NCLT Kolkata-II (28.08.2023) In Hari Vittal Mission Vs. Ravi Sethia RP [IA (IB) No. 1563/KB/2022 in CP (IB) No.204/KB/2021] held that;
Based on the discussion above, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under Section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification.
Excerpts of the Order;
ANALYSIS & FINDINGS
In I.A. (IB) No. 187/KB/2023
# 18. We have heard the learned Counsel appearing on behalf of Param Commercial, the learned Senior Counsel appearing on behalf of the Resolution Professional and the learned Counsel appearing on behalf of the CoC and perused the records.
# 19. The present I.A. has been filed by Param Commercials so that it can be given an opportunity to visit the hospital in order to place a better proposal under section 12A of the Code, which would be agreeable to the CoC.
# 20. The timeline with respect to the CIRP has been given by the Resolution Professional. The last date for submission of EoI was 24 January 2022 and the last date for submission of Resolution Plan was 15 May 2022, whereas Param Commercial submitted its request to submit it’s Resolution Plan on 28 May 2022 and filed it’s Resolution Plan on 05 July 2022, despite the fact that the Resolution Professional had rejected it's request to file such plan. The Resolution Plan filed by Param Commercial was rejected by the CoC.
# 21. Thereafter, Param Commercial filed two proposals under section 12 A of the Code, which were also rejected by the CoC.
# 22. At this stage, the CoC have approved the Resolution Plan on 06 October 2022 and the Resolution Professional has filed an I.A. for approval of the same.
# 23. Param Commercial being the shareholder of the Corporate Debtor was aware of the CIRP and the timelines that were followed according to the Code, yet it did not follow the said timelines. It wasn’t cautious about the timeline and filed it’s Resolution Plan as well as the Proposals for withdrawal after the approval of the Resolution Plan by the CoC. The CoC has considered both the proposals and rejected the same. Going through email rejecting the proposalsvide emails dated 06 October 2022 and 07 December 2022 (filed with the notes of submissions) it is seen that ample reasons have been given for rejecting the proposals under section 12A of the Code.
# 24. Be that as it may, this I.A. has been filed only to seek permission to visit the hospital in order to submit a better proposal. If the CoC were of the view that a better proposal could be given by Param Commercial, the same would have been submitted at the time of arguments or an opportunity would have been granted to Param Commercial to submit a better revised proposal, but it was not. At this stage, where the Resolution Plan is before us for the approval, and the proposal for withdrawal under section 12A of the Code have been rejected twice by the CoC using its commercial wisdom, we are of the view the prayers in this I.A. cannot be allowed. Param Commercial cannot be given an opportunity time and again which will also stall the CIRP of the Corporate Debtor.
IA (IB) No.1563/KB/2022
# 25. Whether applicant Hari Vittal Mission has been rightly denied any share of Resolution Amount
# 26. It is a settled proposition that:
Ultimate discretion of what to pay and how much to pay each class or sub-class of creditors is with the Committee of Creditors, but the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors.
[Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta (2020) 8 Supreme Court Cases 531].
In course of arguments, Ld. Sr. Counsel Mr. Ramji Srinivasan appearing for the RP in the matter would draw our attention to Paragraphs 77, 88, 128, 145 – 147 of the Essar Steel decision [(2020) 8 SCC 531 to contend that:
“Equitable treatment of creditors is equitable treatment only within the same class”.
Ld. Counsel would place the following Paragraphs from the decision to support his contention that the applicant a related party financial creditor has been rightly provided “NIL” in the plan. The extracts would be the following:
xxx xxxxxx
88. The Appellate Tribunal has fallen into grave error. The observation in para 77 cannot be read to mean that financial and operational creditors must be paid the same amounts in any resolution plan before it can pass muster. The amended Regulation 38 set out in para 77 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster.
