An Analysis of the First Insolvency Resolution Scheme Under the Insolvency and Bankruptcy Code

[Guest post by Enakshi Jha, who is a graduate from NALSAR University of Law and is currently working at a corporate law firm in Mumbai]

Factual Matrix

In the present case, Synergies-Dooray Automotive Limited (“SDAL”) was the corporate debtor. Ms. Mamta Binani was appointed as the Resolution Professional and is the applicant in the present dispute and had filed an application against all the parties to the Corporate Insolvency Resolution Process (,i.e., corporate debtor and creditors). The present case arose for the approval of the resolution by the National Company Law Tribunal (“NCLT”), as it was approved by a meeting of the Committee of Creditors on 24 June 2017.

In the present case, insolvency proceedings were instituted under section 10 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) and Ms. Binani was appointed as the Interim Resolution Professional. On passage of 180 days (as stipulated under section 12 of the Code), she issued a public announcement calling for claims for creditors and thereafter constituted the Committee of Creditors (“CoC”). In the first meeting of the CoC, she was confirmed as the Resolution Professional. The list of CoC was finalised by Ms. Binani and it identifies the share of each debtor in the CoC (as provided in the table below).

Section 25 of the Code lists the duties of the Resolution Professional and, under section 25(2)(h), the Resolution Professional must invite all prospective lenders, investors and any other persons to put forth their Resolution Plans. While four participants expressed their interest, only three sent in a Resolution Plan. Thereafter, Ms. Binani filed an affidavit with the NCLT stating complete compliance with the Code. The NCLT noted the same and asked for expedition of this matter. Amongst the three Resolution Plans, the plan of Synergy Castings Ltd. (“SCL”) was selected by a vote of 90.16 % (majority) during the second CoC meeting. EARC abstained from voting in this meeting.

Under section 30(6) of the Code, Ms. Binani moved the Resolution Plan for approval under section 31(1) by the Adjudicatory Authority (viz., the NCLT). The total cost of this scheme was INR 5,408.21 lakhs and was to be paid by way of long term funds and accruals (sum of investments or interests) of SCL over a period of five years. A merger between SDAL and SCL was set to take place, and the state government exempted this merged entity from paying stamp duty. Further, existing tax dues were to be paid over five years without any interest. SCL also agreed to finance any shortfalls in making timely payments to the tax authorities or any other debtors and to induce funds for all other obligations under the Resolution Plan.

EARC’s Objection

Under section 30(2), Ms. Binani found the plan proposed by SCL to be compliant with the Code. Further, 75% of the financial creditors (90.16% share of CoC) had approved of the same under section 30(4) and it met all other conditions of the Code. It is at this juncture that EARC filed an objection against the Resolution Plan, stating that it is in violation of section 30(4), as EARC stated that MFL had been wrongly included as a financial creditor and was in fact a related party to SDAL. Hence, they questioned the constitution of the CoC that voted for SCL’s Resolution Plan. They also claimed that when they expressed this view to Ms. Binani, she stated that she did not have the power to question the validity of the documents submitted to her and could not enquire into any disputes between the creditors, while in fact section 30 imposes a duty on the Resolution Professional to examine the Plan and ensure it does not contravene any existing law and that is in congruence with the Code. Hence, they prayed for rejection of the present Resolution Plan and Ms. Binani’s application.

NCLT’s Decision

Section 30 of the Code provides for the role of the Resolution Professional on submission of a Resolution Plan. This includes an examination to ensure the Plan has provided for repayment of operational debts, such that it is not lesser than what they would receive if the debtor was liquidated, that must provide for the management of the corporate debtor after passage of the Plan and that the CoC must approve of such a plan by not less than 75% of their voting share in the CoC (refers to the financial creditors). Then, under section 31(1), if the Adjudicating Authority (viz, the NCLT) is satisfied that the plan meets the conditions of section 30, it will approve  the Resolution Plan, making it binding on the corporate debtor and its creditors, guarantors and any other stakeholders in the process, including employees. 

Now, section 25 of the Code lists the duties of the Resolution Professional and, under section 25(2)(h), the Resolution Professional must invite all prospective lenders, investors and any other persons to put forth their resolution plan. EARC refused to vote in the CoC meeting leading to selection of SCL by 90.16% majority. Hence, the NCLT held that the Resolution Plan was selected by a majority. Further, addressing concerns of MFP being a related party, the NCLT held that previous decisions of this Tribunal had addressed this contention and rejected the same.

Next, the NCLT analysed the Resolution Plan which included the following –

1. Amalgamation of SDAL and SCL;
2. Payment of Insolvency Process costs above other debts;
3. Payment to financial creditors along with interest over a period of 3 years;
4. Payment of statutory dues;
5. Payment to operational creditors;
6. Resolution Applicant (SCL) is the lessee of SDAL and will continue to use and operate the facilities of SDAL;
7. Lesser cash outage, as Resolution Applicant (SCL) is one of the major financial creditors of SDAL (since SCL has a 9.18% share of debts owed to the CoC, SCL is a major secured lender); and
8. Continued employment of SDAL’s workmen.

The NCLT reiterated that cash outage would be reduced as the Resolution Applicant is also a major financial creditor. Further, SDAL would also receive funds from MFL (its largest debtor), using which the existing debts can then be netted (set off) against the receivables coming from MFL. The NCLT then reiterated the benefits of the multiple strategic and financial synergies of the Resolution Plan, as the amalgamation of SDAL and SCL would benefit their aluminium alloy wheel manufacturing business. The Resolution Applicant’s (SCL) previous record of optimizing synergies and repaying the debtors has been seen in previous cases and the NCLT elucidated that more than 1500 families were dependant on this business, giving a reason for continuation of the business via amalgamation with the Resolution Applicant (SCL). Hence, the NCLT approved the Plan, as it met every legal and moral requirement.

Relevance of this Decision

The present decision from the Hyderabad Bench, approving the Resolution Plan, is the first order to be passed by the NCLT approving a resolution under the Code. Further, the approval of this plan allows for the amalgamation of related parties and it has been made keeping in mind the timeframes prescribed under the Code. It has also been a testament to the understanding that the Code is a collective remedy that can only succeed when all the creditors come together to recover their dues. In the present case, this was tested against section 30(4), which requires the CoC to approve a Resolution Plan by a vote of not less than 75% of the voting share of financial creditors. The NCLT has rightly focused on the optimization of synergies in the present case and simultaneously provided for future funding to the debts by allowing an amalgamation between SCL and SDAL. The larger impact of this decision (and the principles of the Code that have been upheld and celebrated by the NCLT)  lies not only in its effect on debt recovery in corporate India, but also in its ability to ensure a resolution of debt and revival of the corporate debtor, which will in turn act as an incentive to equity investments in Indian companies, including those that carry a heavy debt burden.

– Enakshi Jha