In the matter of India Resurgence ARC Private Limited v. M/s Amit Metaliks Limited & Another [Civil Appeal No. 1700 of 2021] decided on May 13, 2021 (“Judgement”) the Supreme Court (“SC”) held that a dissenting secured creditor cannot challenge an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and insist on a higher amount to be paid to it on the basis of the value of the security interest held by it over the corporate debtor. It was further held that, in the scheme of IBC, every dissatisfaction does not partake the character of a legal grievance and cannot be taken up as a ground of appeal.

Facts

Under Section 62 (Appeal to Supreme Court) of IBC, India Resurgence ARC Private Limited (“Appellant”) sought to question the order dated March 2, 2021 passed by the National Company Law Appellate Tribunal, New Delhi (“NCLAT”), whereby the NCLAT rejected its challenge to the order dated October 20, 2020, passed by the National Company Law Tribunal, Kolkata bench (“NCLT”), in approval of the resolution plan in the corporate insolvency resolution process (“CIRP”) concerning the corporate debtor, VSP Udyog Private Limited (“Respondent No. 2”), as submitted by the resolution applicant, M/s. Amit Metaliks Limited (“Respondent No. 1”). Respondent No. 1 and Respondent No. 2 are collectively referred to as “Respondents”. The Appellant was the assignee of the rights, title and interest carried by Religare Finvest Limited, as the secured financial creditor of Respondent No. 2, having 3.94% of voting share in the Committee of Creditors (“CoC”). When the resolution plan submitted by Respondent No. 1 was taken up for consideration by the CoC, the Appellant became a dissenting financial creditor, basis the share being proposed, particularly with reference to the value of the security interest held by it. However, the resolution plan got the approval of 95.35% of voting share of the financial creditors and was submitted for approval by the resolution professional to the NCLT. The NCLT found the plan to be feasible and viable with judicious distribution of financial bids by CoC to the stakeholders, according to their entitlements as also being compliant of all the mandatory requirements, and thereby approved the resolution plan by its order dated October 20, 2020.

The Appellant had filed an appeal before the NCLAT under Section 61(1) read with Section 61(3) of the IBC, and therein contended that the approved resolution plan failed the test of being ‘feasible and viable’ in as much as the value of the secured asset, on which security interest was created by Respondent No. 2, in its favour, was not taken into consideration. Further, the Appellant had contended that after the amendment to Section 30 (4) of IBC, which came into effect from August 16, 2019, the CoC was required to ensure that the manner of distribution takes into account the order of priority among the creditors as also the priority and value of the security interest of a secured creditor. The Appellant had argued that since Respondent No. 1 and the CoC failed to consider the existing security interest in the Appellant’s favour, the approval of the NCLT was not in accordance with law.

The NCLAT relied upon the judgement of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others. [(2020) 8 SCC 531] (“Essar Steel”), and rejected the Appellant’s contentions, on the grounds that considerations including priority in scheme of distribution and the value of security fell within the realm of CoC and such considerations, being relevant only for purposes for arriving at a business decision in exercise of commercial wisdom of the CoC, could not be the subject of judicial review in appeal within the parameters of Section 61(3) of the IBC. Thus, aggrieved by the decision of the NCLAT, the Appellant preferred this instant appeal before the SC.

Issues

• Whether the orders pronounced and NCLAT was in accordance with the law
• Whether a dissenting secured creditor can challenge an approved resolution plan on the basis of the value of the security interest held by it over the corporate debtor

Arguments

Contentions raised by Appellant:

The Appellant contended that the CoC could not have approved the resolution plan which failed to consider the priority and value of security interest of the creditors while deciding the manner of distribution to each creditor even though the legislature in its wisdom has amended Section 30(4) of the IBC, requiring the CoC to take into account the order of priority amongst creditors as laid down in Section 53(1) of the IBC, including the priority and value of the security interest of a secured creditor. The amended Section 30(4) of the IBC lays down that “The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent, of voting share of the financial creditors, after considering its feasibility and viability the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor, and such other requirements as may be specified by the Board […]”

The primary reason for the Appellant’s dissent to the resolution plan was that the Respondent No. 1 had offered the Appellant a meagre amount of about INR 2,02,60,000 (approximately) as against the total admitted claim of INR 13,38,00,000(approximately), without even considering the valuation of the security held by the Appellant, which admittedly had the valuation of more than INR 12,00,00,000(approximately). Further, the Appellant argued that the observation of the NCLAT, deeming that, the amendment to Section 30(4) of the IBC as a mere guideline, failed to take into account the fact that CoC does not have an unfettered and arbitrary right to exercise its commercial wisdom and to approve the plan which does not stand in conformity with the provisions of the IBC.