xxx xxxxxx
128. When it comes to the validity of the substitution of Section 30(2)(b) by Section 6 of the Amending Act of 2019, it is clear that the substituted Section 30(2)(b) gives operational creditors something more than was given earlier as it is the higher of the figures mentioned in sub-clauses (i) and (ii) of sub-clause (b) that is now to be paid as a minimum amount to operational creditors. The same goes for the latter part of sub-clause (b) which refers to dissentient financial creditors.Ms. Madhavi Divan is correct in her argument that Section 30(2)(b) is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a certain minimum amount, the minimum in the case of operational creditors being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable. As a matter of fact, pre-amendment, secured financial creditors may cramdown unsecured financial creditors who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors are now to be paid the minimum amount mentioned in sub-section (2). Ms. Madhavi Divan is also correct in stating that the order of priority of payment of creditors mentioned in Section 53 is not engrafted in sub-section (2)(b) as amended. Section 53 is only referred to in order that a certain minimum figure be paid to different classes of operational and financial creditors. It is only for this purpose that Section 53(1) is to be looked at as it is clear that it is the commercial wisdom of the Committee of Creditors that is free to determine what amounts be paid to different classes and sub-classes of creditors in accordance with the provisions of the Code and the Regulations made thereunder.
xxx xxxxxx
145. Section 53 of the Code would be applicable only during liquidation and not at the stage of resolving insolvency is correct not in the context of priority of payment of creditors, but only to provide for a minimum payment to operational creditors. However, this again does not in any manner limit the Committee of Creditors from classifying creditors as financial or operational and as secured or unsecured. Full freedom and discretion has been given, as has been seen hereinabove, to the Committee of Creditors to so classify creditors and to pay secured creditors amounts which can be based upon the value of their security, which they would otherwise be able to realise outside the process of the Code, thereby stymying the corporate resolution process itself.
xxx xxxxxx
146. The other argument based upon serious conflict of interest between secured and unsecured financial creditors, as the majority may get together to ride roughshod over the minority, is an argument which flies in the face of the majority of financial creditors being given complete discretion over feasibility and viability of resolution plans, which includes the manner of distribution of debts that is contained in them, subject to following the provisions of the Code relating, inter alia, to dealing with the interests of all stakeholders including operational creditors. The Committee of Creditors does not act in any fiduciary capacity to any group of creditors, as it sought to be suggested by Shri Sibal. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors. It is important to note that the original threshold required by way of majority was 75%. It is during the working of the Code that this was found to be unrealistic and therefore reduced to 66% - see the amendments made to Section 28(3) and 30(4) of the Code by the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. For all these reasons therefore, it is not possible to accept Shri Sibal’s arguments”.
147. NCLAT Judgment which substitute its wisdom for the commercial wisdom of the Committee of Creditors.“xxxxxxx xxx must therefore be set-aside”.
Placing the above it was urged that this Tribunal cannot substitute its wisdom for the Committee of Creditors.
# 27. Ld. Sr. Counsel Mr. Joy Saha would strenuously urge that the analogy given in Para 72 of the Judgment militates against the arguments put forth by the Sr. Counsels for RP and SRA, the extract being herein under:
“72. This is the reason why Regulation 38(1-A) speaks of a resolution plan including a statement as to how it has dealt with the interests of all stakeholders, including operational creditors of the corporate debtor. Regulation 38(1) also states that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. If nothing is to be paid to operational creditors, the minimum, being liquidation value – which in most cases would amount to nil after secured creditors have been paid – would certainly not balance of interest of all stakeholders or maximise the value of assets of a corporate debtor if it becomes impossible to continue running its business as a going concern”.
# 28. Law is fairly well-settled that this Adjudicating Authority cannot substitute its wisdom for the CoC. But at the same time, we may not lose sight of the content of Para 88 which provides:
“88. The Appellate Tribunal has fallen into grave error.
xxx xxxxxx
The observation in para 77 cannot be read to mean that financial and operational creditors must be paid the same amounts in any resolution plan before it can pass muster. The amended Regulation 38 set out in para 77 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster”.
We would note that the reference is misplaced. The claim of the present application is not that it should be paid the same amount that stands allocated in favour of the OC, but that at least a minimum that could have been provided to a dissenting FC (given the fact that the applicant once in CoC was ousted on the ground of “related party” to CD and was thus not allowed to vote). Later the RP has considered it as an unsecured Financial Creditor, we would further note that 30(2)(b) envisages that the resolution plan should provide for “payment of debts of financial creditors, who do not vote in favour of the resolution plan” and as in Explanation I the distribution that “shall be fair & equitable to such creditors”.
In terms of the judgment in Essar Steel (Supra) a balance has to be struck of interest of all stakeholders, including related party financial creditor, or an unsecured financial creditor like the present applicant. There is nothing in the code that deprives them.
