The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has held quantum of admitted claimed amount shall take precedence over the security cover that any financial creditor may have over such outstanding/ claimed amounts.

The matter pertains to a financial creditor of BKM Industries Limited (“Corporate Debtor”) filing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which was allowed by the National Company Law Tribunal, Kolkata Bench (“NCLT”) in C.P (IB) No.2078/KB/2019 on December 30, 2020 and consequently, the Corporate Debtor was admitted into insolvency. Pursuant thereto, the Committee of Creditors (“CoC”) was constituted by the Resolution Professional (“RP”). Amongst the CoC, was ICICI Bank Limited (“ICICI”), a financial creditor, which had also filed its claim.

Pursuant to the corporate insolvency resolution process of the Corporate Debtor, ICICI claimed that the distribution of proceeds from the resolution applicant must be made in proportion to the security cover held by the financial creditors.

In a meeting of the CoC, the RP proposed an agenda for distribution of the amount offered to secured creditors by the resolution applicant, either: (a) on the basis of outstanding debt, or (b) on the basis of security interest available with the respective secured lenders. Interestingly, the CoC by a majority share (78.79%) approved distribution as per outstanding debt/voting share. However, ICICI, which had a security interest in immovable and movable property of the Corporate Debtor was not agreeable to the same and filed an application before the NCLT, which was opposed by the RP as well as the successful resolution applicant. The NCLT dismissed ICICI’s application, relying upon the judgment of the Supreme Court in the matter titled ‘India Resurgence ARC Private v. Amit Metaliks Limited and Anr.’^[1] (“Amit Metaliks”).

ICICI, being aggrieved by the NCLT’s decision, filed an appeal before the NCLAT. ICICI’s primary contentions before the NCLAT were inter-alia that: (a) ICICI had a first charge on the assets of the Corporate Debtor and therefore, ICICI is entitled to receive the liquidation value as per the security interest; and (b) ICICI being a dissenting financial creditor, it was entitled to receive liquidation value^[2] and this could not be altered/restricted by the CoC, in exercise of its commercial wisdom.

The RP opposed ICICI’s appeal, inter-alia, on the grounds that: (a) the distribution methodology had been approved by the CoC in a duly convened meeting; (b) the statutory entitlement of a dissenting financial creditor is regulated by Section 30(2)(b) of the IBC; (c) the issue in question had already been adjudicated by the NCLAT in the matter titled ‘Small Industries Development Bank of India (SIDBI) vs. Vivek Raheja’^[3](“Vivek Raheja”); and (d) if ICICI’s appeal is allowed, the same will set a wrong precedent as the dissenting secured creditors will push for liquidation as against the corporate insolvency resolution of a corporate debtor, which is against the primary objective of IBC.

The CoC’s counsel also supported the RP’s position against ICICI and further submitted that the Supreme Court’s judgment in Amit Metaliks (supra) squarely covered the issue.

The NCLAT, after hearing the parties and examining the provisions of Section 30 and Section 53 of the IBC, as well as the judgments relied upon by the parties, inter-alia, observed that the scheme of Section 53(1) of IBC provides for distribution as per the ‘debt’ and in the legislative scheme there is no scope of distribution of assets among the financial creditors as per security interest.

The NCLAT further observed that the judgments in Vivek Raheja (supra) as well as Amit Metaliks (supra) covered the case before it. It further observed that the judgment in Vistra ITCL (India) Ltd. and Ors. vs. Dinkar Venkatasubramanian and Anr.^[4](“Vistra ITCL”) relied upon by ICICI was distinguishable on facts and was also not applicable to the present case, since in Vistra ITCL, the claim of the financial creditor had been rejected whereas, in the present case, ICICI’s claim was admitted. Further, ICICI was recognized and classified as a ‘dissenting financial creditor’ and ICICI was also a part of the CoC and had voted on the resolution plan.

The NCLAT, therefore, held that there was no violation of the IBC and dismissed ICICI’s appeal.

The view adopted by the NCLAT with respect to the provisions of Section 30(2)(b) of the IBC as well as the waterfall mechanism under Section 53 of the IBC, in relation to the case of ICICI is in sync with the existing jurisprudence on this issue; particularly, in view of the fact that despite ICICI being a secured financial creditor, ICICI’s exposure was limited/lesser that the other CoC members, and therefore, it could not claim a higher amount merely because it was a ‘secured’ financial creditor.

Nonetheless, it would not be out of place to mention that the lenders and financial institutions have long been asking for due consideration to be given (for any distribution) to the value of security interest created for their outstanding amounts along-with priority of charge that they are holding over other secured financial creditors. It would be interesting to see how the courts deal with the said ask of the lenders and financial institutions in the future, while also working within the four-corners of the IBC; or rather IBC be amended to provide for it. We will keep tracking jurisprudence on this aspect, so do watch out this space for more …

Footnotes:

[1] (2021) SCC OnLine SC 409

[2] Section 30(2)(b) of IBC

[3] Company Appeal (AT) (Insolvency) No.570 of 2022

[4] (2023) 7 SCC 324