Can Value of Resolution Plan be Lower than Liquidation Value? : SC Resolves

Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors (Supreme Court), Civil Appeal No. 4242 of 2019, Dated: 22/01/2020

Introduction:

It is, for the matter of reality, that there is no mandate under the I&B Code which provides that whether the Resolution Plan’s value shall be more than the liquidation value of the Corporate Debtor. It is this perplexing issue that the insolvency case of United Seamless Tubulaar Private Limited deals with. On 22^nd January, the Full Bench of the Hon’ble Supreme Court of India in M/s. Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors. categorically decided on the following issues:

Issue 1: Whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not?

Issue 2: Whether Section 12-A is the applicable route through which a successful Resolution Applicant can retreat?

Case Background:

• Indian Bank the forerunner of the CIRP, filed an application under Section 7 of the I&B Code on June 12, 2017 against United Seamless Tubulaar Private Limited (Corporate Debtor). The said application was subsequently admitted by National Company Law Tribunal, Hyderabad.[i]
• The total debt of Corporate Debtor was Rs. 1897 Crores of which Rs. 1652 Crores was in form of Term Loans from two entities of Deutsche Bank, anda working capital borrowing of Rs. 245 Crore from Indian Bank. In addition to that, theverified claims of operational Creditor amounted to Rs.2.02 Crores.
• Valuation of the Corporate Debtor:

• The Resolution Professional received four Resolution Plansaltogether. Out of which the Resolution Plan submitted by Maharashtra Seamless Limited was approved by majority of the CoC by 87.10% of voting share and the Indian Bank/Financial Creditor (having voting share 12.90%) dissented with the Resolution plan of Maharashtra Seamless Limited.
• The Adjudicating Authority, the National Company Law Tribunal, Hyderabad Bench (NCLT) by an order passed on 21^st January 2019 approving the resolution plan submitted by MSL in an application filed by the Resolution Professional.
• The aforesaid order passed by the Adjudicating authority was carried up in appeal before the National Company Law Appellate Tribunal (NCLAT), which were preferred by the Promoter of United Seamless and Indian Bank (Financial Creditor).[ii]
• The arguments of Learned Counsel appearing on behalf of the appellant essentially hinged on the liquidation value. The Counsel contended that the liquidation value submitted by the Resolution Professional and accepted by the CoC for approval of the Resolution Plan was Rs. 597.54 Crores. Therefore, there could be no reason to release property valued at Rs.597.54 crores to MSL for Rs.477 crores. Furthermore, strengthening their submission on this point the appellants made a reference to the other Resolution Applicant whose bid was for Rs.490 crores (which was more than the amount offered by the MSL)
• NCLAT responding to petitions found that Resolution Plan is against the statement and object of the ‘I&B Code’ and thereby rejected the lender-approved resolution plan on the ground that the proposed upfront payment for the stressed asset of Indo-Malaysian joint venture United Seamless Tubular, was significantly lower than the average liquidation value. Ergo, the court directed the winning bidder to modify the plan by paying additional Rs. 120.54 Crores to make it at par with the average liquidation value of Rs.597.54 Crores.
• Consequently, during the pendency of the present appeal under the watchful eye of the Supreme Court, MSL documented an application before the Supreme Court.

Decision of Supreme Court: