Since the inception of the Insolvency and Bankruptcy Code, 2016 (‘Code’), numerous amendments have been carried out to plug the loopholes or uncertainties in the Code. In such a vein, section 30(4) of the Code was amended on 6 August, 2019, which states as follows:
(4) The committee of creditors may approve a resolution plan by a vote of not less than [sixty-six] per cent. 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 creditor] and such other requirements as may be specified by the Board:
[emphasis added]
Regulation 39(4) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) requires submission of Form H, being the Compliance Certificate from the resolution professional of the corporate debtor giving details of amount to be paid to secured, unsecured and dissenting financial creditors under the resolution plan. However, there is no distinction in the category of secured creditors in terms of security held by the secured creditor(s).
Having said that, this may lead to disputes amongst the secured creditors regarding the amount to be received in terms of the approved resolution plan. As there is no distinction amongst the secured creditors with regards to the security held by them, the same may lead to disputes amongst the secured creditors, as the approved resolution plan may remit more funds to a secured creditor having less security interest but high voting share in CoC and less funds to a secured creditor having high security interest but less voting share in CoC.
This post tries to touch upon the subject of distinction amongst the secured creditors in terms of the security held by them, towards proportionate distribution of proceeds from the resolution plan and probable dispute pertaining to the same.
Understanding the issue at hand
For sake of better clarity, it might be useful to set out an example:
| Sl. No. | Name of the financial creditor | % of votes in Committee of Creditors | Security in possession |
| 1. | ABC Bank | 40% | 30% |
| 2. | DEF Bank | 35% | 10% |
| 3. | GHI Bank | 25% | 50% |
It is evident from the aforesaid table that both ABC Bank and DEF Bank jointly hold 75% voting share in the CoC in comparison to GHI Bank holding 25%. However, the security held by GHI Bank is higher than the combined proportion of ABC Bank and DEF Bank.
Further, one may assume that the approved resolution plan brings in an amount of Rs. 100 to be distributed to the secured financial creditors in terms of section 53 of the Code. The approval of resolution plan requires 66% of votes in favor from the plan, which is approved if ABC Bank and DEF Bank vote in positively. It is pertinent to note here that the security in possession of GHI Bank is much higher than the combined security interest held by ABC Bank and DEF Bank. GHI Bank also receives much less of an amount i.e., Rs 25, despite having highest security in its favor.
There can be a state of confusion amongst the secured creditors considering that the creditor having high security may have to settle for a lower amount owing to the fact that they have low voting share in the CoC. Therefore, it would imply that the financial institution having higher security would receive less or equivalent amount in comparison to other members of the CoC having less security interest over the assets of the corporate debtor.
Further, according to the provisions of the Code, even if the said financial institution dissents against the resolution plan and the said resolution plan is nevertheless approved, the dissenting institution shall be paid at least the liquidation value of the corporate debtor. The same in turn hampers the interest of the said creditors as the sole reason for dissenting to the resolution plan could be due to the security interest held by such institution. On the contrary, if the remaining members of the CoC approve the resolution plan, the same may lead to the dissenting members receiving even lower amounts.
In this regard, the National Company Law Appellate Tribunal (‘NCLAT’) in India Resurgence ARC Private Limited v. Amit Metalikshas dismissed the appeal filed by one such dissenting secured creditor stating that the amendment to section 30(4) of the Code requires the consideration of the value of security interest of a secured creditor while reviewing the viability or feasibility of a plan. Since the viability and feasibility of a resolution plan has to be considered by the CoC, hence judicial intervention therein is not warranted.
Background of the case
The corporate insolvency resolution process (‘CIRP’) of VSP Udyog Limited (‘corporate debtor’) was initiated before the National Company Law Tribunal (‘NCLT’), Kolkata Bench by way of an order dated 7 October 2019. However, the resolution plan submitted by Amit Metaliks Limited was approved by 95.35% votes of the CoC. The said plan was then put for approval before the NCLT, Kolkata Bench which was eventually approved on 20 October 2020.
Being aggrieved by the said order of the NCLT, one of the dissenting secured financial creditors, i.e., India Resurgence ARC Private Limited, filed an appeal before the NCLAT challenging the order of approval of the resolution plan by the NCLT, primarily on the ground that India Resurgence held security interest of around Rs. 12 crores and, out of its admitted debt of Rs. 13 crores, India Resurgence was offered around Rs. 2 crores, which goes against the interests of all the stakeholders of the Corporate Debtor.