# 29. In a batch appeals starting with Dr.Periasamy Palani Gounder CA (AT) CH Ins 164/2021 in the matter of Dharani Finance Ltd. CA (AT) (CH) Ins. 176/2021,the RP had challenged the resolution plan,
“On the ground that the Resolution Plan is violative of the IBC and Article 14 of the Constitution”; “and there has been a material irregularity in the exercise of the powers by the RP, and the Appellant who is also an Operational Creditor has not been provided for”.
It was held as under:
(i) The Resolution Plan discriminates against the Appellant by providing no payment to it on the ground that it is a Related Party, even though the debt is admitted. The IBC does not permit discriminatory plans to be approved.
(ii) The Insolvency and Bankruptcy Code (Amendment) Act, 2019, does not provide for ‘related party to be classified separately for payments under the Resolution Plan.
(iii) Para 131 of the Supreme Court’s Judgment in Committee of Creditors of Essar Steel India Ltd. Satish Kumar Gupta (2020) 8 SCC 531 states explicitly that the Resolution Plan may consider different classes of creditors mentioned in Section 53 of the IBC. Accordingly, Section 53 does not treat related parties as separate creditors.
(iv) The law has to permit a distinction to be explicitly created, and this distinction should be based on intelligible criteria. The discrimination should have a nexus with the object sought to be achieved. In the present case, the IBC does not provide for a separate classification of Related Party for payments under the Resolution Plan. Such classification must still meet the test of reasonable nexus with the object to be achieved.
(v) The IBC treats related parties as a separate category for specified purposes, excluding them from CoC under Section 21 and disqualifying them from being Resolution Applicants under Section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose.
(vi) Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. In Phoenix ARC Private Limited w. Spade Financial Services Limited, 2013 SCC 475 the Hon’ble Supreme Court held that they are excluded from the CoC so that they do not impede and interfere with the Resolution Process. This rationale is achieved by excluding them from the CoC and submitting Resolution Plans. However, for payment under the Resolution Plan, there is no reason to treat them as a separate class.
(vii) Although in the 7th and 8th CoC Meetings, a certain amount was set apart for Related Parties in the final plan approved although in the next meeting, no amount is paid to the Related Party, and no discussion in the CoC for the same is recorded.
The NCLAT considered the arguments that,
A related party is prohibited from acting in any of the following capacities in a CIRP:
“That the underlying object is that the involvement of a related party in the CIRP in any capacity is seen as giving unfair benefit to the Corporate Debtor. In short, a related party is treated in the same class as the Corporate Debtor itself”.
After due consideration various pronouncement of Apex Court and other Hon’ble Courts, the Hon’ble NCLAT held in the batch cases as follows:
“183. Based on the discussion above, it is clear that IBC treats related parties as a separate category for specified purposes, excluding from the CoC under Section 21 and disqualifying them from being Resolution Applicants under Section 29A. However, the IBC does not treat Related Party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification.”
It also observed that:
“177. The Tribunal is a creature of statute, and by interpretation, it cannot dilute the statutory compliances”.
In the light of the above proposition, it would not be fair to suggest that only the left out operational creditors are eligible to agitate if their share is nil in the plan. The related party financial creditors who could have been in the CoC but have been deprived to vote, should not deserves NIL payment as a matter of course.
# 30. In M/s SP Enterprises vs. M/s Electrosteel Steels Limited &Ors. [Civil Appeal No. 1133 of 2019] Hon’ble Apex Court ordered as under:
Having heard learned counsel for all the parties, and given our most recent judgment in the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta &Ors. (Civil Appeal Nos. 8766-8767 of 2019) delivered on 15.11.2019, we send the matter back to the National Company Law Tribunal (hereinafter referred to as ‘NCLT’ for brevity) to decide this case in accordance with paragraphs 46 and 56 CIVIL APPAL NO. 1133 OF 2019 etc. of the said judgment so that the NCLT may then consider whether the matter should be sent back to the Committee of Creditors to balance the interests of all the stakeholders, and ask the Committee of Creditors to reconsider nil payment to all Operational Creditors as per the Resolution Plan submitted.
It will be open for the parties to argue before the NCLT that the amount that has been paid by the Resolution Applicant should not be enhanced and that the secured creditors should be asked to take a call on whether a further hair-cut needs to be ordered so that the Operational Creditors may also receive some proportion of debts owed to them.
