[Ashish Rana is an Advocate on Record in the Supreme Court of India]
The Insolvency and Bankruptcy Code, 2016 (‘I&B Code’) provides for resolution of insolvency of persons in a time bound manner along with the maximisation of value of such person’s assets, to promote entrepreneurship, availability of credit and to balance the interests of all stakeholders. Under the I&B Code, upon occurrence of default in payment, the financial creditors, operational creditors and corporate debtor can each individually approach the adjudicating authority for admitting the corporate debtor into the corporate insolvency resolution process (‘CIRP’). Once admitted, an interim resolution professional (‘IRP’) is appointed who, after collation of financial data, constitutes a committee of creditors (‘COC’) comprising financial creditors. The resolution professional thereafter proceeds to prepare an information memorandum and call for resolution plans from resolution applicants for resolution of insolvency under the guidance and approval of the COC.
In the past two years of implementation of the I&B Code, it has come to attention that in resolution plans the maximum return or repayment of money was provided for financial creditors whereas nil or minimum payment was provided for the operational creditors. Interestingly, the I&B Code does not provide for operational creditors to be a part of the COC. The only involvement of the operational creditors is provided under section 24(3)(c) wherein a notice of the COC is also to be provided to the operational creditors or their representatives if the amount of their aggregate dues is not less than 10% of the debt. Despite providing for such participation by virtue of law and judicial precedents, various classes of financial creditors and operational creditors are discriminated against, with the resolution plan heavily loaded in favour of the financial creditors having voting power in the COC and to the prejudice of the operational creditors.
Binani Industries Limited vs. Bank of Baroda & Another
The National Company Law Appellate Tribunal (‘NCLAT’) has dealt with a similar issue in Binani Industries Limited vs. Bank of Baroda & Another, wherein the COC approved a resolution plan which provided for differential payment to the secured financial creditors and unsecured financial creditors and the operational creditors as below:
FINANCIAL TERMS OF RESOLUTION PLAN OF RPPL
|S.NO.||PARTICULARS||VOTING SHARE||VERIFIED CLAIM (IN Rs. Crores)||PROPOSED PAYMENT (IN Rs. Crores)||PERCENTAGE|
|1.||Insolvency Resolution Process Costs||N.A.||114.08||114.08||100%|
|FINANCIAL CREDITORS WITH DIRECT EXPOSURE TO CORPORATE DEBTOR|
|3.||Edelweiss Asset Reconstruction Company||42.9%||2775.82||2775.82||100%|
|4.||IDBI Bank Limited||5.2%||335.85||335.85||100%|
|5.||Bank of Baroda||6.6%||427.69||427.69||100%|
|7.||Bank of India||1.5%||94.66||94.66||100%|
|8.||State Bank of India||0.6%||36.89||36.89||100%|
|FINANCIAL CREDITORS TO WHOM CORPORATE DEBTOR WAS A GUARANTOR|
|9.||IDBI Bank Limited (Dubai Branch)||24.2%||1567||1567||100%|
|10||Export-Import Bank of India||9.6%||620||450||72.59%|
|11.||State Bank of India (Hong Kong)||0.6%||37||3.7||10%|
|12.||Bank of Baroda||2.7%||172||172||100%|
|13.||State Bank of India (Bahrain)||0.4%||25||25||100%|
|OPERATIONAL CREDITORS (OTHER THAN WORKMEN)|
|18.||Equity/Working Capital Infusion||N.A.||N.A.||350||N.A.|
The said differential payments were challenged by the unsecured financial creditors and the operational creditors separately on the ground of discrimination being meted out to the creditors based on their voting share when no such discrimination is provided in the I&B Code. The NCLAT, while laying down the law on this issue, held that the objective of the I&B Code is resolution and its purpose is for the maximisation of the value of assets of the corporate debtor and thereby for all the creditors. It is not the maximisation of value for a ‘stakeholder’ or a ‘set of stakeholders’ such as creditors and is to promote entrepreneurship, availability of credit and balance the interests. The judgement holds that under I& B Code, the following order of objectives is sacrosanct:
(ii) maximisation of value of assets of the corporate debtor, and
(iii) promoting entrepreneurship, availability of credit and balancing the interests.
