Supreme Court Upholds Resolution Plan, Rejects NCLAT Modification in Corporate Insolvency Case (8 November 2019)

Introduction

Date of the Judgment: 8 November 2019

Citation: Civil Appeal No. 7940 of 2019

Judges: Arun Mishra, J. and S. Ravindra Bhat, J.

Can a higher appellate authority modify a resolution plan approved by the adjudicating authority in a corporate insolvency case, especially when the modification imposes a greater financial burden on the resolution applicant? The Supreme Court of India recently addressed this critical question in the case of Rahul Jain vs. Rave Scans Pvt. Ltd. & Ors. This case revolves around a resolution plan for a corporate debtor, where a dissenting financial creditor claimed discrimination, leading to the National Company Law Appellate Tribunal (NCLAT) modifying the original plan. The Supreme Court, in this judgment, had to determine whether the NCLAT’s intervention was justified. The judgment was delivered by a two-judge bench comprising Justice Arun Mishra and Justice S. Ravindra Bhat, with the opinion authored by Justice S. Ravindra Bhat.

Case Background

The Corporate Insolvency Resolution Process (CIRP) was initiated against M/s. Rave Scans Private Limited (“Corporate Debtor”) on 25th January 2017, under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC). Rahul Jain (“Appellant”) submitted a resolution plan to revive the Corporate Debtor, offering ₹54 crores against a liquidation value of ₹36 crores. The National Company Law Tribunal (NCLT) approved this resolution plan on 17th October 2018. However, M/s Hero Fincorp Ltd. (“Financial Creditor” or “Hero”), a dissenting financial creditor, challenged the NCLT’s order before the NCLAT, alleging discrimination. Hero claimed that while other secured financial creditors were offered 45% of their admitted claims, they were only offered 32.34%, despite being in the same class of creditors. The resolution plan was based on the unamended Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Timeline

Course of Proceedings

Hero Fincorp Ltd. appealed the NCLT’s order to the NCLAT, arguing that the resolution plan discriminated against them as a dissenting financial creditor. The NCLAT, relying on previous judgments and the amended Regulation 38, found that the resolution plan was indeed discriminatory. It noted that the unamended Regulation 38(1)(c), which stipulated the liquidation value for dissenting financial creditors, had been declared illegal. The NCLAT held that the resolution plan did not conform to Section 30(2)(e) of the IBC, which requires that a resolution plan does not contravene any law. Consequently, the NCLAT directed the appellant to remove the discrimination by providing similar treatment to Hero as other similarly situated financial creditors.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a corporate applicant.
• Section 30 of the IBC: This section outlines the process and requirements for a resolution plan. Specifically, it states:

  “30. (1) A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum.
  (2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan—
  (a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor;
  (b) provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;
  (c) provides for the management of the affairs of the Corporate debtor after approval of the resolution plan;
  (d) the implementation and supervision of the resolution plan;
  (e) does not contravene any of the provisions of the law for the time being in force;
  (f) conforms to such other requirements as may be specified by the Board.”
  

• Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation, before and after its amendment, deals with the mandatory contents of a resolution plan. The unamended regulation stated:

  “38. Mandatory contents of the resolution plan.—
  (1) A resolution plan shall identify specific sources of funds that will be used to pay the—
  (a) insolvency resolution process costs and provide that the [insolvency resolution process costs, to the extent unpaid, will be paid] in priority to any other creditor;
  (b) liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority; and
  (c) liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.”
  

  The amended regulation states:

  “38. Mandatory contents of the resolution plan.—
  (1) The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors.
  (1-A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.”
  

The legal framework emphasizes fair treatment of all creditors, particularly operational creditors, and prohibits discrimination among creditors of the same class. The amendment to Regulation 38 aimed to strengthen the rights of operational creditors by prioritizing their payments over financial creditors.

Arguments

Appellant’s Arguments (Rahul Jain):

• The resolution plan offered ₹54 crores against a liquidation value of ₹36 crores, thus maximizing the value of assets as required by Regulation 37(1).
• The resolution plan was formulated based on the then-existing Regulation 38(1)(c), which mandated maintaining the liquidation value for dissenting financial creditors.
• Public Sector Undertaking (PSU) banks had a higher stake due to security of fixed assets, plant and machinery, debtors, inventory, and personal guarantees, whereas Non-Banking Financial Companies (NBFCs) like Hero had limited security.
• The resolution plan had been fully implemented, with financial creditors (except Hero) releasing their securities.
• Section 30(2)(b)(ii) of the IBC allows for separate treatment of financial creditors who do not vote in favor of the resolution plan.

