NCLT Orders Surplus CIRP Profits to Financial Creditors, Aligning with Resolution Plan Terms

In a recent judgment by the National Company Law Tribunal (NCLT) Mumbai, the case of Kalyan Janata Sahakari Bank Ltd. Vs Arun Kapoor addressed a critical aspect of Corporate Insolvency Resolution Process (CIRP) – the allocation of profits. The tribunal’s ruling sheds light on the distribution of profits during the CIRP period, particularly when the Resolution Plan and Request for Resolution Plan (RFRP) are silent on the matter.

Detailed Analysis

The crux of the matter revolved around the utilization of profits accrued during the CIRP period. The Financial Creditors of Cicil Biochem Private Limited, the Corporate Debtor, sought direction regarding the distribution of profits and withdrawal of a letter issued by the Respondent concerning profit utilization. The tribunal examined the facts leading to the application, highlighting the arrangements made during CIRP to reduce costs and maintain the company’s viability.

Despite the Resolution Plan’s approval, ambiguity arose regarding the surplus generated by job work arrangements. The Respondent’s legal advice suggested the surplus should go to the Resolution Applicant. However, with the absence of clear directives in the RFRP and Resolution Plan, the Financial Creditors contended that profits during CIRP should benefit them.

The tribunal analyzed submissions from both parties, referencing precedents such as the Essar Case and insights from the Insolvency Law Committee. Notably, the committee emphasized the need for clarity on profit distribution and recommended including provisions in Resolution Plans.

In its decision, the tribunal weighed commercial considerations and the interests of stakeholders. It noted clauses in the Resolution Plan aimed at safeguarding financial interests and specified that receivables post-approval date would go to the Resolution Applicant.

Considering the source of funds deployed by Financial Creditors and the Resolution Plan’s provisions, the tribunal ruled in favor of the Financial Creditors. It deemed it just and equitable to allocate surplus profits accrued during the CIRP period to them.

Conclusion

The NCLT Mumbai’s judgment in the Kalyan Janata Sahakari Bank Ltd. Vs Arun Kapoor case clarifies the allocation of profits during CIRP, particularly in scenarios where the Resolution Plan and RFRP are silent. The ruling emphasizes fairness and equitable distribution, ensuring that Financial Creditors benefit from profits generated during the resolution process. This decision sets a precedent for future cases, providing clarity and guidance in insolvency proceedings.

FULL TEXT OF THE NCLT JUDGMENT/ORDER