The judgment, further relying upon the report of the Bankruptcy Law Reform Committee (BLRC), and the aforesaid objectives held as follows:
(i) The liabilities of all creditors who are not part of the COC must also be met in the resolution.
(ii) The financial creditors can modify the terms of the existing liabilities, while other creditors cannot take the risk of postponing payment for better future prospectus. That is, financial creditors can take a haircut and can take their dues in future, while operational creditors need to be paid immediately.
(iii) A creditor cannot maximise its own interests in view of the moratorium.
(iv) If one type of credit is given preferential treatment, the other types of credit will disappear from market. This will be against the objective of promoting the availability of credit.
(v) The I&B Code aims to balance the interests of all stakeholders and does not maximise value for financial creditors.
(vi) Therefore, the dues of operational creditors must get at least similar treatment as compared to the due of the financial creditors.
The judgment also notes that a resolution plan is a plan for insolvency resolution of the corporate debtor as a going concern. It does not spell out the shape, colour and texture of resolution plan, which is left to the imagination of stakeholders. It is held that the I&B Code or the Regulations framed by the Insolvency and Bankruptcy Board of India (‘IBBI’) do not prescribe differential treatment between the similarly situated operational creditors or financial creditors on any ground.
The appeal preferred by the Binani Industries Limited before the Supreme Court of India in Rajputana Properties Private Limited v. Ultratech Cements Limited was dismissed by the Supreme Court without any detailed discussion. The Court the following order:
Having perused the judgments of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) and after hearing learned counsel for all the parties, we are of the opinion that there is no infirmity in the order passed by the NCLAT. The appeal is accordingly dismissed. Pending applications stand disposed of.
Resultantly, the NCLAT judgment and findings with respect to purpose of the I&B Code and discrimination between financial and operational creditors have attained finality for the time being.
The finding of the NCLAT that the dues of creditors of operational creditors must get at least similar treatment as compared to the due of financial creditors’\ cannot be applied as a straight jacket formula to all cases. The fact that cannot be ignored is that that the said judgment in the Binani case was passed in a peculiar situation where a competing resolution applicant has offered 100% payment to the operational and financial creditors as against the COC-approved resolution applicant who has discriminated against the operational and unsecured creditors. Since the Supreme Court has dismissed the appeal with limited orders, it cannot be said with certainty that this issue has been settled.
In fact, according to the I&B Code, it is the prerogative of the resolution applicant to propose a resolution plan to resolve the insolvency of the corporate debtor. On the contrary, the the Binani judgment, by providing equal treatment to the dues of the creditors, has curtailed the free hand given to the resolution applicant to resolve the insolvency of the corporate debtor. The I&B Code is silent on how and in what manner a resolution plan has to be framed and drafted. However, regulation 37 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 does provide some insight. According to this provision, a resolution plan may provide for insolvency resolution of the corporate debtor for maximisation of value of its assets, including but not limited to:
(a) transfer of all or part of the assets of the corporate debtor to one or more persons;
(b) sale of all or part of the assets whether subject to any security interest or not;
(c) the substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or more persons;
(d) cancellation or delisting of any shares of the corporate debtor, if applicable;
(e) satisfaction or modification of security interests;
(f) curing or waiving of any breach of the terms of any debt due from the corporate debtor;
(g) reduction in the amount payable to the creditors;
(h) extension of maturity date or a change in interest rate or other terms of a debt due form the corporate debtor;
(i) amendment of the constitutional documents of the corporate debtor;
(j) issuance of the securities of the corporate debtor for cash, property, securities or in exchange of claims or interests or other appropriate purpose;
(k) change in technology used by the corporate debtor; and
(l) obtaining necessary approval from the central and state government and other authorities.
Therefore, a resolution applicant may propose to resolve the insolvency based on any of the aforesaid actions or measures and this does not necessarily merit equal or similar treatment to the debts of the operational creditor or the financial creditors. In this regard, attention is invited for the long title of the I&B which provides that the insolvency process shall provide for ‘balance of interests of all stakeholders’. Therefore, so long as a resolution plan balances the interests of all the stakeholders, which may or may not include equal or similar treatment of dues of the financial and operational creditors, the same cannot bad in law. Overall, the Binani judgment does provide a ray of hope to operational creditors and is step in right direction, although it will still take a while for the law to settle this issue and offer the require clarity.
– Ashish Rana