NCLT Hyderabad (13.03.2023) In Canara Bank Vs. Sri. Nitin Vishwanath Panchal RP [I.A. No.520 /2021 with I.A. No.663/2021 in CP(IB) No.384/7/HDB/2018] held that;
The word used being “may”,[in section30(4)] the same is directory and not mandatory. That apart, the said provisions is only an enabling provision and does not impose any mandate on the COC to distribute payments to creditors based on the value of security held by them.
What amount is to be paid to different cases or subclasses of creditors in accordance with the provisions of the IB Code, 2016 and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors, and a dissenting secured creditor like the Appellant therein cannot suggest a higher amount to be paid to it with reference to the value of the Security Interest.
Blogger’s Comments; In my opinion applicant would have better rights/share in plan funds as a dissenting FC, because as dissenting FC he will share the liquidation value in proportion of his voting share amongst secured creditors, irrespective of the priority of security interest (first charge/second charge/ on fixed assets/current assets), provided there is no substantial difference between plan value & liquidation value to offset the advantage.
Excerpts of the order;
# 1. Being aggrieved by the decision of CoC in not treating the secured financial creditors equitably, the Applicant filed this application seeking;
a. to stay the procedure of voting of CoC on the agenda as decided in the 25th CoC meeting dated 17.09.2021 and stay all further proceedings, pending further orders in the present Application.
b. to direct the Respondent No.3 (being the Resolution Applicant) to provide 28.63% of the amount to be paid to the Applicant (in accordance to its voting shares), instead of 12% as was decided in the JLM dated 19.08.2021 & 27.08.2021 and to set aside the resolutions passed by the Respondent No.2 in 24th & 25th CoC meetings dated 31.08.2021 and 07.09.2021.
# 2. Briefly, the facts as mentioned in the application are as follows:
a. The Applicant submitted that the Respondent No.1 was appointed as the Resolution Professional of M/s. Galada Power and Telecommunications Ltd. and the Applicant had submitted their proof of Claims dated 01.10.2019 in Form C to the Respondent No.1 for consideration and the same was admitted by Respondent No.1.
b. Submitted that with respect to the distribution of amount/assets amongst the Financial Creditors of the Company, as was decided in the Joint Lenders Meeting (JLM) dated 19.08.2021 & 27.08.2021, an inter se sharing ratio for Secured Financial Creditors of the Company was decided as 88:12 with 88% being shared between the Financial Creditors who were 1st Charge holder against the fixed assets of the Corporate Debtor (i.e. M/s. SASF and M/s. Edelweiss Arc) and 12% being shared between the second charge holder against the fixed assets of the Corporate Debtor (i.e. Applicant herein and UTI Mutual Fund) for which, the Applicant raised an objection before the JLM and in the 24th CoC Meeting dated 31.08.2021. But, it was asserted by them that inter se sharing should be in ratio of voting share of the CoC members, in order to insure their equitable treatment and the Hon’ble Chairman of CoC failed to consider the representation, citing that the decision on inter se sharing was already taken in the JLM.
c. Submitted that the Applicant again raised the same issue in 25th CoC meeting dated 07.09.2021 in Item A-6 on the ground that distribution pattern is to be adopted in the resolution plan, must be as per voting share only and was finally decided that the said matter shall be put to voting to the CoC members which is to be held on 17.09.2021.
d. Submitted that Section 30(4) & 53(1) of IBC clearly implies that Secured Creditors are to be treated equitably and the same principle of equality in IBC has also been uphold by the Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd. Vs. Satish Kumar Gupta and Others (2020) 8 SCC 531, wherein the Hon’ble Bench had referred to the Bankruptcy Law Reforms Committee Report of 2015 (formed the basis of enactment of the Code) and it was held that creditors are to be treated equitably, i.e. creditors of same class are to be treated equally.
e. Submitted that Section 30(4), IBC read with 53(1) envisages that Financial Creditors who are placed similarly are to be treated equally and this principle was cemented by the Hon’ble
Supreme Court in the case of India Resurgence Arc Private Limited Vs. M/s. Amit Metaliks Limited And Anr in Civil Appeal No.1700/2021.
f. Submitted that since the Applicant herein has a voting share of 28.63%, the distribution ratio of 88.12 as adopted in JLM is discriminatory against the Applicant and hence in violation of the sole basis of IBC and therefore, cannot be finalized in the Resolution Plan. Though, the Applicant herein has first charge on current assets and second charge over the fixed assets, this solely cannot be a ground to bring the distribution ratio to 88.12.
g. Submitted that in case the Resolution Plan does not observe equality and fails to treat financial creditors equally, intervention of Courts, even in CoCs wisdom becomes necessary, since it would otherwise defeat the spirit of IBC, as was held in India Resurgence Arc Private Ltd Vs. M/s. Amit Metaliks Limited And Anor in Civil Appeal No.1700/2021.
