment of 100% of the verified claim to all financial creditors with direct exposure to the corporate debtor. As far as financial creditors to whom corporate debtor was a guarantor was concerned, while it provided for 100% repayment to certain creditors, two of such creditors were provided 72.59% and 10% of their respective verified claims.8 In so far as the operational creditors were concerned, the resolution plan submitted by Rajputana Properties Private Limited, provided for repayment of 35% of the claim of unrelated parties and did not provide any claim of the related parties.9

  1. Resolution Plan submitted by Ultratech Cement Limited:

Resolution Plan submitted by Ultratech Cement Limited, including the revised offer submitted on 8th March 2018, was not considered by the committee of creditors10, stating that the offer was not made in accordance with the process prescribed in the process document and that it was submitted beyond the time stipulated under the Insolvency and Bankruptcy Code, 2016, ("IBC").11 However, the resolution plan submitted by Rajputana Properties Private Limited that was approved by the committee of creditors on 14th March, 2018, was taken note of by the committee of creditors only on 7th March, 2018.

The resolution plan submitted by Ultratech Cement Limited provided for infusing of working capital of Rs. 350 Crores and provided for payment of 100% of dues to both 'Financial Creditors' and 'Operational Creditors', except the related parties.12

  1. NCLT Holding:

NCLT rejected the application for approval of the resolution plan submitted by Rajputana Properties Private Limited holding that the resolution plan was discriminatory and contrary to the scheme of IBC. The NCLT also directed the committee of creditors to consider other resolution plans including the one submitted by Ultratech Cement Limited.13

  1. Approval of the resolution plan submitted by Ultratech Cement Limited and application before the NCLAT:

Following the decision of the NCLT dated 2nd May 2018, the committee of creditors held meeting on 28th May 2018 and considered the revised plan submitted by Ultratech Cement Limited, which was then approved by 100% voting shares voted in favour of the resolution plan.14

The resolution professional placed the revised resolution plan submitted by Ultratech Cement Limited before the NCLAT for its approval under s. 31 of IBC read with order of the Supreme Court dated 2nd July, 2018 remitting the matter to NCLAT and directing the transfer of the insolvency petition from NCLT to NCLAT.15

Holding by the NCLAT

NCLAT, vide this judgment has extensively dealt with the framework on resolution under IBC and has laid down the law in relation to the thresholds to be met by a valid resolution plan and consideration of resolution plans by committee of creditors. The important points of law emerging from this judgment are as follows:

  1. The objective of IBC:16

The objective of IBC is resolution and IBC aims to promote resolution over liquidation.

  • The first order objective is "resolution".
  • The second order objective is "maximisation of value of assets of the 'Corporate Debtor'' and
  • the third order objective is "promoting entrepreneurship, availability of credit and balancing the interests".

The NCLAT emphasized that this order of objectives is sacrosanct

With regard to the resolution being the primary objective of IBC, the NCLAT referred to the judgment of the Hon'ble Supreme Court of India in Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors. wherein it was held that every effort must be made to try and see that the corporate debtor continues to run as a going concern.

  1. Nature of Resolution17

The NCLAT held that functionally, the resolution plan shall resolve insolvency, maximise the value of assets of the 'Corporate Debtor', and promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders.

It further held that:

  • Resolution is not a sale, but the resolution of corporate debtor as a going concern;
  • Resolution is not an auction, feasibility and viability of a resolution plan are not amenable to bidding or auction. It requires application of mind by financial creditors who understand the business well;
  • Resolution is not recovery. While recovery bleeds the corporate debtor to death, resolution endeavors to keep the corporate debtor alive. IBC prohibits and discourages recovery in several ways;
  • Resolution is not liquidation. Liquidation is inequitable as it considers the claims of a set of stakeholders only if there is any surplus after satisfying the claims of a prior set of stakeholders fully. IBC, therefore, does not allow liquidation of a corporate debtor directly.
  1. Financial creditors as members of the committee of creditors and their role:18

The NCLAT referred to the discussions of the Bankruptcy Law Reform Committee while concluding that the committee of creditors should comprise of financial creditors of the corporate debtor and also looked into the framework prescribed by IBC, and held that:

  • The liabilities of all creditors who are not part of committee of creditors must also be met in the resolution.
  • The financial creditors can modify the terms of existing liabilities, while other creditors cannot take the risk of postponing payment for better future prospects. That is, financial creditors can take haircut and can take their dues in future, while operational creditors need to be paid immediately.
  • A creditor cannot maximise his own interests in view of moratorium.
  • If one type of credit is given preferential treatment, the other type of credit will disappear from market. This will be against the objective of promoting availability of credit.
  • The IBC aims to balance the interests of all stakeholders and does not maximise value for financial creditors.
  • Therefore, the dues of operational creditors must get at least similar treatment as compared to the due of financial creditors (emphasis supplied).
  1. Resolution Plan shall not be Discriminatory:
  • IBC or the regulations framed by the Insolvency and Bankruptcy Board of India ("IBBI") do not prescribe differential treatment between similarly situated operational creditors or financial creditors on one or other grounds.19
  • Any resolution plan if shown to be discriminatory against one or other financial creditor or the operational creditor, can be held to be against the provisions of IBC.20
  • NCLAT took note of the fact that IBBI, vide amendment dated 5th October, 2018, amended regulation 38 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations"), which only mandated payment of liquidation value to operational creditors and dissenting financial creditors. It also referred to its earlier judgment in Central Bank of India Vs. Resolution Professional of the Sirpur Paper Mills Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 526 of 2018 wherein it had held Regulation 38 of CIRP Regulations as it stood prior to the amendment to be ultra vires IBC.
  • NCLAT also observed that if the operational creditors are ignored and provided with 'liquidation value' on the basis of misplaced notion and misreading of Section 30(2)(b) of IBC, then in such case no creditor will supply the goods or render services on credit to any 'Corporate Debtor'.21

