NCLT Mumbai: Profits During CIRP Be Allocated To Financial Creditors When RFRP And Resolution Plan Are Silent On Such Allocation

Background Facts:

On 01.10.2019, Cicil Biochem Private Limited (Corporate Debtor) was admitted into CIRP. During this process, the Committee of Creditors (CoC) agreed to allow Shri Ganesh Enterprises to utilize the facilities of the Corporate Debtor under a job work arrangement, paying a monthly compensation of Rs. 5.5 Lakhs plus GST and actual electricity expenses. This arrangement aimed to reduce CIRP costs and sustain the Corporate Debtor as a viable entity.

On 06.03.2021, the CoC approved the Resolution Plan, the CoC approved Resolution Plan, but it was noted that the compensation paid by Shri Ganesh Enterprises exceeded the total CIRP costs. This raised concerns about the utilization of the excess funds once the Resolution Plan was approved. As neither the Resolution Plan nor the request for it addressed this issue, the Respondent, based on legal advice, suggested that these funds should go to the Resolution Applicant.

In response, Kalyan Janata Sahakari Bank Ltd. and Thane Bharat Sahakari Bank Ltd (Applicants), the Financial Creditors of the Corporate Debtor, filed an application asserting that any profits earned during the CIRP should belong to them. Moreover, they seek a directive regarding the distribution of profits accrued during the CIRP period and the withdrawal of the Resolution Professional's (Respondent) letter dated 01.02.2023 which outlined the utilization/distribution of these profits.

NCLT Verdict:

The NCLT Mumbai allowed the application and held that the profits accrued during the CIRP be allocated to the Financial Creditors when the RFRP and the Resolution Plan are silent on the allocation of profits.

The Tribunal noted that no dispute existed in the letting out of facilities to Shri Ganesh Enterprises during the CIRP period, resulting in compensation that substantially exceeded the total CIRP costs, amounting to approximately Rs. 77 lakhs. It also noted that Both the RFRP and the approved Resolution Plan do not address the allocation of profits earned during the CIRP.

NCLT relied on the Supreme Court decision in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta to address the issue relating to the distribution of profits earned during the CIRP period, it observed that Supreme wherein it was held that the profits made during the CIRP shall be distributed as per the provisions of RFRP and has also been reiterated by NCLAT in its decision of JSW Steel Ltd. vs Mahender Kumar Khandelwal & Ors. However, it observed that neither of the decisions decide upon the allocation of profits earned during CIRP when the RFRP and the Resolution Plan do not address the allocation of profits.

The Tribunal also relied upon the findings of the Report of the Insolvency Law Committee dated 20.02.2020 and pointed out that the said report is also silent on the beneficiary of such profits. It noted that the committee identified two main perspectives on how these profits should be distributed:

First was that the profits should generally go to the creditors of the corporate debtor, considering that they often face unpaid interest on their debts and may incur losses due to the company's decreased valuation during the insolvency period by taking haircuts. Second is that the operating profits earned during the CIRP must belong to the company itself and should remain with the company since when a resolution applicant takes over the company, these factors such as profits as part of the company's value are also acquired by them.

Thus, the Committee concluded that the law must be flexible in determining whether the creditors or the resolution applicant should benefit from the operating profits. It recommended that the Resolution Plan should specify how these profits or losses are to be managed or distributed, suggesting the inclusion of a definite provision to address this issue.

NCLT, in the absence of RFRP and Resolution Plan, relied upon the commercial intent of the CoC and observed that the Resolution Plan includes a provision for an overall cap on the total financial outlay to protect the interests of secured financial creditors, ensuring that any surplus within this cap is passed on to them if CIRP expenses are lower than expected. Additionally, the Resolution Applicant intends to acquire the Corporate Debtor's receivables only post approval from the NCLT.

It emphasized that though the Applicant's commercial considerations are outlined in the Plan, CoC's approval does not signify the commercial settlement of debts, as remedies against guarantors and recoveries from avoidable transactions remain open. Moreover, the decision to vote in favor of a resolution plan or accept it is more akin to a mandatory choice between resolving the company or liquidating it, involving significant sacrifices by stakeholders.

In conclusion, NCLT observed that the income generated during the CIRP period originates from funds provided by Financial Creditors without any return, such as interest. Thus, it is deemed just and equitable to allocate surplus profits from the CIRP period to the Financial Creditors, aligning with the Resolution Plan's provision that receivables will be transferred to the Resolution Applicant only after plan approval.

Case Title: Kalyan Janata Sahakari Bank Ltd. & Anr. vs. Arun Kapoor, Resolution Professional of CICIL Biochem Private Limited

Case No.: IA No. 2300/2023 in C.P. (IB) No. 4676/MB/2018

Counsel for Applicant: Counsel, Devashish Godbole a/w Omakr Kanegaonkar, Anuj Joglekar

Counsel for Respondent: Counsel, Arjun Sathees

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