# 10. Therefore, it is required to see whether the decision of the COC as to payment to different classes or sub-classes of creditors under the Resolution Plan can be interfered with, especially on the ground of alleged discrimination among the purportedly same class of financial creditors.
# 11. At the outset, we must say that the legal perspective, in so far as the order of priority amongst creditors, including the priority and value of the security interest of a secured creditor in distribution of the cash and receivables of the Corporate Debtor undergoing CIRP, post 2019 amendment to Section 30 of the IB Code, 2016, is as clear as crystal, as can be traced not only from Section 30 of the IB Code, 2016, but also from several rulings of Hon’ble Supreme Court, as such, the same is no longer res integra.
# 12. Hon’ble Supreme Court of India, in Essar Steel, supra, having reiterated that “existence of certain intrinsic assumptions relating to the COC on which the principle of “commercial wisdom” has been recognised, the assumptions are that the COC has the requisite expertise to assess the viability of the Corporate Debtor and verify the commercial feasibility of the proposed resolution plan, that their actions are a consequence of a thorough examination and assessment of the proposed Resolution Plan, and that their decisions are a result of deliberations and voting in the COC meetings”, further, held that “subject to Section 30(2), the mechanism of distributing payments to the creditors falls within the exclusive commercial realm of the COC’.
# 13. In the very same ruling, Hon’ble Supreme Court of India, upheld the constitutional validity of the amendment made in the year 2019, to Section 30 of the IB Code, 2016, and the said reads as under:
30(4) The Committee of Creditors may approve a Resolution Plan by a vote of note less than sixty six percent of voting share of the financial creditors, after considering its feasibility and viability the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53, including the priority and value of the security interest of a secured creditors, and such other requirements as may be specified by the Board.
# 14. A bare perusal of the language used by the Legislature in the amended Section 30(4), with respect to considering the security interest, shows that the word used being “may”, the same is directory and not mandatory. That apart, the said provisions is only an enabling provision and does not impose any mandate on the COC to distribute payments to creditors based on the value of security held by them. Section 30(4) of the IB Code only says that the COC may take into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53 of the IB Code, including priority and value of security interest of secured creditors, while approving the resolution plan, so much so, the argument that, as the COC failed to take into the account the pre-CIRP preferential financial bargains made by the Applicants with the Corporate Debtor, as such, the impugned decisions are liable to be set aside, is untenable.
# 15. An identical issue had cropped up in the matter of India Resurgence ARC Private Limited vs. Amit Metalika Limited and Another [2021 SCC OnLine SC 409], supra, wherein it as similarly contended by the Appellant therein that the COC could not have approved the Resolution Plan which failed to consider the priority and value of security interest of the creditors while deciding the manner of distribution to each creditor even though the legislature in its wisdom has amendedSection 30(4) of the IB Code, 2016, requiring the COC to take into account the order of priority amongst creditors as laid down in Section 53(1) of the IB Code, 2016, including the priority and value of the security interest of a secured creditor, and Hon’ble Supreme Court, held that
“it needs hardly any elaboration that financial proposal in the Resolution Plan forms the core of the business decision of Committee of Creditors. Once it is found that all the mandatory requirements have been duly complied with and taken care of, the process of judicial review cannot be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction’.
Thus, it is noteworthy from the ruling above, that in the Scheme of the IB Code, 2016, every dissatisfaction like that of the Applicants herein, does not partake the character of a legal grievance and cannot be taken up as a ground of appeal.
# 16. The Hon’ble Supreme Court of India in the matter of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. [(2020) 8 SCC 531], went on record that the submissions on behalf of the Appellant therein with reference to the value of its security interest neither carry any meaning nor any substance, and held that ‘what amount is to be paid to different cases or subclasses of creditors in accordance with the provisions of the IB Code, 2016 and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors, and a dissenting secured creditor like the Appellant therein cannot suggest a higher amount to be paid to it with reference to the value of the Security Interest – a finding which is squarely applicable to the facts of the case at hand.
# 17. Therefore, the well settled legal position in so far as the priority in payment amongst different classes of creditors, essentially being the commercial wisdom of the Committee of Creditors, and a dissenting secured creditor like the Applicants herein cannot seek a higher amount to be paid to them on the basis of the value of their security interest by pleading dissatisfaction.
# 18. That apart, in the matter between IDBI Bank vs. Mamata Binani and Ors. wherein the Applicant is also a party, the Applicant raised a similar plea, which was accepted by the Hon’ble NCLAT. However, the order of the NCLAT has been set aside by the Hon’ble Supreme Court with a direction for fresh enquiry and thereafter, the Hon’ble NCLAT heard afresh and dismissed the application. As the said finding has attained finality, the Applicant is bound by the said Ruling.
# 19. Therefore, for the aforesaid reasons, we find no merit, as such, the same deserves to be dismissed. Accordingly, we hereby dismiss the application IA 520/2022 in 384/7/HDB/2018. No costs.
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