The NCLAT, however, rejected the said appeal on the ground that approval or rejection of a resolution plan is a subject of commercial wisdom of the CoC itself and, hence, judicial intervention should not be sought for when the CoC has either rejected or approved a plan in terms of their commercial wisdom.
Whether disputes amongst the CoC can be subjected to judicial intervention?
However, this judgement in question gives rise to following event wherein:
- the member of the CoC having high voting percentage but less security interest may approve the plan, and
- through the same plan a member of the CoC having less voting share but high security interest, despite dissenting, ought to abide by the terms of the said approved plan.
Further, the amendment to section 30(2) of the Code was also discussed by the Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, wherein the Court stated that the amendment has worked in favor of the operational creditors and dissentient financial creditors. Along with the same, the Court also held that the commercial wisdom of the CoC will be deciding factor qua the amount to be paid to different class and sub-class of creditors. Therefore, it is clear that the member of the CoC holding majority of voting share in the CoC, irrespective of the security interest held by them, will be the major decision takers of the CIRP of the corporate debtor.
The Supreme Court also states that the relevant word is “may” as mentioned in section 30(4), the relevant excerpt of the section is as follows:
(4) The committee of creditors may approve a resolution plan by a vote of not less than 3[sixty-six] per cent. 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 creditor and such other requirements as may be specified by the Board:
xxx
[emphasis added]
It is relevant to note that the Supreme Court has held that the word ‘may’ gives a direction to the CoC for considering the approval or rejection of a resolution plan on the ground of viability or feasibility of the plan qua each class of creditors. It may not be wrong in interpreting this as if the members of the CoC will utilize this according to their own choice of commercial wisdom, i.e., the decision(s) that benefits them individually since the said judgement supports idea that the distribution of proceeds only acts as a guiding factor and not mandatory. Therefore, it may be incorrect to expect that the members of the CoC work towards having a common vision for the corporate debtor.
Hence, it can be interpreted in the example set out earlier that ABC Bank and DEF Bank may choose to approve or reject the plan basis the amount it receives through the said plan. On the other hand, if GHI Bank, which has a high security interest but less voting share, dissents, it will have to accept the amount as mentioned in the approved resolution plan or the liquidation value, whichever is higher.
This interpretation leads to a certain amount of disgruntlement amongst the secured creditors having high security interest but less voting share in the CoC, as they are bound to go by the decision(s) of the member of the CoC holding majority voting share in the CoC. On the contrary, the Bankruptcy Law Reforms Committee, 2015 (‘BLRC Report’) is referred to in the judgement pronounced by the Supreme Court, the relevant excerpts of which are as follows:
3.4.2 Principles driving the design
IV. The Code will ensure a collective process.
9. The law must ensure that all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution.
V. The Code will respect the rights of all creditors equally.
xxx
It is evident that the judgement of the Court is contradictory in the sense that the BLRC Report envisages the involvement of all the creditors and desires to safeguard the interest of all the creditors. However, the judgement covers the interests of the members of the CoC having majority voting share irrespective of the security interest held by them.
Therefore, it can be conveniently construed that the judgement of the Supreme Court fails to be synchronous with the object of the Code as compared to the object mentioned in the BLRC Report. As the judgement only hinges around the fact that the commercial wisdom of the CoC cannot be a subject of a judicial review, the rights of all the secured creditors in that case are not rightly protected.
Conclusion
In view of the said state of affairs, it may not be wrong to hold that the commercial wisdom of the CoC will hold sway over the individual interests of the secured creditors who may have dissented against the resolution plan in comparison to the security interest held by them and the remittance of funds by way of the resolution plan.
Despite having dissented against the resolution plan and the said resolution plan having been approved by the majority of the members of the CoC, the law laid out clearly indicates that the dissenting creditor(s) shall be paid at least the liquidation value. Hence, the situation of a secured creditor having high security interest but lesser voting share in the CoC is in a much worse position that the other members of the CoC holding high voting shares in the CoC but lesser security interest. Therefore, the same goes totally against the object of the Code as envisaged in the BLRC Report and fails to protect the rights of a secured creditors.
Once the company is into liquidation, the said secured creditor may choose to either relinquish its security interest to the liquidation estate in terms of section 52(1)(a) of the Code or realise its security interest according to section 52(1)(b). However, no such facility is provided to the secured creditors while the corporate insolvency resolution process is ongoing. Hence, it is pertinent that disputes amongst the same class of creditors be addressed through the amendments bought out by the Insolvency and Bankruptcy Board of India or through judgements of the adjudicatory authorities.
– Rohit Sharma