On 14 November 2018, the National Company Law Appellate Tribunal (NCLAT) pronounced its ruling in the case of Rajputana Properties Pvt. Ltd. v Ultratech Cement Ltd. & Ors. along with other connected matters, upholding the revised resolution plan submitted by UltraTech Cement Limited (UltraTech) for Binani Cements Limited (Binani Cements). Vide the said order, the resolution plan submitted...
On 14 November 2018, the National Company Law Appellate Tribunal (NCLAT) pronounced its ruling in the case of Rajputana Properties Pvt. Ltd. v Ultratech Cement Ltd. & Ors. along with other connected matters, upholding the revised resolution plan submitted by UltraTech Cement Limited (UltraTech) for Binani Cements Limited (Binani Cements). Vide the said order, the resolution plan submitted by the rival contender viz Dalmia Bharat led Rajputana Properties Private Limited (Rajputana), was held by the NCLAT to be 'discriminatory' in nature. Soon thereafter, Rajputana Properties approached the Supreme Court of India (Supreme Court) challenging the NCLAT verdict. On 19 November 2018, the Supreme Court rejected the said challenge and upheld the order passed by the NCLAT, as warranting no interference. While the Supreme Court order has now sealed Rajputana's fate as far as its quest for Binani Cements is concerned, the spotlight is now back on the judgment passed by the NCLAT and its possible implications for pending and future corporate insolvency resolution process (CIRP) cases under the Insolvency and Bankruptcy Code, 2016 (IBC).
Brief Background
Pursuant to an invitation by the Resolution Professional (RP), various resolution plans for Binani Cements (which was undergoing CIRP) were submitted, including by Rajputana and UltraTech. Based on the evaluation matrix, Rajputana was declared H1 on 27 February 2018. On 08 March 2018, UltraTech submitted a substantially improved offer, which the Committee of Creditors (COC) of Binani Cements refused to consider. Instead, the COC approved the resolution plan of Rajputana on 14 March 2018.
When the RP filed an application with the National Company Law Tribunal, Kolkata (NCLT) for approval of the Rajputana plan, applications were filed by various stakeholders, raising various issues, including discriminatory treatment of certain financial creditors and operational creditors and alleged lack of transparency in the process. Applications were also filed by UltraTech, questioning the process and seeking directions to the RP/COC for consideration of its revised offer.
On 02 May 2018, NCLT passed a detailed order, inter alia, rejecting the Rajputana plan as being 'discriminatory' and directed the COC to consider the revised offer and plan of UltraTech, along with other revised offers, if any. The matter reached the NCLAT and eventually, the Supreme Court. On 02 July 2018, the Supreme Court directed that all points, including those pending before NCLT be decided by the NCLAT expeditiously.
Meanwhile, the COC in its meeting held on 28 May 2018 considered and approved the revised plan of UltraTech by 100% voting shares, which was then placed by the RP before the NCLAT for appropriate orders under IBC. UltraTech's plan provided for 100% payment to all financial and operational creditors (except to related parties).
Key Takeaways from the NCLAT Ruling:
- Objectives of the IBC: According to the NCLAT, the objectives of the IBC are first, resolution; second, maximisation of value of assets of the Corporate Debtor for all creditors (and not maximisation for a 'stakeholder' or 'a set of stakeholders'); and third, promoting entrepreneurship, availability of credit and balancing the interests. This order of objectives is "sacrosanct".
- Role of Financial Creditors as COC Members: The NCLAT observed that the IBC aims at promoting availability of credit, which comes from both - financial creditors and operational creditors – and both kinds of credits need to be on a 'level playing field'. Further, there should be balancing of interests of and value maximisation for all stakeholders. One or a set of stakeholders cannot benefit unduly at the cost of another. Following conclusions were drawn by the NCLAT:
Ø Liabilities of all creditors who are not part of COC must also be met in the resolution;
Ø Financial creditors can modify the terms of existing liabilities, while other creditors cannot take risk of postponing payment for better future prospects i.e. while financial creditors can take haircut and recover their dues in future, operational creditors need to be paid immediately;
Ø A creditor cannot maximise his own interests in view of moratorium;
Ø If one type of credit is given preferential treatment, the other type of credit will disappear from market, which will be against the objective of promoting availability of credit;
Ø IBC aims to balance the interests of all stakeholders and does not maximise value for financial creditors;
Ø Therefore, the dues of operational creditors must get at least similar treatment as compared to the dues of financial creditors.
- Resolution Plan: A resolution plan is distinguishable from 'Sale', 'Auction', 'Recovery' and 'Liquidation'. In the context of sale and auction, NCLAT held that no one is selling or buying the Corporate Debtor through a resolution plan and if it were a sale, one could put it on a trading platform and give it to whoever pays the highest price. The feasibility and viability of a resolution plan are not amenable to bidding and auction. It requires application of mind by the financial creditors who understand the business well.
- Discrimination in a Plan: The NCLAT held that a plan which is discriminatory against one or the other financial creditor or operational creditor can be held against IBC and made following observations while discussing the issue:
Ø IBC or the underlying Regulations do not prescribe differential treatment between similarly situated 'operational creditors' or 'financial creditors' on one or other grounds.
Ø Dissenting financial creditors cannot be discriminated against assenting financial creditors.
Ø Section 53 of the IBC (which prescribes distribution waterfall on liquidation), including explanation given therein, cannot be relied upon while approving a resolution plan.
Ø Discrimination cannot also be made between the Resolution Applicants.
Ø If the operational creditors are ignored and provided with 'liquidation value' on the basis of "misplaced notion and misreading" of Section 30(2)(b) of the IBC, then no operational creditor will supply goods or services on credit to any Corporate Debtor. Therefore, it is necessary to balance the financial creditors and the operational creditors.
