Dhiraj Yadav, 4th Year Law Student, Dr. Ram Manohar Lohiya National Law University, Lucknow; and
Urvashi Gattani, 3rd year Law Student, ILS, Pune
Insolvency and Bankruptcy Code, 2016 has been severely tested since its enactment. However, constructive interpretation by the judiciary coupled with effective amendments to the Code has flooded the gates with teething issues.
In the instant case, Corporate Insolvency Resolution Process was initiated against ‘Essar Steel India Limited (“Corporate Debtor”), and pursuant to which the Committee of Creditors (“CoC”) approved the Resolution Plan submitted by ArcelorMittal India Pvt. Ltd.(‘Successful Resolution Applicant’) which was adjudged by NCLT, Ahmedabad Bench with certain modifications by the impugned order dated 8th March 2019. The successful resolution applicant in its resolution plan made the following categorisation:
(i) Secured Financial Creditors (having a charge on project assets of the ‘Corporate Debtor’);
(ii) Secured Financial Creditors (having no charge on project assets of the ‘Corporate Debtor’);
(iii) Unsecured Financial Creditors (with admitted claims less than Rs.10, 00,000);
(iv) Unsecured Financial Creditors (with admitted claims equal to or above Rs. 10, 00,000).
(i) Operational Creditors (workmen and employees);
(ii)The Operational Creditors (other than workmen and employees), but admitted claim amount is less than Rs. 1 Crore and
(iii) The Operational Creditors (whose admitted claim is equal to or more than Rs. 1 Crore).
According to the resolution plan, the first two categories of the operational creditors were proposed to be paid 100% of their dues, but the rest of the Operational Creditors whose claim admitted is Rs. 1 Crore or more, have been proposed with NIL amount i.e. 0% (zero per cent).
However, pursuant to this bifurcation numbers of appeals were preferred by the Operational Creditors and the Financial Creditors, on similar ground. These appeals were clubbed together to answer the question of law involved. The grievances of the Operational Creditors have been that in the resolution plan 0% of their debt has been proposed to be paid and claims of some of the Operational Creditors have been notionally assessed at Re. 1/- (average) by the ‘Resolution Professional’ without any basis.
Standard Chartered Bank (SCB) being one of the Financial Creditors, alleged that they were not equated with other Financial Creditors. All the Financial Creditors have been allowed 91.99% of their claim amount, whereas the claim of SCB has been categorised as-
- ‘Secured Financial Creditors’ (having a charge on project assets of the Corporate Debtor) ─ in respect of claim amount of Rs. 3,487.10 Crores and SCB has been shown as Secured Financial Creditors but it has not been allowed 91.99% of the claim amount as allowed in favour of other Financial Creditors. SCB has been provided with 1.74% of the claim amount on the ground that it has no charge on project assets of the Corporate Debtor.
- Unsecured Financial Creditors in respect of claim amount of Rs. 70.34 Crore has been allowed 4.08% of the claim amount.
The following Questions of Law arising from this appeal and the earlier preferred appeals have been answered by the Hon’ble NCLAT in this pertinent case:
- Whether the distribution as shown in the ‘Resolution Plan is discriminatory and can the Financial Creditors be classified on the ground of a Secured Financial Creditor having charge on project assets of the Corporate Debtor and Secured Financial Creditor having no charge on the project asset of the Corporate Debtor or on the ground that the Financial Creditor is an Unsecured Financial Creditor?
Financial Creditors being Claimants at par with other Claimants like other Financial Creditors and the Operational Creditors having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other Financial Creditors and minimum or ‘NIL’ amount in favour of some other Financial Creditors or the Operational Creditors. This violates Section 30 (2) and Regulation 38 (1A).
There is also discrimination made by CoC in the distribution of the proposed amount to Operational Creditors qua the Financial Creditors. The distribution is discriminatory and arbitrary. Classification of Financial Creditors is also discriminatory.
Therefore, Appellate Tribunal observed that as per the definition of the creditor in the Code, it includes a ‘Financial Creditor’, an ‘Operational Creditor’, a ‘Secured Creditor’, an ‘Unsecured Creditor’ and a decree-holder. Also as per the definition of Financial Creditor and Financial Debt (Section 5 (7)& (8), there is no distinction made between one or other ‘Financial Creditor’. All of such person form one class i.e. ‘Financial Creditor’ they cannot be sub-classified as ‘Secured’ or ‘Unsecured Financial Creditor’ for the purpose of preparation of the ‘Resolution Plan’.
- Whether the Operational Creditors can be validly classified on the ground of:
- employees of the Corporate Debtor
- those who have ‘supplied goods’ and ‘rendered services’ to the ‘Corporate Debtor’ and
- the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the Local Authorities?
The Hon’ble Appellate Tribunal held that the Operational Creditors can be classified for determining the manner in which the amount is to be distributed to them, they are to be given the same treatment if similarly situated.
Thus the classification of Operational Creditors in the Resolution Plan is upheld and not discriminatory as the Operational Creditors whose claim is more than Rs. 1 Crore or the ‘Central Government’ or the ‘State Government’ or the ‘Local Authority’, who raise their claim on the basis of the statutory dues, cannot ask for same treatment as allowed in favour of the Operational Creditors like employees or those who have ‘supplied goods’ and ‘rendered services’ having claim less than Rs.1 Crore, are provided with 100% dues of their claim amount.
- Whether the ‘Committee of Creditors’ can delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiation with the ‘Resolution Applicant’ for revision of plan and is it empowered to distribute the amount amongst the ‘Financial Creditors’ and the ‘Operational Creditors’ and other Creditors?
A ‘Sub-Committee or ‘Core Committee’ is unknown and against the provisions of the IBC. There is no provision under IBC which permits constitution of a ‘Core Committee’ or ‘Sub-Committee’ nor the IBC or Regulations empowers the ‘Committee of Creditors’ to delegate the duties of the ‘Committee of Creditors’ to such ‘Core Committee’/ ‘Sub-Committee’.
Therefore, the Committee of Creditors’ cannot delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiating with the ‘Resolution Applicant(s)’. The manner of distribution of amount among various stakeholders is the exclusive domain of the Resolution Applicant.
The said provision makes it clear that the ‘Resolution Applicant’ in its ‘Resolution Plan’ must provide the amount it proposes to pay one or other Creditors, including the ‘Operational Creditors’ and the ‘Financial Creditors’ that means if the ‘Resolution Plan’ does not show the distribution amongst the ‘Financial Creditors’ and the ‘Operational Creditors’, it cannot be placed before the ‘Committee of Creditors’.
The Insolvency and Bankruptcy Code,2016 is experiencing a seesaw of judgments where time and again rights of Financial and Operational Creditors rights have been determined. As per this judgment following the precedents set up in the case of Binani Judgments and in Swiss Ribbons Financial and Operational Creditors have been treated at par. Amount earned during the process by the company, where the Resolution Applicant is not paying full, the profits have been given to the creditors – financial and operational. It has also serious relevance where the resolution plan has been approved and accepted by the lender whether the said lender has any rights left against the principal borrower under the guarantee or otherwise This judgment will have a far-reaching impact in the future when the law of precedent will be referred to.
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