India: Supreme Court: Secured Creditor Cannot Insist On Receiving Higher Amount In The Resolution Plan Based On Value Of Security Interest

The Supreme Court of India, in its judgment in India Resurgence Arc Pvt. Ltd. v. M/S Amit Metaliks Ltd has held that the Secured Creditors cannot challenge Resolution Plan insisting that higher amount should be paid based on its Security Interest.

Facts of the Case: The Appellant, India Resurgence Arc Pvt. Ltd. filed an appeal against the NCLAT's order rejecting the appeal and upholding the decision of National Company Law Tribunal (NCLT), Kolkata approving the Resolution Plan in Corporate Insolvency Resolution Process (CIRP) as submitted by the Resolution Applicant.

As the appellant is the assignee of rights, title and interest of the Corporate Debtor having 3.94% of voting share of the Committee of Creditors (CoC), it expressed reservations on share being proposed and the value of security interest held by these shares and chose to remain the dissentient financial creditor. Substantial majority of other financial creditors voted in favour of the Resolution Plan which got approved by a total percentage of 95.35% of the voting shares. The NCLT expressed its complete satisfaction after examining the salient features and financial proposals of Resolution Plan and therefore approved the same by its order dated 20.10.2020.

Contention of Appellants: It was contended that the Resolution Plan failed the test of being “feasible and viable” as its security interest was not taken into consideration at the time of preparation of Resolution Plan by the Resolution Applicant and according to the amendment made in Section 30(4) as effective from 16.08.2019, the CoC has to ensure that the manner of distribution takes into account the order of priority amongst the creditors and shall also be the priority and value of the security interest of a creditor and therefore the CoC has acted against the said amendment.  

Decision of the NCLAT: The Appellate Authority (NCLAT) referred to the decision of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors¹  which held “the concept of equitable treatment of creditors, including the observations that equitable treatment of creditors meant equitable treatment only within the same class; and that protection of creditors in general was important but it was also imperative that the creditors be protected from each other”. The Appellate Authority made observations that Section 30(4) of the I&B Code provides that the Committee of Creditors may approve a Resolution Plan by a vote which shall not be less than 66% of voting share of Financial Creditors and on a plain reading of this provision it is clear that the considerations regarding feasibility and viability of the Resolution Plan, distribution proposed with reference to the priority amongst creditors as per statutory waterfall distribution mechanism including value of security interest of Secured Creditor are matters which fall within the exclusive domain of Committee of Creditors for consideration before deciding a plan. The decision of NCLT, Kolkata approving the resolution plan was upheld.

Decision of the Supreme Court: Unsatisfied with the order of the NCLAT, Delhi, the Appellant filed an appeal before the Supreme Court with the main contention that the CoC failed to consider the priority and value of security interest of the creditors under Section 30(4) of I&B Code. The total claim was of INR 13.38 crore, out of which the Appellant was offered a little amount of INR 2.026 crore without considering value of the security held by the Appellant having valuation of more than INR 12 crores. The Supreme Court dismissed the appeal and held that the requirements under Section 30 of I&B Code is dealing with process relating to submission of Resolution Plan, its contents, its consideration and approval by the Committee of Creditors and finally submission for approval from the Adjudicating Authority. The matter is of commercial wisdom of the CoC and scope of judicial review remains limited to four corners of Section 30(2) of I&B Code for the Adjudicating Authority. Once it is found that all the mandatory requirements have been duly complied with then the process of judicial review cannot be stretched to carry out quantitative analysis. Supreme Court observed that “the business decision taken in exercise of commercial wisdom of CoC does not call for interference unless creditors belonging to a class being similarly situated are denied fair and equitable treatment… It has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors.”

The extent of value to be received by the appellant is given out in the resolution plan i.e., a sum of INR 2.026 crore which is in the same proportion and percentage as provided to the other secured financial creditors with reference to their respective admitted claims. Hence, the repeated appeal on behalf of the appellant to value the security at INR 12 crores is inapt and the should be dismissed.

Conclusion: As it has been mentioned in the I&B Code that the Resolution Plan has to be feasible and viable, it shall also be proportionate and equal in the amount of ratio for creditors belonging to a class who are similarly situated. If the amount receivable by each creditor is decided only on the basis of value of the security interest leaving out other factors to be considered in making a resolution plan, it will become irrational and unjust may not lead towards resolution and maximization of value of assets of a Corporate Debtor. The Supreme Court has, therefore, rightly disregarded the plea of secured creditor insisting on higher amount in the resolution plan based on the value of security interest held by such secured creditor.

Footnote

1 (2020) 8 SCC 531

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