No amount to be paid through partly paid ‘Redeemable Preference Shares to Operational Creditor

Gupta Textiles Vs Darshan Patel (NCLAT Delhi)

Conclusion: Operational Creditor cannot be paid through partly paid ‘Redeemable Preference Shares’ as the distribution of the amount to the Operational Creditor (other than Government Departments) was clearly contrary to provisions of Section 30 (2)(b)(ii). The Adjudicating Authority had failed to advert to Section 30, sub-section (2) (b) (ii) and failed to notice that amount proposed to the Operational Creditor was clearly contrary to Section 30(2)(b)(ii). The order of Adjudicating Authority approving the Resolution Plan could not be sustained.

Held: Appellant challenging the impugned order submitted that the Resolution Plan was not in compliance of Section 30, sub-section (2) (b).It was submitted that liquidation value of the Corporate Debtor was Rs.5.74 lakhs and the total Plan amount offered by Resolution Applicant was Rs.9.05 crores. The total amount of the Financial Creditor admitted in the CIRP was only Rs.19,65,908/-, which had been paid 100% and there being no unsecured Financial Creditor, Secured Operational Creditor and the dues of the Government Departments having been admitted at notional amount of Rs.1/- for each statutory department, the balance amount, which was offered in the Resolution Plan ought to be distributed as per Section 30(2)(b)(ii). Instead of making the payment of the amount to the Operational Creditor as was envisaged under Section 30(2)(b)(ii), the Operational Creditor were being paid only a meager amount of 2.16% and the Resolution Applicant had offered to pay redeemable preference shares of the CD at the option of the Operational Creditor, which was not in accordance with law laid down by the Hon’ble Supreme Court in Jaypee Kenisington Boulevard Apartments Welfare Association & Ors. v NBCC & Ors. The Resolution Plan, ought not to have been approved. Respondent submitted that Resolution Plan had been approved by 100% vote share of the CoC and the commercial wisdom of the CoC could not be challenged by appellant. It was submitted that total Resolution Plan amount of Rs.9.05 crores and liquidation value being only Rs.5,74,822/-, out of which only upfront cash payment of Rs.1.05 crores had been offered. The Operational Creditor having been given option of partly paid redeemable preference shares 1,60,00,000 having paid value of INR 10 wherein the amount proposed was INR 8 crores. The total upfront payment being INR 1.05 crores, the plan provided to pay to the Operational Creditor upfront payment of INR 35,34,092/-, which was 2.16% of their admitted claim. The payment offered to the Operational Creditor was in compliance of Section 30, sub-section (2). The CoC had also noted that the return on funds involving partly paid amount comes to around 12% per annum. The present Appeal did not raise any question of law, which warranted adjudication by this Tribunal. The Resolution Plan was just and fair Plan. Held: The law was thus well settled that commercial wisdom of the CoC approving the Plan could not be interfered and it could be interfered only when there was statutory non-compliance, i.e., non-compliance of Section 30, sub­section (2). The distribution of the amount to the Operational Creditor (other than Government Departments) was clearly contrary to provisions of Section 30 (2)(b)(ii). The Adjudicating Authority had failed to advert to Section 30, sub-section (2) (b) (ii) and failed to notice that amount proposed to the Operational Creditor was clearly contrary to Section 30(2)(b)(ii). The order of Adjudicating Authority approving the Resolution Plan could not be sustained. However, the Appeal had been filed by the Operational Creditor questioning only part of the Resolution Plan by which distribution to the Operational Creditor had been made under the Plan, no other part of the Resolution Plan was being sought to be challenged. In the facts of the present case, the order passed by Adjudicating Authority dated 09.11.2023 required to be modified. No other part of the Resolution Plan being under challenge, ends of justice would be served in modifying the order of the Adjudicating Authority only with respect to distribution to the Operational Creditor. It was obligatory for the Resolution Plan to comply with the provisions of Section 30(2)(b)(ii) in the facts of the present case. Hence, the order was modified to make it in compliance of the provisions of Section 30, sub-section (2) (b)(ii).

FULL TEXT OF THE NCLAT JUDGMENT/ORDER

This Appeal by Operational Creditor has been filed challenging order dated 09.11.2023 passed by National Company Law Tribunal, Mumbai Bench, Court-IV in IA No.3908 of 2023, by which order Resolution Plan submitted by Respondent No.2 has been approved.

Please become a Premium member. If you are already a Premium member, login here to access the full content.