SC upheld importance of proportionate & equal treatment for creditors in a class

India Resurgence Arc Private Limited Vs M/S. Amit Metaliks Limited & Anr. (Supreme Court of India); Civil Appeal No. 1700 of 2021; 13/05/2021

Case Background:

This case involves an Appeal filed under Section 62 of the Insolvency and Bankruptcy Code, 2016 (IBC) by India Resurgence ARC Private Limited (the Appellant) against the NCLAT’s order rejecting the Appeal filed before the NCLAT and upholding the decision of National Company Law Tribunal, Kolkata (the NCLT) approving the Resolution Plan in Corporate Insolvency Resolution Process (CIRP) of VSP Udyog Private Limited (the Corporate Debtor), submitted by the Respondent herein i.e., Amit Metaliks Limited (also, the Resolution Applicant).

Facts of the Case:

• The Appellant is the assignee of rights, title, and interest from Religare Finvest Limited, a secured Financial Creditor of the Corporate Debtor.
• The Resolution Plan submitted by the Respondent herein, was considered by the Committee of Creditors (CoC). The Appellant expressed reservations about the proposed share and the value of its security interest, choosing to remain a dissenting financial creditor.
• The CoC approved the Resolution Plan with 95.35% of voting share from other Financial Creditors. Thereafter, the Resolution Plan was approved by the NCLT.
• As the appellant is the assignee of rights, title and interest of the Corporate Debtor having 3.94% of voting share of the CoC, it expressed reservations on share being proposed and the value of security interest held by these shares and chose to remain the dissentient financial creditor. Substantial majority of other financial creditors voted in favour of the Resolution Plan which got approved by a total percentage of 95.35% of the voting shares.
• The NCLT expressed its complete satisfaction after examining the salient features and financial proposals of Resolution Plan and therefore approved the same in its order dated 20.10.2020.

NCLAT Decision and Findings:

1. The NCLAT rejected the Appellant’s contentions and upheld the decision of the Adjudicating Authority i.e., NCLT.

2. The NCLAT cited the principles established in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and ors. which held “the concept of equitable treatment of creditors, including the observations that equitable treatment of creditors meant equitable treatment only within the same class; and that protection of creditors in general was important but it was also imperative that the creditors be protected from each other”.

3. The Appellate Authority made observations that Section 30(4) of the I&B Code provides that the Committee of Creditors may approve a Resolution Plan by a vote which shall not be less than 66% of voting share of Financial Creditors and on a plain reading of this provision it is clear that the considerations regarding feasibility and viability of the Resolution Plan, distribution proposed with reference to the priority amongst creditors as per statutory waterfall distribution mechanism including value of security interest of Secured Creditor are matters which fall within the exclusive domain of Committee of Creditors for consideration before deciding a plan. The decision of NCLT, Kolkata approving the resolution plan was upheld.

4. The NCLAT held that considerations regarding the feasibility, viability, distribution, and the value of security interest were matters fall within the exclusive domain of the CoC and its commercial wisdom. Judicial intervention was unwarranted unless creditors of the same class were not treated fairly and equitably.

5. The NCLAT dismissed the Appeal, finding it devoid of substance.

Contention of the Parties before the Supreme Court:

• Appellant’s Contention: The Appellant contended that the approved Resolution Plan failed the test of being ‘feasible and viable’ because it didn’t considered the value of the security interest held by the Appellant. The Appellant argued that the amendment to Section 30(4) of the IBC as effective from 16.08.2019, required the CoC to ensure that the manner of distribution takes into account the order of priority amongst the creditors and shall also be the priority and value of the security interest of a creditor and therefore the CoC has acted against the said amendment.
• Respondent’s Contention: The Respondent argued that considerations like priority and value of security interest were within the realm of the CoC’s commercial wisdom and business decision-making. The amendment to Section 30(4) was a guideline, not a mandate, and it provided flexibility to the CoC to consider such factors while making a decision.

Decision of the Supreme Court:

The Appellant had a claim of INR 13.38 crore and was offered INR 2.026 crore in the Resolution Plan, without considering the value of their security interest valued at over INR 12 crores. The Supreme Court, however, dismissed the appeal, emphasizing that the CoC’s decisions fall under the realm of commercial wisdom and that the scope of judicial review is limited to the provisions of Section 30(2) of the I&B Code. The Supreme Court stated that as long as the resolution plan fulfils the mandatory requirements, it cannot be subject to detailed quantitative analysis. The Court also noted that a dissenting financial creditor’s security interest does not grant them a right superior to other creditors or allow them to enforce their entire security interest to receive excess amounts. The Court clarified that the value the Appellant should receive was specified in the Resolution Plan and was in proportion to other secured financial creditors. The Appellant’s insistence on a higher amount based on the value of their security interest was deemed irrelevant.

In conclusion, the Supreme Court upheld the importance of proportionate and equal treatment for creditors in a class, emphasizing that the Resolution Plan should be feasible, viable, and just. The Court rejected the appellant’s plea for a higher amount based on the value of their security interest, underscoring the need for a rational and equitable resolution process that maximizes the value of the Corporate Debtor’s assets.