No Provision In IBC Mandates Treatment Of Unrelated Party At Par With Related Party: NCLAT Principal Bench, New Delhi

Background Facts

Jayant Kumar Panja, ex-employee of Fort Gloster Industries Limited (“Corporate Debtor”) initiated CIRP on account of default in payment of Rs.1,13,946/- towards his gratuity. Bijay Murmuria (New Interim Resolution Professional (IRP)) was appointed replacing the old IRP. An application was filed by the Resolution Professional for the approval of Resolution Plan of Fort Gloster Industries Ltd. which was approved. West Coast Paper Mills Ltd. (“Appellant”) submitted that an amount of Rs. 7,15,41,918/- was paid by them on behalf of Corporate Debtor to KDCC Bank Ltd., due to default by the Corporate Debtor and Corporate Guarantee Bond executed by the Appellant. The Appellant filed its claim amounting to Rs. 89,20,02,003.54/- after the initiation of CIRP against the Corporate Debtor.

It was contended by the Appellant that he should be treated on par with other Financial Creditors and should be eligible for equal pro rata distribution as per Resolution Plan. It was submitted that he has been equated with equity shareholders rather than being treated on par with unrelated Secured Financial Creditors. It was also argued that Resolution Plan is contrary to the provision of IBC and is liable to be rejected.

It was contended by the respondent that a resolution plan can provide for differential payment to different classes of creditors. It was further argued that the appellant cannot seek payment under the resolution plan in parity with secured financial creditors. It was submitted that the appellant is a related party of Corporate Debtor and unsecured Financial Creditor.

NCLAT Verdict

It was observed by the tribunal that the resolution plan reflecting the status of Appellant as related party unsecured financial creditor has been approved by the CoC and Adjudicating Authority. So, the appellant has not been treated as equivalent to equity shareholder. Further, NIL amount has been given to the appellants on account of them being related parties.

It was observed that the appellant who is an unsecured financial creditor and related party to Corporate Debtor does not fall in that category as per IBC. It relied on M.K. Rajagopalan Vs. Dr. Periasamy Palani Gounder & Anr where it was held that there was no provision of IBC, which mandates that the related party should be paid in parity with unrelated party. It was also observed that “Any prohibition of differential payment to different class of creditors in the resolution plan is ultimately, subject to the commercial wisdom of CoC and no fault can be attached to the resolution plan merely for not making provisions for a related party, so long as provision of the IBC and CIRP regulations are met.”

It was held that the Committee of Creditors and Adjudicating Authority were well within their rights not to treat a related party unsecured creditor on par with secured financial creditors.

With the aforesaid observation, the appeal was dismissed.

Case: West Coast Paper Mills Ltd. vs Bijay Murmuria & Ors.

Case No. Company Appeal (AT) (Ins.) No. 1272 of 2019

Counsels for the Appellant Mr. Sidharth Sharma, Mr. Arjun Asthana, Advocates.

Counsels for the Respondents Mr. Anand Varma, Mr. Ayush Gupta, Advocates for RP/R1. Mr. Shaunak Mitra, Mr. Anil Agarwalla, Ms. Neha Sharma, Advocates for R-3/SRA.

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