We make it clear that all arguments will be open to all the parties to make before the NCLT which will be decided strictly in accordance with our latest judgment.
We make it clear that the implementation of the Resolution Plan is not stayed.
The civil appeals stand disposed of.
Thus, it is explicit that in the extent this Tribunal finds that a balance is not struck of interest of all stakeholders the matter (here resolution plan) can be sent back to the CoC to take a call.
31. In Hammond Power Solutions Private Limited vs. Sanjit Kumar Nayak and Others [2020 SCC OnLine NCLAT 199], Hon’ble NCLAT noted,
“13. It has been observed in Para – 80 and 81 of the Judgment as follows: -
“80. When it comes to the validity of the substitution of Section 30(2)(b) by Section 6 of the Amending Act of 2019, it is clear that the substituted Section 30(2)(b) gives operational creditors something more than was given earlier as it is the higher of the figures mentioned in sub-clauses (i) and (ii) of sub-clause (b) that is now to be paid as a minimum amount to operational creditors. The same goes for the latter part of sub-clause (b) which refers to dissentient financial creditors. Mrs. Madhavi Divan is correct in her argument that Section 30(2)(b) is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a certain minimum amount, the minimum in the case of operational creditors being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable. As a matter of fact, pre-amendment, secured financial creditors may cramdown unsecured financial creditors who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors. Section 53 is only referred to in order that a certain minimum figure be paid to different classes of operational and financial creditors. It is only for this purpose that Section 53(1) is to be looked at as it is clear that it is the commercial wisdom of the Committee of Creditors that is free to determine what amounts be paid to different classes and sub-classes of creditors in accordance with the provisions of the Code and the Regulations made thereunder.
15. If the above minutes are perused, it can be hardly said that there are any reasons given by the Committee to demonstrate that it has taken care of interest of all stakeholders. Para 46 – of the Judgment in the matter of “Essar Steel” requires to see “the reasons given by the Committee of Creditors while approving a resolution plan” from point of view stated in the paragraph. The reasons for giving NIL to Operational Creditors is not reflected from record. We have already reproduced portion from Part B – Financial Proposal with regard to what the approved Resolution Plan states regarding dues to the Operational Creditors. The proposal is based on the assessment that there is no liquidation value due to Operational Creditors. Although it is not stated but there is reason to doubt that the Resolution Applicants were aware of the liquidation value. There is no dispute that so many of the Operational Creditors have been left high and dry giving them nil amount which Hon’ble Supreme Court has observed that giving NIL to Operational Creditors “would certainly not balance the interest of all stakeholders or maximise the value of assets of the Corporate Debtor if it becomes impossible to continue running its business as a going concern.” (emphasis added)
# 32. What we infer from the foregoing discussions is that:
(i) The IBC treats related parties as a separate category for specified purpose so that they are excluded from the CoC and are as such not able to impede and interfere with the resolution process. (Section 21) and are disqualified from being resolution Applicants [Section 29(A)].
(ii) However, there is nothing to show that Section 53 treats them as a different class and excludes them altogether from the ambit of its reach.
(iii) None of the provisions whether its Regulation 38(1-A) (supra) or the Section 30(2) of IBC specifically negates the claim of a related party financial creditor who is not allowed a place in the CoC and is hence not allowed to vote.
(iv) Admittedly, the RP has treated the applicant as an unsecured financial creditor, and in terms of the distribution of assets under Section 53, the financial debts of an unsecured creditor ranks at fourth place.
# 33. We are given to understand that the admitted claim of all the stakeholders is 628.30 crores. The amount proposed by SRA is 180 crores. While the commercial wisdom of CoC is paramount, we are of the opinion that a balance is required to be struck among all the stakeholders.
# 34. In the aforesaid backdrop, to ensure fairness qua all the stakeholders, we deem it appropriate to send the resolution plan back to the CoC to review the distribution so as to balance the interest of all stakeholders as required in section 30(2) – Explanation 1, and see that a provision can be made for payment to the applicant from the proceeds.
# 35. The CoC will be at liberty to consider any other proposal including that of resolution applicant in IA 187/KB/2023 on the basis of its viability, feasibility and merits. IA (IB) No. 1381/KB/2022 shall be put back on board for considering along with the revised distribution, if any.
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