A resolution plan as per Section 30 of the Insolvency and Bankruptcy Code ('the Code') has to provide for the payment of debts of operational creditors and should not be less than the amount to be paid to such creditors in the event of liquidation of the corporate debtor under Section 53 or the amount that would have been paid to such creditors if the amount to be distributed under the resolution plan had been distributed in order of priority under Section 53(1), whichever is higher. The plan should also provide for the payment of the insolvency process costs in priority of payment of other debts of the corporate debtor. Further, it should provide for the payment of debts of the financial creditors who do not vote in favour of the resolution plan, which is not to be less than the amount to be paid to such creditors in accordance to Section 53(1) in the event of liquidation of the corporate debtor. It is the responsibility of the resolution professional, to assess that the resolution plan conforms with the requirements prescribed under Section 30 of the Code.
Accordingly, once presented before the committee of creditors by the resolution professional, the resolution plan has to gain the approval of at least 66% of the financial creditors of the corporate debtor before the resolution professional can submit the same to the Adjudicating Authority. Owing to the enormous role played by the resolution professional and the committee of creditors in processing the resolution plan, the Adjudicating Authority has limited scope in admitting a resolution plan once rejected by the Committee of Creditors ('CoC').
Adjudicating Authority's limited scope of interference
When assessing the contours of the power of the Adjudicating Authority to intervene in a rejected resolution plan, the Supreme Court of India in the case of K. Sashidhar v. Indian Overseas Bank and Others. on 05.02.2019 held that the legislature had not endowed the Adjudicating Authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. It was further held that there is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination and assessment of the proposed resolution plan made by their team of experts. The opinion of the CoC is expressed after due deliberations made in the CoC meetings as a collective business decision. The legislature consciously has not provided any ground to challenge the "commercial wisdom" of the individual financial creditors or their collective decision before the Adjudicating Authority, which is non-justiciable. Thus, this case categorically restricted the role of the Adjudicating Authority when dealing with a rejected resolution plan. Emphasizing that when assessing the merits of a resolution plan, reliance is to be placed on the commercial wisdom of the creditors.
Similarly, the Supreme Court in the case of Committee of Creditors through Essar Steel India Limited v. Satish Kumar Gupta and Others on 15.11.2019 reaffirmed that Adjudicating Authority has limited power of judicial review and interference once a resolution plan has been approved by the CoC in accordance to Section 30(4) of the Code. It was noted that under the Code, the Adjudicating Authority has the jurisdiction to merely decide whether a resolution plan passes muster under the code thereby reiterating the notion that the real power to approve a resolution plan lies in the hands of the CoC whose commercial wisdom is well-regarded.
To this effect, earlier this year, the Supreme Court in the case of Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Others on 22.01.2020 considered whether the Adjudicating Authority could reassess a resolution plan approved by the CoC even if the same otherwise complies with the requirements as asserted by Section 31 of the Code. In this respect, it was expressly held that Adjudicating Authority ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis. Section 31(1) of the Code clearly establishes that for the final approval of the resolution plan, the Adjudicating Authority has to be satisfied that the requirements of Section 30(2) and the proviso to Section 31(1) of the Code has been complied with.
This principle was reaffirmed by the Hon'ble National Company Law Appellate Tribunal ('NCLAT') where in the recent case of IMR Metallurgical Resources AG v. Ferro Alloys Corporation Limited and Others on 08.06.2020, it was expressly held that the commercial wisdom of the CoC is paramount and the CoC has the absolute prerogative to decide the viability and feasibility of the resolution plan presented before them and the same is not to be interfered even by the Adjudicating Authority. It was clarified that the approval or rejection of resolution plan depends on the commercial wisdom of the CoC, which involves evaluation of the resolution plan based on its feasibility. Such commercial wisdom of the CoC with the requisite voting majority is non-justiciable. The powers of the Adjudicating Authority under Section 31 of the Code are limited to matters covered under Section 30(2) of the Code when the resolution plan does not conform to the stated condition. Therefore, the commercial wisdom of the CoC in approving the resolution plan cannot be questioned when the requisite majority has been met.
Balancing the interests of stakeholders
The Hon'ble NCLAT in the case of Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Limited and Others on 12.09.2018 held that no discrimination can be made between the financial creditors in the resolution plan on the ground that one has dissented and voted against the resolution plan or the other has supported and voted in favour of the resolution plan. In the case of Binani Industries Limited and Others v. Bank of Baroda and Others on 14.11.2018, NCLAT further elaborated that it is necessary to balance the interests of all stakeholders while emphasizing on maximization of assets of the corporate debtor. It was also held that a discriminatory plan goes against the provisions of the Code.
In this regard, Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ('CIRP Regulations') mandates that the resolution plan should account for the interest of all the stakeholders and creditors of the corporate debtor. The provision also states that the financial creditors who did not vote in favour of the resolution plan shall be paid in priority over financial creditors who voted in favour of the plan thereby protecting the interests of the dissenting creditors.
Choosing between resolution plan and liquidation
'Fair value', as per Regulation 2(1)(hb) of the CIRP Regulations is the estimated realizable value of the assets of the corporate debtors if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm's length transaction after proper marketing, where the parties had acted knowledgeably, prudently and without compulsion. Correspondingly, 'liquidation value', as defined in Regulation 2(1)(k) of the CIRP Regulations is the estimated realizable value of the assets of the corporate debtors if the corporate debtor were to be liquidated on the insolvency commencement date.
As per Regulation 35 of the CIRP Regulations, after the receipt of resolution plan, the fair value and liquidation value is provided by the resolution professional to every member of the CoC on the undertaking that the members shall maintain confidentiality of the values and not use such values to cause undue loss or gain to itself or any other person..
The key observation in the case Maharashtra Seamless Limited (supra) was that there exists no provision under the Code or its regulations that mandates the sum in the resolution plan to match the liquidation value as arrived in Regulation 35 of the CIRP Regulations. Consequently, there is no prohibition in approving a resolution plan that is less than the liquidation value. Paragraph 54 of the Essar Steel (supra) judgment was relied on to establish this observation, where it was stated that if an "equality for all" approach which recognizes the rights of different classes of creditors as part of an insolvency resolution process is followed, then secured financial creditors will be incentivized to vote for liquidation rather than resolution as they would be better placed if the corporate debtor was to be liquidated as opposed to being revived through the resolution plan. It was therefore held that this was contrary to the object of the Code where the goal is to first ensure that resolution of distressed assets takes place and only if this is not possible, should liquidation be permitted.
This highlights the essence of the Code, which is resolution of distressed entities and only in the event that such a resolution is not practically possible, liquidation as a last resort is considered.
It is clear that the dissenting financial creditors are to be paid in priority as per Regulation 38 of CIRP Regulations. Further, Section 30(2) of the Code requires such dissenting financial creditors to be paid not less than the liquidation value. Hence, it may occasionally be a viable option for a financial creditor, ignoring the other creditors to dissent and vote against a resolution plan to maximize their value. Since the CoC is given absolute decision-making power in approving or rejecting a resolution plan, they are to exercise this power cautiously with utmost care and integrity in order to achieve maximum value for the assets of the corporate debtor while balancing the interests of all the stakeholders.
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