A resolution plan cannot be permitted to discriminate in payments to be made to one class of creditors – Analysis of the NCLAT’s Order ‘Akashganga Processors Pvt. Ltd. v. Shri Ravindra Kumar Goyal & Ors’^[1]

BRIEF FACTS

The resolution applicant (“RA”) was aggrieved by the order dated August 23, 2022 passed by the Adjudicating Authority, whereby the Adjudicating Authority rejected the application filed by the Resolution Professional (“RP”) seeking approval of the resolution plan submitted by the RA (“Application”).

The premise on which the Adjudicating Authority rejected the Application was that the resolution plan was in violation of Section 30 (2)(e) and (f) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). It was noted by the Adjudicating Authority that the resolution plan seeks to discriminate amongst one class of creditors, which is not permissible under law. The Adjudicating Authority observed that the resolution plan envisaged payment to two out of the four operational creditors of the corporate debtor, which was not permissible, as the same resulted in discrimination amongst one class of creditors.

Separately, the Adjudicating Authority also observed that the dissenting financial creditor was not given notice for the meeting of the committee of creditors (“CoC”), and therefore, the resolution plan came to be rejected by the Adjudicating Authority.

OBSERVATIONS AND ORDER BY THE NCLAT

The RA preferred an appeal against the order passed by the Adjudicating Authority whereby the Application was dismissed. The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) while dealing with the appeal reiterated the settled position of law that there can be differential payment mechanism in payment of debts of different class of creditors, viz., financial creditors and operational creditors of a corporate debtor; however, there can be no difference/ discrimination in inter-se payment within one class of creditors ^[2].

The NCLAT further observed that in the present case two operational creditors of the corporate debtor had filed their respective claims with the RP. It was open for the RA to not allocate any amounts to the said operational creditors. However, the RA in the resolution plan envisaged payments to the said two operational creditors, to the exclusion of the other operational creditors. This, the NCLAT observed, was not permissible in law as there cannot be any discrimination between payment of one class of creditors.

Further, the NCLAT went ahead and modified the resolution plan to include payment for all operational creditors, as against the two operational creditors to which payments were envisaged under the resolution plan. The NCLAT observed that by way of a slight modification to the resolution plan, the same can be allowed to sail through, as the same has already been approved by 99.84% voting share of the CoC.

 OUR ANALYSIS

 We feel that the NCLAT judgment reiterating the position that there cannot be a discrimination in payment in relation to one class of creditors is the correct application of the settled legal position and may not require any interference.

While we feel that the NCLAT has tried to balance equities by making slight modification to the resolution plan to include payment for all operational creditors of the corporate debtor; however, it cannot be lost sight of the fact that the Hon’ble Supreme Court has time and again noted that a resolution plan once approved by the CoC, cannot be made amenable to judicial review and no change/ modification can be made by the Adjudicating Authority at the stage of approval of the resolution plan^[3].

It is pertinent to mention that it is an established position of law that the power available to the Adjudicating Authority qua judicial review is limited and can only be dealt within the four corners of Section 30(2) of the IBC. Such judicial review can in no circumstance trespass upon a business decision of the majority of the CoC. As such the Adjudicating Authority would not have power to modify the resolution plan which the CoC in their commercial wisdom have approved.

By way of the present judgment, the NCLAT has gone ahead and held that the Adjudicating Authority could have made modifications to the resolution plan, which is contrary to the otherwise settled position of law. It is imperative to point out that at present, there is no challenge to the NCLAT judgment before the Hon’ble Supreme Court; however, it would be interesting to see how the Hon’ble Supreme Court deals with such modification/ interference by the NCLAT with the resolution plan. In the present case, it can be argued that the NCLAT has made slight modifications to the resolution plan so as to ensure that the same is in compliance with the applicable law. Although, on the other hand, the argument in relation to the commercial wisdom of the CoC and the already settled position of law, cannot be lost sight of.

It is also interesting to note that the law in relation to IBC is still evolving. In a recent judgment^[4], the Hon’ble Supreme Court has also created a distinction within one class of creditors and their rights. In the said judgment, the Hon’ble Supreme Court has categorized an operational creditor as a secured operational creditor, having rights as set out under the IBC. Similar finding was also made by the National Company Law Tribunal, Delhi in a recent judgment, classifying one class of creditors as a secured operational creditor^[5]. The courts are yet to test the position if one can treat such a class as a sub-class of creditors and then make a distinction/ discrimination in payments to such creditors, which in our view will be an interesting juxtaposition; although, there will be a compelling case to call out the distinction for some class of secured financial creditors on the basis of priority of their securities created, example first charge and subordinate charges. We will track the updates on subject, so please do watch this space for more.

Footnotes:
[1] Company Appeal (AT) (Insolvency) No.1148 of 2022 passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi on July 13, 2023.
[2] Committee of Creditors of Essar Steel India Limited, through Authorised Signatory v. Satish Kumar Gupta & Ors, (2020) 8 SCC 531.
[3] K. Sashidhar v. Indian Overseas Bank & Others, Civil Appeal No. 10673/2018 and SREI Multiple Asset Investment Trust Vision India Fund v. Deccan Chronicle Marketeers  & Others, Civil Appeal No(S).1706 of 2023.
[4] Vistra ITCL (India) Limited and Others v. Mr. Dinkar Venkatasubramanian and Another, Civil Appeal No. 3606 of 2020.
[5] https://www.azbpartners.com/bank/nclt-delhi-held-greater-noida-authority-to-be-secured-operational-creditor-while-payment-priorities-remained-unsettled/