[Richa Saraf and Ananya Raghavendra are with Vinod Kothari Consultants Pvt Ltd]
The insolvency resolution process of Binani Cements has been through various twists and turns. On 19 November 2018, the Supreme Court in Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd. & Ors. dismissed Dalmia Bharat’s plea to seek a stay on Ultratech’s bid for Binani Cement, thereby upholding the UltraTech Cement’s bid for Binani Cement sale. Previously, on 14 November 2018, the National Company Law Appellate Tribunal (NCLAT) had also held UltraTech’s offer for Binani Cement as valid, stating that Dalmia Bharat’s offer was discriminatory against some creditors.
The primary question that arises out of the above is whether the courts or tribunals are allowed to intervene in the functions of the committee of creditors (CoC) and overturn their decisions relating to resolution plans. The UK Insolvency Act, 1986 provides for remedies in case the voluntary agreement is either unfairly prejudicial to the interests of creditors or there has been some material irregularity in relation to the relevant qualifying decision procedure. Despite the lack of a specific provision in the Insolvency and Bankruptcy Code, 2016 (the Code), the adjudicating authority has, in various cases, expanded the scope of its power under section 31 of the Code in examining resolution plans and, in a way, conferred remedies upon creditors whose interests have been affected. This post seeks to answer the question by analyzing the case in hand.
Facts of the Case
The NCLAT noted that Rajputana Properties Private Limited in its resolution plan had discriminated between some of the financial creditors who are equally situated and did not balance the interest of stakeholders such as operational creditors. The non-application of mind by the CoC and the discriminatory behaviour in approving the plan was apparent. The NCLAT held that the plan of Rajputana Properties was discriminatory and contrary to the scheme of the Code. It further held that if the resolution plan is shown to be discriminatory against any one or other financial creditor or operational creditor, such plan can be held to be against the provisions of the Code.
The NCLAT held that merely because a discriminatory plan has been placed before the CoC and has received their approval, it does not mean that it should be approved by the adjudicating authority, as the same will be against the basic object of maximization of the assets of the corporate debtor on one hand and the object of balancing the stakeholders on the other hand.
The two major issues considered by the NCLAT were as follows:
(i) whether CoC has discriminated between the eligible resolution applicants, while considering the resolution plan of Rajputana Properties; and
(ii) whether the resolution plan submitted by Rajputana Properties is discriminatory.
The NCLAT considered the financial terms of the plans to establish that the CoC has discriminated between the resolution applicants, which was evident from the fact that the proposal for negotiation and better bid offered by the Ultratech Cement were not at all considered. It also pointed out that the resolution professional (RP) as well as the CoC are duty bound to ensure the maximization of value within the time frame prescribed under the Code, and observed that the object in ascertaining a resolution applicant who can offer maximum amount so as to safeguard the interest of all stakeholders of the corporate debtor is lacking from the CoC.
Scope and Extent of Power Vested on the Adjudicating Authority
Earlier, in Bhaskara Agro Agencies v. Super Agri Seeds (23 July 2018), with respect to a plan rejected by the CoC, considering that the adjudicating authority cannot approve a plan unless approved by the requisite majority of CoC, the NCLAT held that the adjudicating authority cannot revisit the decision of CoC to determine the viability and feasibility of a resolution plan, and in Darshak Enterprise Pvt. Ltd. v. Chhaparia Industries Pvt Ltd (2 May 2018), the NCLAT held that in the absence of any discrimination or perverse decision, it is not open to the adjudicating authority or the NCLAT to modify the plan.
However, it failed to note that one of the conditions precedent to the approval of a plan by the adjudicating authority is its “satisfaction” that the resolution plan approved by the CoC meets the requirements of section 30(2) of the Code. This principle was applied by the Supreme Court in Arcelor Mittal India Private Limited v. Satish Kumar Gupta (4 October 2018), wherein it examined certain extracts of the resolution plan to ascertain the eligibility of the resolution applicant. The Court deliberated on the extent to which the adjudicating authority can exercise the power under the provisions of section 31, and the following observations were made:
– Once a plan is approved by the CoC, it is to be submitted to the adjudicating authority; and at that stage, a judicial mind is applied by the adjudicating authority who, after being satisfied that the plan meets (or does not meet) the requirements mentioned in section 30, may either approve or reject such plan.
