On April 18, 2023, the National Company Law Appellate Tribunal, New Delhi ("NCLAT") gave its decision in the case of Ashvinkumar Jayantilal Patel v. Shri Sanjay Jitendralal Shah, whereby it has held that a resolution plan providing for carrying forward of liabilities of the Corporate Debtor toward the suspended directors, post CIRP, is non-compliant with Section 31(1), IBC, which mandates that all claims which are not a part of the resolution plan, shall stand extinguished on the date of approval of the resolution plan by the Adjudicating Authority. Thus, the NCLAT upheld the Adjudicating Authority's decisions to reject the resolution plan on the above grounds.
Brief Facts:
B&C Energy Infra Limited ("Corporate Debtor"), a Micro, Small & Medium Enterprise ("MSME") unit, was admitted into corporate insolvency resolution process ("CIRP") on January 3, 2022. Subsequent to receiving and verifying of claims, the resolution professional of the Corporate Debtor ("RP") constituted the committee of creditors of the Corporate Debtor ("CoC") consisting of two financial creditors holding 86% and 14% of voting shares each. Two other financial creditors of the Corporate Debtor, being suspended directors and related parties of the Corporate Debtor, were not included in the CoC.
One of the above suspended directors, namely Mr. Ashvinkumar J. Patel ("Appellant"), submitted a resolution plan for the Corporate Debtor ("Resolution Plan") as per Section 240A, IBC, which permits related parties of the Corporate Debtor to submit a resolution plan, provided that the Corporate Debtor is an MSME unit. The Appellant's Resolution Plan provided for no payments to the operational creditors of the Corporate Debtor. However, with respect to the debts owed to the two suspended directors of the Corporate Debtor, the Resolution Plan stated that "As this is a related party debt, no amount shall be offered as part of the Resolution Plan. The existing debt will be taken over as a liability in the new company and only repaid if funds are available in the new company".
The Resolution Plan was approved by the CoC. Subsequently, the RP filed an application before the Adjudicating Authority seeking its approval of the Resolution Plan. The RP's application was opposed by the operational creditors of the Corporate Debtor.
Issue:
- Whether the Resolution Plan is non-compliant with 30(2), IBC, as it does not envisage any payment toward the operational creditors?
- Whether the Resolution Plan is non-compliant with IBC as it provides for carrying forward of the Corporate Debtor's liabilities, post CIRP?
Decision of Adjudicating Authority:
The Adjudicating Authority observed that the entitlement of the operational creditors, under Section 30(2), IBC, is to the extent of the amount the said creditors would have received under Section 53, IBC, in case the Corporate Debtor were to undergo liquidation. It further noted that the liquidation value of the assets of the Corporate Debtor is insufficient to pay the full debts owed to the two financial creditors forming the CoC. Accordingly, since the liquidation value of the Corporate Debtor would be exhausted in paying the financial creditors alone, as per Section 53, IBC, the operational creditors would receive no amounts whatsoever. Thus, in this case, the entitlement of the operational creditors under Section 30, IBC would be nil.
In light of the above observations, the Adjudicating Authority held that the Resolution Plan, offering nil amount to the operational creditors, is compliant with Section 30(2) & (4), IBC. On the second issue, the Adjudicating Authority took note of the Supreme Court's judgment in Ghanashyam Mishra and others v. Edelweiss Asset Reconstruction [Civil Appeal No. 8129 of 2019] wherein it was held that as per Section 31(1), IBC, on the date of approval of the resolution plan by the Adjudicating Authority, all such claims which are not a part of resolution plan, shall stand extinguished. The Adjudicating Authority observed that in the present case, the claims of the suspended directors of the Corporate Debtor were not even considered by the RP, as they were related parties. Yet, the CoC had approved the Resolution Plan which provides for continuance of these liabilities toward the suspended directors, even post CIRP.
Further, the Adjudicating Authority also noted that the operational creditors were correct in their submissions that the Resolution Plan does not give equitable treatment to all stakeholders as required under Section 30(2), as it completely extinguishes the debts owed to the operational creditors, while keeping the debts of the suspended directors alive.
Based on the above observations, the Adjudicating Authority held that the Resolution Plan envisaging a continuing liability of the Corporate Debtor even post CIRP, is impermissible and is in contravention of Section 31(1), IBC. Thus, the Adjudicating Authority rejected the Resolution Plan under Section 30(2)(e) and (f), IBC.
Decision of the NCLAT:
The NCLAT observed that the suspended directors were not entitled to receive any amount under the Resolution Plan, however, the suspended directors, being the successful resolution applicants themselves, have indirectly sought to recover their dues post the resolution of the Corporate Debtor, which is impermissible.
With the above observations, the NCLAT found no reason to interfere with the impugned order of the Adjudicating Authority and dismissed the appeal.
Please find a copy of the Adjudicating Authority's order, here and a copy of the NCLAT`s order, here.
Originally Published by 3 May 2023
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