NCLAT Says Dissenting Financial Creditors Cannot Be Discriminated Against [Read Judgment]

Ringing a bell of caution for all future resolution plans under the IB Code, the Hon'ble NCLAT has reiterated that resolution plans must not discriminate between similarly situated creditors, and must conform to the requirements of the amended Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("IBBI Regulation").

In the present case, CIRP had been initiated against M/s Rave Scan Private Limited ("Corporate Debtor"), under Section 10 of the IB Code, 2016. The revised Resolution Plan, submitted by the successful Resolution Applicant, was approved by a majority vote of 78.55% of the CoC. Subsequently, the Hon'ble NCLT, Principal Bench, at New Delhi, gave its approval to the Resolution Plan, vide the impugned order dated 17.10.2018.

Aggrieved by the approval, Hero Fincorp Limited ("the Appellant"), a Secured Financial Creditor of the Corporate Debtor, challenged the approved plan as discriminatory on the ground that other 'Secured Financial Creditors' have been provided with higher percentage of their claim amount, whereas the Appellant has been allowed lesser percentage of its admitted claim.

The Appellant, who had dissented with the approved Resolution Plan, was identified by the Resolution Applicant as a 'Secured Financial Creditor' and placed in the category of 'Secured NBFCs' with two other NBFCs. While the approved Resolution Plan provided for payments of 75.63% and 51.37% of the respective admitted claim amounts to the other two 'Secured NBFCs', it only made provision for payment of 32.34% of the admitted claim to the Appellant. Pertinently, three others 'Secured Public Sector Banks' were provisioned to be paid 45% of their respective admitted claim amounts.

Upon perusal of the approved Resolution Plan, the Hon'ble NCLAT noted that the Appellant had dissented with the plan and which plan appeared to have been prepared in accordance with the old un-amended Regulation 38, as it stood, prior to the amendment of 05.10.2018. It referred to its earlier decisions in the cases of "Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. and Ors. – Company Appeal (AT) (Insolvency) No. 526 of 2018" and "Binani Industries Limited v. Bank of Baroda & Anr. – Company Appeal (AT) (Insolvency) No. 82 of 2018 etc." wherein, the un-amended Regulation 38 was held to be discriminatory on the ground that it discriminates between the same set of groups of creditors.

The Hon'ble NCLAT noted that pursuant to the above decisions, Regulation 38 was amended on 05.10.2018 to, inter alia, delete the sub-clause providing for payment of liquidation value to dissenting Financial Creditors.

It further noted that the un-amended Regulation 38 and the post amendment Regulation 38 (as amended on 05.10.2018) fell for consideration of the Hon'ble Supreme Court in the case of "Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. – 2019 SCC Online SC 73", wherein it gave a seal of approval to the amended Regulation 38 by observing that the amended Regulation strengthens the rights of creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors' rights, together with priority in payment over financial creditors.

The Hon'bl NCLAT rejected the submission that as per Section 30(2)(b)(ii) of the IB Code, the 'Resolution Plan' allows differential treatment of 'Financial Creditors', who do not vote in favour of the resolution plan.

Ultimately, the Hon'ble NCLAT observed that the Adjudicating Authority passed the impugned order after failing to notice that no 'Resolution Plan' can be approved discriminating the dissenting 'Financial Creditor' in terms of the post-amended Regulation 38. Accordingly, the approved Resolution Plan was held to be violative of Section 30(2)(e), being discriminatory between similarly situated 'Secured Creditors'.

However, it granted time to the successful Resolution Applicant to modify the approved Resolution Plan to make payment of 45% of the admitted claims to the Appellant within 30 days, failing which the plan would be set aside.

Appellants were represented by Dr. UK Chaudhary, Sr. Adv., instructed by Advocates Pulkit Deora, Sylvine Sarmah and Dhruv Gupta.