– The adjudicating authority, acting quasi-judicially, can determine whether the resolution plan violates the provisions of any law, including section 29A of the Code, after hearing arguments from the resolution applicant as well as the CoC.
In Pratik Ramesh Chirana v. Trinity Auto Components Ltd (22 January 2018) as well, National Company Law Tribunal, Mumbai Bench interpreted the phrase “if the adjudicating authority is satisfied….” under section 31 and observed that “satisfaction” must be objective, subjective or both and, to form an opinion, a thorough study of a resolution plan is required.
(a) Objective Satisfaction: The objective satisfaction revolves around the object of enactment of the Code, enshrined in the preamble.
(b) Subjective Satisfaction: This depends upon logical analysis of the financial data supplied, where a methodical scrutiny of the financial statement is expected before concurring with approval of the CoC.
Again, in J.R. Agro Industries P Limited v. Swadisht Oils Pvt Ltd. (31 May 2018), it was observed that the pros and cons of the resolution plan must be studied and, if the tribunal approves the plan, it should record in writing its satisfaction in the judgement approving the resolution plan.
In jurisdictions like United Kingdom (UK) and the United States (US), there are provisions which provide remedies to creditors against unfair prejudice. Section 6 of the UK Insolvency Act, 1986 provides that an application can be filed by any aggrieved person on the following grounds:
1. That the voluntary arrangement unfairly prejudices the interests of a creditor, member or contributory of the company; and/ or
2. That there has been some material irregularity at or in relation to either the meeting of the company or in relation to the relevant qualifying decision procedure.
If the court is satisfied as to either of the grounds mentioned above, it may either revoke or suspend the decision approving the voluntary agreement or give directions to summon further meetings to consider any revised proposal or reconsider the original proposal.
In Daewoo Singapore Pte Ltd. v. CEL Tractors Pte Ltd.  SGCA 53, the Singapore Court of Appeal held:
After a scheme is accepted by the creditors, an objecting creditor can persuade the court to withhold its approval, or to approve it subject to such alternatives or conditions as it thinks fit. The objecting creditor would succeed if he can show that the creditors did not vote bona fide for the benefit of the creditors or the company as a whole, or that the scheme is not fair and reasonable.
The US courts follow a “cram down” test, wherein the court approves the plan over the objections of the creditors, if the plan does not discriminate unfairly and is “fair and equitable”. The principle requires that the plan meet certain standards of fairness and is in best interest of creditors. The court may confirm over a dissent if the members of the class are unimpaired. Section 1129(a) of the US Bankruptcy Code enumerates the requirements governing confirmation of a plan. The court is required to confirm a plan if and only if all of the following requirements are met:
(i) The plan complies with the applicable provisions of Chapter 11, governing contents of the plan; and
(ii) The plan has been proposed in good faith, and not by any means forbidden by law.
The criterion of unfair discrimination is not derived from the fair and equitable rule or from the best interests of creditors test; rather it preserves just treatment of a dissenting class from similarly placed class. However, different courts employ different tests in determining whether a plan is discriminates unfairly. In essence, a plan does not discriminate unfairly with respect to a dissenting class if the plan protects the legal rights of a class in a manner inconsistent with the treatment of other classes that hold similar rights. Again, no plan is approved if the principal purpose of the plan is the avoidance of taxes, or if the court determines that the plan is not feasible.
The case of Binani Cements clarified one aspects that the approval of the adjudicating authority is not a mere requirement or formality, although the adjudicating authority is not permitted to alter the terms of the plan. The ultimate authority to approve or reject a plan vests with the adjudicating authority, and for that it should consider the following aspects:
(i) whether the plan complies with the requirements of section 30(2) of the Code;
(ii) whether the plan is fair and equitable or there is any unjust discrimination not envisaged in law; and
(iii) whether the plan adheres to the object of the Code, i.e., maximises the value of assets and balances the interests of all the stakeholders.
Only if the aforesaid questions are answered in satisfactory, the plan is confirmed; if not the adjudicating authority may deny its confirmation.
– Richa Saraf & Ananya Raghavendra
Well written. The NCLT is not a resolution professional., it can approve or reject a plan cleared by the COC. for example if the COC differentiates between first charge holder and residual charge holder, though it is not specifically contemplated in the Code, and it is approved by the COC, the NCLT may approve it. But NCLT cannot create its own formula for resolution.