NCLAT Urges Central Government And IBBI To Consider Legislative Change For Payment To Operational Creditor Under Resolution Plan

The bench also raised its concerns towards nil and almost negligible payment to operational creditors under the resolution plan.

Damodar valley corporation (Damodar Valley) approached the NCLAT against the order dated 08.10.2021 of NCLT Kolkata wherein NCLT approved the resolution plan of Dimension Steel and Alloys (Dimension Steel).

Brief Facts

Dimension steel entered into a Power Purchase agreement dated 30.11.2012 with Damodar valley for supply of electricity. Dimension Steel defaulted on electricity dues and the power supply was disconnected by Damodar Valley on 07.06.2019.

Subsequently, Corporate Insolvency Resolution Process (CIRP) was initiated against Dimension Steel by NCLT on 18.10.2019 and accordingly, Damodar valley filed its claim of INR 36.35 Crores before the Resolution Professional.

COC approved the resolution plan submitted by CP Ispat private limited with 80.93% voting which was subsequently approved by NCLT however only an amount of INR 7.45 lakhs was paid to Damodar valley under the Resolution Plan as against its claim of INR 36.35 Crores.

Arguments Of Appellant

It was contended on behalf of the Appellant that the resolution plan does not comply with the provisions of Section 30(2) of the Code as no fair and equitable treatment is accorded to the operational creditor under the resolution plan.

Arguments Of Respondent

It was contended on behalf of the respondent that there is no violation of any provision of the code as the distribution under the plan is the commercial wisdom of COC and cannot be interfered by NCLT.

Decision/Analysis By NCLAT

After hearing the parties, NCLAT framed a question of law I.e.,

"Whether the Resolution Plan is in accordance with Section 30, sub-section (2), sub-clause (b) and the distribution to the Appellant – Operational Creditor is fair and equitable?"

NCLAT observed that the Appellant is specifically agitating that the payment to the operational creditors under the resolution plan is not fair and equitable. NCLT further noted that the Hon'ble Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd. versus Satish Kumar Gupta and Ors. already laid down that the minimum value that is required to be paid to Operational Creditors is set out in Section 30(2)(b) and further held that amended Regulation 38 of CIRP does not lead to the conclusion that Financial Creditor and Operational Creditor must be paid the same amount percentage wise.

However, the NCLAT noted that in the present case, the Financial Creditors have provided much higher amount that the operational creditors which is as follows;

NCLAT held that;

"26. Law being now settled that mere fact that Operational Creditors and Financial Creditors are not paid same amount and same percentage, cannot be said to be inequitable. It is settled that the Code and the Regulations does not contemplates that there could be equal treatment to all creditors. Hon'ble Supreme Court has held in paragraph 77 in Essar Steel that equitable treatment of creditors is equitable treatment only within the same class. We, thus, do not find any substance in the submission that Resolution Plan violates Section 30, sub-section (2)(b) of the Code."

NCLAT further noted that question of payment and distribution to creditors had been raised again and again. The Insolvency Law Committee Report, 2018 deliberated upon the same and decided that there is no requirement of any amendment to the existing scheme of Code.

However, NCLAT raised a concern that;

"We are consistently receiving the Plans, where Operational Creditors either not paid any amount towards their claim or paid negligible amount, sometime even less than 1%. In the present case, the Operational Creditors have been given only miniscule of their admitted claim to the extent of only 0.19%."

Thereafter, NCLAT noted that time has come to reconsider the payment mechanism to operational creditors under the Resolution plan and urged the Central Government and IBBI to find out if there is any ground to reconsider the legislative change towards payment to the operational creditors under the resolution plan.

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