NCLAT Sets Aside NCLT Modification Reserving 5% Equity For Public Shareholders In MSME Resolution Plan

The National Company Law Appellate Tribunal (NCLAT) at Delhi has reiterated an insolvency court cannot add new conditions to a resolution plan approved by lenders, and set aside a direction that required 5 percent equity of the corporate debtor to be reserved for public shareholders.

A bench of Judicial Member Justice N Seshasayee and Technical Member Arun Baroka said the clause had found its way into the order without any basis in the approved resolution plan.

The tribunal held that such an insertion, even if inadvertent, materially alters the nature of the plan and cannot be sustained. “This wrong or inadvertent insertion of a clause in the resolution plan changes the complexion of the plan as regards the existence of the CD post CIRP. It is therefore, imperative that this term which is not part of the original resolution plan may have to be deleted.”

The appeal was filed by the suspended directors and the chief financial officer of Techno Forge Limited, whose corporate insolvency resolution process had been initiated before the NCLT, Ahmedabad Bench.

As the company was registered as a micro, small and medium enterprise, the promoters themselves were permitted to submit a resolution plan. The committee of creditors consisted of two financial creditors, with Bank of India holding the dominant voting share.

The joint resolution plan submitted by the appellants was approved by the lenders.

One of the terms of the plan provided for exoneration of the personal guarantors of the corporate debtor. While another creditor objected, the objection was overruled by the majority vote. When the resolution professional placed the plan before the adjudicating authority for approval, the NCLT cleared it but introduced changes. It kept the liability of personal guarantors alive and also added a clause stating that public shareholding would be reduced to 5 percent. These modifications were challenged before the appellate tribunal.

During the pendency of the appeal, the parties settled the dispute relating to the personal guarantees, leaving only the issue of public shareholding for consideration. On this, the appellate tribunal found that the approved resolution plan did not contain any provision reserving equity for the public.It noted that the clause did not appear in the operative part of the NCLT's order and surfaced only in the narration of the plan.

Calling the error obvious, the tribunal held that an insolvency court has no authority to rewrite the commercial terms approved by the committee of creditors.

Since equity structure directly affects the post-resolution existence and control of the corporate debtor, the tribunal said the clause could not be allowed to stand.

Allowing the appeal, the NCLAT modified the NCLT's order and directed that it be read without the inserted paragraph on reserving 5 percent equity for public shareholders.