Priority and Value of Security Interest Cannot be a Ground for Challenge of Resolution Plan

[Anugya Mukati and Kirti Dhoke are undergraduate students at the National Law Institute University, Bhopal]

The Supreme Court of India in a recent judgment in the matter of India Resurgence Arc Private Limited v. Amit Metaliks Limited, held that a Resolution Plan that has been approved under the Insolvency and Bankruptcy Code ( “the Code”) cannot be challenged by a dissenting financial creditor on the ground that he is entitled to a higher amount based on the value of security interest.

Background of the Dispute

The adjudicating authority, National Company Law Tribunal, Kolkata Bench, admitted the application for initiation of corporate insolvency resolution process by operational creditor against the corporate debtor (V.S.P. Udyog Private Limited).

The resolution plan proposed by Amit Metaliks Ltd. (Respondent No.1) was approved by the committee of creditors (“CoC”) with 95.35% voting shares. Consequently, the resolution professional applied for approval of the resolution plan, and by order dated 20 October 2020, the adjudicating authority approved the same. The order was challenged in an appeal before the National Company Law Appellate Tribunal, New Delhi by India Resurgence ARC Pvt. Ltd. (appellant) – the dissenting secured financial creditor having a vote share of 3.94% and a CoC member, but the appeal was rejected. Therefore, this present appeal was brought up.

The main ground of challenge is that the valuation of the security interest held by India Resurgence ARC Pvt. Ltd. in its resolution plan was approximately Rs. 12 crores which was not considered. Thus the approved resolution plan failed to regard the interests of all the stakeholders including India Resurgence ARC Pvt. Ltd. who was offered a meagre amount of slightly over Rs. 2 crores.

India Resurgence ARC Pvt. Ltd. contended that the purpose of the amendment of section 30(4) of the Code has been overlooked since the amendment was to ensure that the manner of distribution follows the order of priority among creditors, including the priority and value of security interest of a secured creditor which the unamended section failed to do so. To assert the importance of considering the value and quality of security, reliance was placed on the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta (“Essar Steel Case”).

Amit Metaliks Ltd contended that the correct interpretation of section 30(4) of the Code as amended is already given in the Essar Steel Case, wherein it was held that while exercising its discretion, the CoC may look into the considerations including different priorities and values of security interests only as a guideline in arriving at a business decision for acceptance or rejection of a resolution plan. This discretion is beyond the purview of review in appeal under the Code.

Scope of Judicial Review of the Resolution Plan

The Court, while deliberating the ambit of judicial review as regards the process of consideration and approval of resolution plan, unequivocally established that approval of resolution plan substantially relates to commercial wisdom oftheCoCandconsequently establishes an exclusive domain of the CoC, thereby limiting the scope of judicial review of the adjudicating authority under section 31 and appellate authority under section 32 read with section 61 within the contours of section 30(2) of the Code. Placing reliance on the Essar Steel Case,the Court concluded that the extent of judicial review for resolution plan is restricted to taking into account the key parameters set out in the Code about the need of maximizing the value of assets, taking care of the interest of all the stakeholders and the need to continue the corporate debtor as a going concern. If all the parameters as to provisions of the Code and its regulations are duly taken into account by the CoC while approving a resolution plan, the scope of judicial review cannot be expanded to cover quantitative analysis for a dissatisfied stakeholder as every dissatisfaction cannot take a legal character under the Code.

Priority Among Secured Creditors Under Section 30(4) of the Code

Addressing the main contention of the appellant that the amendment to section 30(4) of the Code, by way of section 6(b) of the amending act of 2019, obligates the CoC to take into account priority and value of security interest of the secured creditor, the Court held that the appellate authority has correctly placed reliance on Essar Steel Case and observed that the word used in the section is “may” which establishes the flexibility afforded to the CoC to exercise commercial wisdom to arrive at business decisions and the amendment does not make it mandatory for the CoC to take into account the priority of secured interest and value of the security. The amendment merely specified the considerations that may be taken into account to aid the CoC in arriving at a viable and feasible resolution plan but the same cannot be purported to be a fetter on the exercise of commercial wisdom of the CoC. Consequently, such business decisions cannot be subject to judicial interference unless fair and equitable treatment is denied to creditors who belong to the same class and are similarly placed.

Treatment of Dissenting Financial Creditor under Section 30(2)(b)

Concerning the amount to be paid to the dissenting financial creditor per the second part of section 30(2)(b), as has been amended by section 6 of the amending Act of 2019, the Court relied on Essar Steel to observe that the main purpose of the amendment to section 30(2)(b) was to introduce a provision for payment of a certain amount to the dissenting stakeholders as the pre-amendment provision had enabled majority voters (66%) in favor of resolution plan to not provide any payment to the dissenting financial creditors. It was only for this purpose of payment of a certain amount in nature of liquidation value that a reference was made to section 53(1) of the Code. The Court concluded that reference to section 53 does not insert the order of priority in section 30(2)(b) as the CoC, exercising its commercial wisdom, is free to determine what amount should be paid to different classes and sub-classes of creditors. A dissenting financial creditor is not permitted to propose higher amount regarding the value of security interest.

The Court referred to Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd.. to observe that nowhere in the Code has it been laid down that a dissenting financial creditor would be entitled to recover or receive the value of the entirety of the security interest. Any such right would be unjust and inequitable to other creditors. Therefore, a dissenting financial creditor would only receive payments as per its entitlement, and this entitlement could also be satisfied by allowing it to enforce its security interest. However, the dissenting financial creditor would not be entitled to enforce the entire security interest, as the enforcement would always be subject to the extent of value receivable by the dissenting financial creditor under section 30(2)(b). 

The Court, therefore, rejected the appeal by observing that the amount receivable by the appellantunder the resolution plan was proportional and similar to the amount receivable by other secured financial creditors for their respective accepted claims.

Concluding Remarks

Through this judgment, the Court has once again reiterated the paramountcy of commercial wisdom of the CoC and limited the scope of judicial interference in such business decisions. By clarifying the position with regards to the value of security interest vis-a-vis claims of other stakeholders, the Court not only underscored the flexibility afforded to the CoC under section 30(4) but also emphasized the principle of equal treatment of equally placed creditors. Preferential treatment on the basis of value of security interest would ultimately lead to financial creditors opting to stand in dissent, thus favoring liquidation and defeating the purpose of the Code which aims for insolvency resolution and not the death of the corporate debtor.

– Anugya Mukati & Kirti Dhoke

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