Under Section 30(2)(b), Operational Creditor Can't Be Paid Through Partly Paid 'Redeemable Preference Shares': NCLAT Delhi

BACKGROUND FACTS

Television Home Shopping Network Limited (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT.

Gupta Textiles (“Appellant/Operational Creditor”) is an Operational Creditor of the Corporate Debtor. The Appellant filed its claim in Form-B for Rs.1,41,16,647/-, which was admitted to the extent of Rs. 1,24,73,281/- by the Resolution Professional.

The Centre for Economic and Social Inclusion Pvt. Ltd. (“Financial Creditor”) was the sole member of Committee of Creditors (“CoC”).

The resolution plan submitted jointly by Goblin India Limited and M/S Khandwala Finstock Pvt Ltd. (Successful Resolution Applicants/SRA) was approved by the CoC with 100% votes. The liquidation value of Corporate Debtor is Rs.5.74 lakhs and Resolution Plan of SRA is valued at Rs.9.05 Crores.

The resolution plan proposed to pay the Operational Creditor a sum of Rs.35.3 Lakhs as against an admitted claim of Rs.16.3 Crores, i.e. 2.16% of admitted claim as a cash payment. The plan proposed that operational creditors can subscribe for partly paid redeemable preference shares of the Corporate Debtor.

The admitted claim of sole Financial Creditor for Rs. 19.6 Lakhs has been paid in full. The Government dues have been admitted at notional amount of Rs.1 for each department. An amount of Rs. 15 Lakhs has been earmarked for statutory dues. Therefore, the balance amount offered in the Resolution Plan was to be distributed as per Section 30(2)(b)(ii) of IBC.

On 09.11.2023, the NCLT approved the Resolution Plan of the SRA. The Appellant filed an appeal before NCLAT against the order dated 09.11.2023. The Appellant argued that the resolution plan is violative of Section 30 (2)(b) of IBC as regards the Operational Creditors.

RELEVANT LAW

Section 30(2)(b) of IBC

“30(2)(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-

(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.”

NCLAT VERDICT

Section 30(2)(b) of IBC provides that Operational Creditor has to be paid the higher amount out of amount provided in the event of liquidation or approval of resolution plan. The liquidation value of Corporate Debtor is Rs.5.74 lakhs and Resolution Plan of SRA is valued at Rs.9.05 Crores.

It was observed that since the resolution plan is valued higher than the liquidation value, the Operational Creditors have to be paid as per Section 30(2)(b)(ii) i.e. on resolution plan value.

Reliance was placed on the Supreme Court judgment in Jaypee Kenisington Boulevard Apartments Welfare Association & Ors. v NBCC & Ors, (2022) 1 SCC 401, wherein it was held that Operational Creditors are to be paid in priority over Financial Creditors only by cash and not by issuing of equity.

The Bench opined that when the plan amount is distributed as per Section 30(2)(b)(ii) and Section 53(1), then the balance amount (after excluding amount payable to Financial Creditor and Government departments) was to be distributed on pro-rata basis to the Operational Creditors. However, the Operational Creditors have been given merely 2.16% of admitted dues as cash and alongside redeemable preference shares have been offered for the remaining amount as per Section 30(2)(b) of IBC.

It was opined that distribution of amount to Operational Creditors is incompliant of Section 30(2)(b)(ii) of IBC. The Bench has directed the SRA to distribute the balance amount under Resolution Plan to Operational Creditors on pro rata basis, as per Section 30(2)(b)(ii) and priority under Section 53(1) of IBC.

“To save the approval of Resolution Plan in its entirely, we direct that Resolution Applicant shall distribute the Resolution Plan amount to the Operational Creditor on pro-rata basis as per Section 30, sub-section (2) (b) (ii) and as per priority under Section 53(1), i.e., by distributing the balance amount under the Resolution Plan in priority to the Financial Creditor as per priority under Section 53(1).”

It has been held that in case the SRA fails to comply with Section 30(2)(b)(ii) then the plan would be treated as disapproved. The Bench partially modified the NCLT order and disposed of the appeal.

Case title: Gupta Textiles v Darshan Patel & Ors.

Case No.: Company Appeal (AT) (Insolvency) No. 408 of 2024

Counsel for Appellant: Mr. Nipun Gautam, Advocate.

Counsel for Respondents: Mr. Navin Pahwa, Sr. Advocate with Mr. Karan Valecha, Advocates for SRA/R-2.

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