MISHRA AND S. RAVINDRA BHAT, JJ.] versus RAVE SCANS PVT. LTD. & ORS. on 8 November 2019

1. The resolution applicant (hereafter “the appellant”) is aggrievedby the decision of the National Company Law Appellate Board (hereafter“NCLAT”) in regard to its directions modifying a resolution plan acceptedby the adjudicating authority (i.e. National Company Law Tribunal,hereafter “NCLT” or “the adjudicating authority”). The CorporateInsolvency Resolution Process (CIRP) was initiated against M/s. RaveScans Private Limited (hereafter the “Corporate Debtor”) under Section10 of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”for short). The revised resolution plan submitted by the appellant wasapproved by the NCLT on 17th October, 2018. The second respondent,M/s Hero Fincorp Ltd. (hereafter the “Financial Creditor” or “Hero”)appealed against the NCLT’s order on grounds of discrimination betweenfinancial creditors, which resulted in the NCLAT modifying the NCLT’sfinal order. The question urged by the appellant is whether the findingthat the financial creditor was discriminated against, leading the NCLATto modify the adjudicating authority’s directions, and consequentlyimposing greater financial burdens on the resolution applicant, is justifiedin the circumstances.

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A2. The facts of the case are as follows. The CIRP was initiatedon 25[th] January, 2017 against the Corporate Debtor under Section 10 ofthe IBC. The appellant was the resolution applicant of the CorporateDebtor, whose liquidation value was ascertained as 36 crores. Againstthe said amount, the appellant offered 54 crores to revive the CorporateDebtor in terms of the resolution plan. The resolution plan was thenBrevised and the revised resolution plan submitted by the appellant wasapproved by the adjudicating authority, i.e., the Principal Bench of theNCLT. This resolution plan was challenged before the NCLAT by thesecond respondent in the present appeal, Hero Fincorp Ltd. as beingdiscriminatory. Discrimination was alleged on the ground that the securedCfinancial creditors were provided with a higher percentage of their claimamounts; however, Hero had been allowed a lesser percentage of itsadmitted claim. Hero, who had dissented with the resolution plan, hadbeen provided with 32.34% of its admitted claim, whereas other financialcreditors had been provided with 45% of their admitted claims. Theremarks column in the resolution plan showed that the plan was basedDon ‘Maintained liquidation value (LV) under Regulation 38 of theInsolvency and Bankruptcy Board of India (Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016. The reference hereinwas to the unamended Regulation 38, pertaining to the mandatory contentsof a resolution plan.E

3. The NCLAT in its impugned order which set aside the NCLT’sdirections and required the appellant to increase the liquidation value ofthe offer to Hero, relied on Central Bank of India v. ResolutionProfessional of the Sirpur Paper Mills Ltd. & Ors., Company Appeal(AT) (Insolvency) No. 526 of 2018 and Binani Industries Ltd. v. BankFof Baroda & Anr., Company Appeal (AT) (Insolvency) No. 82 of 2018,and noticed that Regulation 38 had been held to be discriminatory inthese cases. Accordingly, an amendment was made on 5[th] October, 2018,and the provision in Regulation 38(1)(c) on liquidation value payable tofinancial creditors was deleted. The amended regulation was alsoconsidered by the Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v.GUnion of India, 2019 SCC Online SC 73, which noticed that theamendment strengthens the rights of operational creditors by statutorilyincorporating the principle of fair and equitable dealing of operationalcreditors’ rights, together with priority in payment over financial creditors.Swiss Ribbons (supra) also observed that the NCLAT, while lookingHinto the viability and feasibility of resolution plans approved by the committee of creditors, has always gone into the question of whetheroperational creditors are given roughly the same treatment as financialcreditors, and if not, such plans have been rejected or modified so thatthe rights of operational creditors are safeguarded.