NCLAT's Finding on Facts:

On the basis of the analysis of the framework governing resolution as elaborated above, the NCLAT in the facts of this case considered the following questions:

  1. Whether the committee of creditors discriminated between the eligible resolution applicants, while considering the resolution plan submitted by Rajputana Properties Private Limited?
  2. Whether the resolution plan submitted by Rajputana Properties Private Limited is discriminatory?

NCLAT concluded as follows:

  1. The committee of creditors discriminated among the other resolution applicants which is evident from the fact that the proposal for negotiation and better proposal given by Ultratech Cement Limited was not considered at all though it was submitted on 8th March, 2018 i.e. much prior to the approval of the plan (14th March, 2018).
  2. The resolution professional as well as the committee of creditors are duty bound to ensure maximization of value within the time frame prescribed by IBC. Such an object in finding out a resolution applicant who can offer maximum amount so as to safeguard the interest of all stakeholders of the Corporate Debtor is lacking in the case at hand from the side of the committee of creditors.22
  3. Committee of creditors also failed to safeguard the interest of the stakeholders while ignoring the revised resolution plan offered by Ultratech Cement Limited which had taken care of maximization of the assets of the Corporate Debtor and balanced the claim of all the stakeholders of the Corporate Debtor.23
  4. Ultratech Cement Limited had submitted its resolution plan within time on 12th February, 2018. Therefore it was open to the committee of creditors to notice the revised offer given by Ultratech Cement Limited on 8th March, 2018.24
  5. The process document, in this case, had provided the flexibility to consider the resolution plan submitted by Ultratech Cement Limited, which was not used by the committee of creditors25 The only time limit that applied to this case is the stipulated period of 180 days or maximum 270 days under IBC.
  6. Non-application of mind by the committee of creditors and discriminatory behavior in approving the plan submitted by the Rajputana Properties Private Limited is apparent.26
  7. The resolution plan submitted by Rajputana Properties Private Limited and was approved by the committee of creditors discriminated between the financial creditors on the ground that some of the financial creditors are direct exposure to the Corporate Debtor while to some of the financial creditors the Corporate Debtor was guarantor.27
  8. Discrimination has also been made inter se financial creditors who have been classified as financial creditors on account of being guarantors.28
  9. Thus the resolution plan submitted by Rajputana Properties Private Limited discriminates between creditors who are similarly situated.29
  10. In so far as the operational creditors (other than workmen) are concerned, unrelated parties have been provided with 35% of their verified claim which is about Rs. 90 crores. However, related parties have not been provided with any amount.30
  11. Therefore, NCLT has rightly held the resolution plan submitted by Rajputana Properties Private Limited to be discriminatory.31
  12. The NCLAT noted with regard to the application for settlement filed by Binani Industries Limited that there is no provision of settlement under IBC.32 Although s. 12A, IBC provides for withdrawal of an admitted application for initiation of corporate insolvency resolution, this provision came into effect after NCLT pronounced its judgment in the application for settlement filed by Binani Industries Limited. In any case, Binani Industries Limited has not filed an application for withdrawal after approval of the 90% voting share of the committee of creditors, therefore, Binani Industries Limited cannot take advantage of Section 12A nor can be allowed to settle the matter.33

In light of the foregoing, the NCLAT approved the resolution plan submitted by Ultratech Cement Limited, that had been approved by 100% vote of the committee of creditors and held it to be binding on the Corporate Debtor and its employees, members, Creditors, guarantors and other stakeholders involved in the Resolution Plan.

Footnotes

1 Binani Industries Limited v Bank of Baroda & Anr (Company Appeal (AT) (Insolvency) No. 82 of 2018)

2 (Company Appeal (AT) (Insolvency) No. 82 of 2018)

3 Company Appeal (AT) (Insolvency) No. 216 of 2018

4 Company Appeal (AT) (Insolvency) No. 123 of 2018

5 Company Appeal (AT) (Insolvency) No. 188 of 2018

6 Para 13

7 Para 24

8 Para 19

9 Para 22

10 Para 14

11Para 31

12 Para 42

13 Para 15

14 Para 71

15 Para 70,73

16 Para 17.1,17.2

17 Para 3 at page 15

18 Para 17.3

19 Para 23

20 Para 48

21 Para 48

22 Para 32

23 Para 33

24 Para 34

25 Para 35- 39

26 Para 40

27 Para 19

28 Para 19

29 Para 19

30 Para 22

31 Para 43

32 Para 65

33 Para 68

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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