Observations of the Supreme Court

The SC observed that the process of consideration and approval of resolution plan is essentially that of the commercial wisdom of the CoC and the scope of judicial review was limited within the four-corners of Section 30(2) of the IBC for the NCLT, and Section 30(2) read with Section 61(3) of the IBC for the NCLAT. It was observed that if all the mandatory requirements have been duly complied with and taken care of, the process of judicial review cannot be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction. In the scheme of IBC, every dissatisfaction does not partake the character of a legal grievance and cannot be taken up as a ground of appeal. The SC opined that the provisions of the amended Section 30(4) of the IBC do not warrant interference with the resolution plan at the instance of the Appellant. Placing reliance on Essar Steel (supra) with regards to the purport and effect of the amendment to Section 30(4) of the IBC, the SC affirmed the observation of the NCLAT, that the amendment to Section 30(4) of the IBC only amplified the considerations for the CoC while exercising its commercial wisdom, to take an informed decision in regard to the viability and feasibility of resolution plan, with fairness of distribution amongst similarly situated creditors. Further, the SC upheld the view of the NCLAT that the business decision taken in exercise of the commercial wisdom of CoC does not call for interference, unless creditors belonging to a class being similarly situated are denied fair and equitable treatment. The SC noted that the proposal for payment to all the secured financial creditors was equitable and the proposal for payment to the Appellant was at par with the percentage of payment proposed for other secured financial creditors. The SC observed that, there was no case of denial of fair and equitable treatment or disregard of priority and pointed out that determining the amount to be paid to different classes or subclasses of creditors in accordance with provisions of the IBC and the related regulations, was essentially the commercial wisdom of the CoC, and a dissenting secured creditor like the Appellant could not suggest a higher amount to be paid to it with reference to the value of the security interest.

The SC noted that in Jaypee Kensington Boulevard Apartments Welfare Association and Others. v. NBCC (India) Limited and Others [Civil Appeal No. 3395 of 2020], the SC had repeatedly made it clear that a dissenting financial creditor would receive the payment of the amount as per his entitlement, and that entitlement could also be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him. It had never been laid down that if a dissenting financial creditor had security available with him, he would be entitled to enforce the entire security interest or to receive the entire value of the security available with him. His dealing with the security interest would be conditioned by the extent of value receivable by him.

The SC observed that the extent of value receivable by the Appellant was distinctly laid out in the resolution plan that is, a sum of INR 2,02,60,000 (approximately) which was in the same proportion and percentage as provided to the other secured financial creditors with reference to their respective admitted claims, The SC observed that, the repeated reference of the Appellant to the value of security at about INR 12,00,00,000 (approximately) as wholly inapt and ill-conceived.

The SC remarked that if the Appellant’s propositions were to be accepted, it would result in more liquidation with every secured financial creditor opting to stand on dissent, as against insolvency resolution and value maximization of the assets of the corporate debtor, thereby defeating the very purpose envisaged by IBC. The SC relied on the observation made in Essar Steel (supra) that if an “equality for all” approach recognizing the rights of different classes of creditors as part of an insolvency resolution process was adopted, secured financial creditors would be incentivized to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This would defeat the entire objective of the IBC, which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.

Decision of the Supreme Court

It was held by the SC that the financial proposal in the resolution plan forms the core of the business decision of the CoC. The SC further held that the limitation on the extent of the amount receivable by a dissenting financial creditor is innate in Section 30(2)(b) of the IBC and it was not 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 SC, thus, rejected the contentions of the Appellant.

VA View:

Through this Judgement, the SC has confirmed that a dissenting secured creditor cannot challenge a resolution plan approved under the IBC with an argument that higher amount should have been paid to it, in light of the value of the security interest held by it over the corporate debtor. Recognizing the supremacy of the commercial wisdom of the CoC, the SC has reiterated the limited scope of judicial review and interference in business decisions that fall under the ambit of the commercial wisdom of the CoC.

The SC has rightly upheld the integral principles of IBC that is value maximization of the assets of the corporate debtor, and insolvency resolution, as against liquidation. The SC has clarified that any entitlement extended to creditors on the basis of the value of security would defeat the purpose of IBC as it would result in the financial creditors dissenting and opting for liquidation as against insolvency resolution.

For more information please write to Mr. Bomi Daruwala at [email protected]

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