4. The order approving the resolution plan, which was impugnedbefore the NCLAT was passed by the adjudicating authority on17[th] October, 2018. The NCLAT held that this order failed to notice thatno resolution plan could be approved discriminating against the dissentingfinancial creditor, in terms of the amended Regulation 38. The NCLATfurther held that the adjudicating authority failed to notice that the NCLAThad declared the unamended Regulation 38(1)(c), which stipulated theliquidation value for dissenting financial creditors as illegal. It was heldthat the resolution plan in this instance, which had been approved by theimpugned order of the NCLT, did not conform to the test in Section30(2)(e) of the IBC, and was discriminatory against similarly situated‘Secured Creditors’.

5. The NCLAT further observed that under Section 30(2)(b)(ii),such differential treatment must only be made in such a manner as maybe specified by the Board, which shall not be less than the amount to bepaid to these creditors in accordance with Section 53(1) in the event ofliquidation of the corporate debtor. The NCLAT held that the amendedRegulation 38 would still be applicable, and the Corporate Debtor couldnot take advantage of the repealed provision. In light of this reasoning,the NCLAT held the resolution plan to be discriminatory and violative ofSection 30(2)(e) of the IBC, and directed that the successful resolutionapplicant remove the discrimination by providing similar treatment to theappellant before the NCLAT, as other similarly situated financial creditors.

6. It was observed that the successful resolution applicant hadnoticed that Regulation 38 was amended on 5[th] October, 2018; theapplicant, however, failed to bring this fact to the notice of the adjudicatingauthority when the matter was taken up for approval, and also did notamend the resolution plan to make it in accordance with the amendedRegulation 38. The grounds for discrimination alleged by the CorporateDebtor were that firstly, Regulation 37(1) requires a resolution plan tooffer ‘maximization of value of its assets’, which is fulfilled by offering54 crores against the liquidation value of 36 crores only; secondly,Regulation 38(1)(c) mandatorily provided for the maintenance of theliquidation value of dissenting financial creditors before the amendment A

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Adated 5[th] October 2018; thirdly, the committee of creditors, in its meeting,directed the resolution professional to seek a legal opinion on differentialvalue of financial creditors. The committee of creditors accepted theopinion obtained by the resolution professional stating that liquidationvalue has to be maintained for dissenting creditors. Accordingly, in thenext revised resolution plans dated 12[th] January, 2018, 16[th] February,B2018, and 5[th] October, 2018, the resolution applicant offered minimumliquidation value (not a percentage of the claim).

7. It was urged by Mr. Ramji Srinivasan, learned senior counsel,that PSU banks had a higher stake in the total claim value and liquidatedvalue of assets, having security of fixed assets, plant and machinery,Cdebtors, inventory and personal guarantee, etc. On the other hand, NBFCsonly had security against specific plant & machinery and the personalguarantee of the promoters. It was also argued that the resolution planhas been fully implemented and financial creditors (except Hero) havereleased security to the Corporate Debtor. Further, the senior counselDappearing on behalf of the Corporate Debtor argued that under Section30(2)(b)(ii), the resolution plan allows separate treatment of financialcreditors who do not vote in favour of the resolution plan.

8. Mr. Amit Sibal, learned senior counsel for the second respondent-Hero, urged that this court should not interfere with the impugned order.EHe relied on the observations in Swiss Ribbons and Section 30 of theIBC, to say that creditors falling within one description or class cannotbe discriminated against. It was pointed out that the PSU banks’ dueswere given primacy, inasmuch as all of them were given a settlement of45% of their admitted claims; however, the dissenting Financial Creditor(Hero) was provided with 32.34% of its admitted claim which is plainlyFdiscriminatory and contrary to the letter and spirit of the IBC.

9. Mr. Sibal relied on the observations of this court in Swiss Ribbons(supra) that:

“72. The aforesaid Regulation further strengthens theGrights of operational creditors by statutorilyincorporating the principle of fair and equitabledealing of operational creditors’ rights, together withpriority in payment over financial creditors.”

10. Section 30, which is relied upon by the respondents, and whichwas interpreted by the NCLAT, reads as follows:H

“30. (1) A resolution applicant may submit a resolution planto the resolution professional prepared on the basis of theinformation memorandum.