- On process and timelines: A question also came up as to whether UltraTech's revised plan could be considered as it was submitted after the deadline mentioned in the process document issued by the RP. The NCLAT held that Section 25(2)(h) of the IBC provides for invitation for resolution plans. The submission of a revised offer is in continuation of a resolution plan already submitted and accepted by the RP. All resolution plans which meet the requirements of Section 30(2) of the IBC are required to be placed before the COC and there is no time limit except that the CIRP should be completed within the stipulated period of 180 days (extendable up to 270 days).
- Settlement Proposal: CIRP of a Corporate Debtor cannot be set aside merely because a promoter wants to pay all dues. Setting aside of CIRP is possible only if some illegality is shown or for lack of jurisdiction or for some other valid reason. In this regard, the NCLAT also noted and discussed Regulation 12A of the CIRP Regulations.
Applying the aforesaid principles to the facts of the case, the NCLAT and held as under:
- COC discriminated between Rajputana and UltraTech in as much as the revised proposal of UltraTech was not considered at all. UltraTech's offer having been submitted within time on 12 February 2018, it was open to the COC to take note of its revised offer on 08 March 2018. While the COC considered Rajputana's revised offer on 07 March 2018, it refused to consider the revised offer submitted by UltraTech on 08 March 2018 i.e. much prior to the decision of the COC on 14 March 2018, despite the same being compliant with Section 30(2) of the IBC.
- While approving the Rajputana plan, the COC failed to safeguard and balance the interest of all stakeholders of the Corporate Debtor and also ignored that the revised plan of UltraTech had taken care of maximization of assets of the Corporate Debtor.
- Rajputana plan discriminated some of the financial creditors who are equally situated and not balanced other stakeholders, such as operational creditors. It was noticed that while some financial creditors were paid 100% (of verified debt) on the basis that they have direct exposure to the Corporate Debtor, the other financial creditors (who were beneficiaries of guarantees provided by the Corporate Debtor) were being paid differential percentages. Amongst such guarantee beneficiaries, certain guarantee beneficiaries were paid 100%, while others were paid lesser amount. As regards, operational creditors, varying percentages were paid depending on the amount of debt. Further, unrelated parties were being paid certain percentage of their verified claims while related parties were not being paid any amount.
Upon being satisfied that the UltraTech plan met the requirements of IBC, NCLAT approved the plan and remitted the matter to the NCLT for constitution of monitoring committee and implementation of the plan.
Implications:
The principles emerging from the NCLAT ruling, particularly those relating to non-discrimination and balanced treatment of all stakeholders, are likely to have far-reaching implications on both pending and future CIRPs. NCLAT has held that differential treatment between similarly situated 'operational creditors' or 'financial creditors' cannot be made. Now the questions that are left open are:
- Can discrimination be made between secured and unsecured financial creditors? The issue here is that the distinction between secured and unsecured creditors arises from the fact that secured creditors are placed higher on the distribution waterfall under Section 53 of the IBC. However, the NCLAT has also held that Section 53 is not applicable to resolution. Therefore, can a distinction still be made between them on the basis that they are not similarly situated, despite non-application of Section 53?
- Can discrimination be made between creditors that are related to corporate debtor and creditors that are not related? The NCLAT notes that the Rajputana plan proposes nil payment to related operational creditors and 35% to non-related operational creditors. However, even the Ultratech plan provides for 100% payment to non-related operational creditors and nil payment to related operational creditors. However, the NCLAT does not comment on this aspect of the Ultratech plan.
- Can discrimination be made between financial creditors and operational creditors? NCLAT ruling talks of balancing of interests between financial and operational creditors and states that IBC is not meant for maximisation of interests of financial creditors alone. However, assuming the resolution applicant has balanced these interests by providing some payment to the operational creditors, does the percentage of amount to be paid to them need to be at least the same as being paid to the financial creditors? In this context, the statement in the NCLAT order that "dues of operational creditors must get at least similar treatment as compared to the dues of financial creditors" is significant. If the statement is interpreted to mean that operational creditors need to be paid at least the same percentage as financial creditors, this may go against Section 30 (2) of the IBC which pegs the minimum value to be paid to the operational creditors to liquidation value due to them (which in most cases will be nil). As opposed to Section 30 (2), the NCLAT appears to be pegging the minimum value to be paid to operational creditors to "at least similar treatment as compared to the dues of financial creditors".
- Who is to decide if the interests of the stakeholders have been balanced? At various places in the order, NCLAT has observed that the COC failed to consider the interests of other stakeholders. The question here is whether the NCLT and NCLAT will sit in judgment over COC's consideration of interest of all stakeholders. Further, would this not leave the plan open to challenges from various stakeholders, particularly operational creditors, who would rush to NCLT claiming they have not been paid sufficiently under the plan?
In addition to the discrimination issue, on process vs maximisation, NCLAT gave weightage to maximization and held that UltraTech's revised plan should be considered by COC even if process document did not permit such consideration. It will be interesting to see how this principle plays out in the context of revised CIRP Regulations which, for CIRPs commencing after 4 July 2018, prescribe a timeline for each of the steps to be undertaken for inviting and considering the resolution plans. A question which is likely to arise is whether in a particular case, in the interest of maximisation, can the timelines in CIRP Regulations be ignored, provided the overall timeline of 180 (or 270) days is met.
NCLAT has also observed that CIRP is not a sale or auction of the Corporate Debtor to the highest bidder and that feasibility and viability of a resolution plan requires application of mind by the financial creditors. Hence, another interesting issue open for debate is whether open auctions/ bidding can be undertaken now to evaluate resolution plans.
It will indeed be interesting to watch how this NCLAT ruling plays out going forward.