Respondent’s Arguments (Hero Fincorp Ltd.):

• The NCLAT’s order should not be interfered with, as it correctly applied the law.
• The observations in Swiss Ribbons and Section 30 of the IBC prohibit discrimination among creditors of the same class.
• PSU banks were given preferential treatment with a settlement of 45% of their admitted claims, while Hero, a dissenting financial creditor, was only offered 32.34%, which is discriminatory.
• The amended Regulation 38 strengthens the rights of operational creditors by incorporating fair and equitable treatment, which should also apply to financial creditors of the same class.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the finding that the financial creditor was discriminated against, leading the NCLAT to modify the adjudicating authority’s directions, and consequently imposing greater financial burdens on the resolution applicant, is justified in the circumstances.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. & Ors. [NCLAT] and Binani Industries Ltd. v. Bank of Baroda & Anr. [NCLAT]: The Court acknowledged that these cases were relied upon by the NCLAT, but did not find them applicable in the present case due to the timing of the resolution plan and the subsequent amendment to Regulation 38.
• Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India [Supreme Court of India]: The Court noted the observations in this case regarding the amended Regulation 38 and the strengthening of operational creditors’ rights but stated that it did not apply to the present case due to the timing of the resolution plan.
• Section 30 of the IBC: The Court acknowledged the provisions of Section 30 but did not find that the resolution plan contravened it.
• Regulation 38 (unamended): The Court stated that the resolution plan was formulated based on the unamended Regulation 38.
• Regulation 38 (amended): The Court held that the amended Regulation 38 was not applicable to the present case.

The Supreme Court set aside the NCLAT’s order and restored the NCLT’s order. The court held that the NCLAT’s directions were not justified, considering the resolution process began before the amendment to Regulation 38.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the resolution process was initiated and the resolution plan was approved before the amendment to Regulation 38. The Court emphasized that the resolution plan was compliant with the existing regulations at the time of its approval. The Court also noted that the resolution plan offered a higher value than the liquidation value, which was a positive factor. The court was of the view that the NCLAT was not justified in applying the amended regulation retrospectively.

The court gave more weight to the factual aspects of the case, such as the timing of the resolution plan and the fact that the plan had already been implemented.

The Court’s reasoning was that the NCLAT erred in applying the amended regulation to a resolution plan that was approved before the amendment came into force. The Court emphasized that the resolution plan was compliant with the existing regulations at the time of its approval.

The Supreme Court quoted the following from the judgment:

“Given that the resolution process began well before the amended regulation came into force (in fact, January, 2017) and the resolution plan was prepared and approved before that event, the wide observations of the NCLAT, requiring the appellant to match the pay­out (offered to other financial creditors) to Hero, was not justified.”

“Having regard to these factors and circumstances, it is held that the NCLAT’s order and directions were not justified. They are hereby set aside; the order of the NCLT is hereby restored.”

“The court notices that the liquidation value of the corporate debtor was ascertained at ₹36 crores. Against the said amount, the appellant offered ₹54 crores. The plan was approved and, except the objections of the dissenting creditor (i.e Hero), the plan has attained finality.”

Key Takeaways

• Resolution plans should be evaluated based on the regulations in force at the time of their formulation and approval.
• Retrospective application of amendments to regulations may not be justified, especially when it affects the finality of approved plans.
• The maximization of asset value in a resolution plan is a positive factor.
• The timing of the resolution process and the approval of the plan play a crucial role in determining the applicability of amended regulations.

Directions

The Supreme Court did not give any specific directions other than setting aside the NCLAT’s order and restoring the NCLT’s order.

Specific Amendments Analysis

The judgment discusses the amendment to Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The amendment deleted the provision on liquidation value payable to dissenting financial creditors and prioritized operational creditors. The court noted that the amendment was not applicable to the present case due to the timing of the resolution process.

Development of Law

The ratio decidendi of this case is that a resolution plan should be evaluated based on the regulations in force at the time of its formulation and approval. The Supreme Court clarified that amendments to regulations should not be applied retrospectively, especially when it affects the finality of approved plans. This judgment reinforces the principle that the law applicable at the time of an event should be considered, and subsequent changes should not automatically invalidate prior actions taken in compliance with the then-existing legal framework.

Conclusion

In conclusion, the Supreme Court allowed the appeal, setting aside the NCLAT’s order and restoring the NCLT’s order. The Court held that the NCLAT was not justified in modifying the resolution plan based on the amended Regulation 38, as the resolution process had begun and the plan had been approved before the amendment came into force. This judgment highlights the importance of considering the timing of events and the applicable regulations when evaluating resolution plans under the IBC.