(2) The resolution professional shall examine each resolutionplan received by him to confirm that each resolution plan—

(a) provides for the payment of insolvency resolution processcosts in a manner specified by the Board in priority to therepayment of other debts of the corporate debtor; (b) provides for the repayment of the debts of operationalcreditors in such manner as may be specified by the Boardwhich shall not be less than the amount to be paid to theoperational creditors in the event of a liquidation of thecorporate debtor under section 53; (c) provides for themanagement of the affairs of the Corporate debtor afterapproval of the resolution plan; (d) the implementation andsupervision of the resolution plan; (e) does not contravene any of the provisions of the law forthe time being in force; (f) conforms to such other requirements as may be specifiedby the Board.

(3) The resolution professional shall present to the committeeof creditors for its approval such resolution plans whichconfirm the conditions referred to in sub-section (2).

(4) The committee of creditors may approve a resolution planby a vote of not less than seventy-five per cent. of votingshare of the financial creditors.

(5) The resolution applicant may attend the meeting of thecommittee of creditors in which the resolution plan of theapplicant is considered:

Provided that the resolution applicant shall not have a rightto vote at the meeting of the committee of creditors unlesssuch resolution applicant is also a financial creditor.

(6) The resolution professional shall submit the resolution planas approved by the committee of creditors to the AdjudicatingAuthority.”

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A11. Section 30 lays out the duties of the resolution professionaland the various steps that she or he has to take, as well as theconsiderations that are to weigh, in examining a resolution plan. Theprinciple of fairness engrafted in the provision is that the plan shouldmake a provision for repayment of debts of operational creditors havingregard to the value, which shall not be less than what is prescribed byBthe Board (i.e. the Insolvency Board), repayable in the event of liquidation,spelt out in Section 53. Section 30(3) requires the resolution professionalto present the resolution plan to the committee of creditors and Section30(4) stipulates that approval shall be by a vote not less than 75% of thevoting share of the financial creditors. Regulation 38, as it stood beforeCthe amendment and its substitution, read as follows:

“38. Mandatory contents of the resolution plan.—

(1) A resolution plan shall identify specific sources of fundsthat will be used to pay the- (a) insolvency resolution process costs and provide that the[insolvency resolution process costs, to the extent unpaid, willbe paid] in priority to any other creditor; D

(b) liquidation value due to operational creditors and providefor such payment in priority to any financial creditor whichEshall in any event be made before the expiry of thirty daysafter the approval of a resolution plan by the AdjudicatingAuthority; and

(c) liquidation value due to dissenting financial creditors andprovide that such payment is made before any recoveries areFmade by the financial creditors who voted in favour of theresolution plan.”

12. After its amendment, Regulation 38 now reads as follows:

“38. Mandatory contents of the resolution plan.—

(1) The amount due to the operational creditors under aGresolution plan shall be given priority in payment overfinancial creditors.

(1-A) A resolution plan shall include a statement as to how ithas dealt with the interests of all stakeholders, includingfinancial creditors and operational creditors, of the corporatedebtor.”

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13. In the present case, it is noticeable that no doubt, Hero wasprovided with 32.34% of its admitted claim as it has dissented with theplan. On the other hand, Tata Capital Financial Services Ltd. was providedwith 75.63% of its admitted claim; other financial creditors (IndianOverseas Bank, Bank of Baroda and Punjab National Bank) wereprovided with 45% of their admitted claims. Given that the resolutionprocess began well before the amended regulation came into force (infact, January, 2017) and the resolution plan was prepared and approvedbefore that event, the wide observations of the NCLAT, requiring theappellant to match the pay-out (offered to other financial creditors) toHero, was not justified. The court notices that the liquidation value ofthe corporate debtor was ascertained at 36 crores. Against the saidamount, the appellant offered 54 crores. The plan was approved and,except the objections of the dissenting creditor (i.e Hero), the plan hasattained finality. Having regard to these factors and circumstances, it isheld that the NCLAT’s order and directions were not justified. They arehereby set aside; the order of the NCLT is hereby restored.

14. In view of the foregoing discussion, the appeal succeeds andis allowed. In the circumstances, there shall be no order on costs.

Ankit Gyan

Appeal allowed.

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