CoC Cannot Modify Distribution Mechanism After Approving Resolution Plan: NCLAT Dismisses Bank of Baroda's Appeal In RCIL CIRP

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has held that once a resolution plan is approved by Committee of Creditors under section 30(4) of the Insolvency and Bankruptcy Code, 2016 (IBC) and the CoC is itself bound by the plan, it cannot subsequently alter or modify the distribution mechanism provided therein. A Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Member–Technical) dismissed an appeal filed by Bank of Baroda, an assenting financial creditor, challenging an order of the NCLT, Mumbai Bench-I, which had upheld objections raised by IDBI Bank, a dissenting financial creditor, against post-approval reallocation of proceeds under the resolution plan of Reliance Communications Infrastructure Limited (RCIL). The appeal arose out of the Corporate Insolvency Resolution Process (CIRP) of RCIL wherein a resolution plan submitted by Reliance Projects & Property Management Services Ltd. was approved by the CoC in its 18th meeting. Bank of Baroda voted in favor of the plan but IDBI Bank, State Bank of India and other lenders dissented. The resolution plan contemplated assignment of the Reliance Bhutan Loan (RBL) to the approving financial creditors. Subsequently, Bank of Baroda filed an application seeking reallocation of resolution proceeds by assigning the Reliance Bhutan Loan to the dissenting financial creditors. The resolution professional put the proposal before the CoC after being directed by the NCLT. The CoC approved the reallocation in its meeting despite objections by dissenting lenders. Thereafter, IDBI Bank filed an Interlocutory Application challenging the approval of reallocation which was accepted by the NCLT holding that once the resolution plan was approved it could not be modified by the CoC. Aggrieved, the Bank of Baroda had approached the Appellate Tribunal. Bank of Baroda argued that the CoC in its commercial wisdom was entitled to reallocate proceeds under the resolution plan and a clause in the plan permitted the assignment of the Reliance Bhutan Loan to such entity as identified by the approving financial creditors. Rejecting the contention, the Appellate Tribunal observed that the commercial wisdom is exercised at the stage of approval of the resolution plan and once the plan is approved, the CoC itself is bound by it. “When the resolution plan was approved by the CoC in its meeting dated 05.08.2021 (by e-voting on 31.08.2021), the said approval of resolution plan shall also be approval of resolution plan regarding manner of distribution of assets, which is statutory requirement under Section 30(4). Manner of distribution when once finalized, which contemplate assignment of Reliance Bhutan Loan to Approving Financial Creditors for their pay-outs, the said distribution mechanism could not have been allowed to be altered even by the CoC after approval of the Resolution Plan...”, it said. Relying on the Supreme Court's decision in State Bank of India v. Consortium of Murari Lal Jalan and Florian Fritsch, the Bench observed that once a resolution is approved and submitted to the Adjudicating Authority for approval, it immediately becomes binding on the CoC and the successful resolution applicant. No modification in its terms can be permitted. It further held that modification of the distribution mechanism which is impermissible cannot be avoided in the name of commercial wisdom. “It is true that the CoC with commercial wisdom can take a decision regarding different aspects of the plan including manner of distribution, which is also statutory scheme under section 30(4) but once the commercial wisdom has been exercised by approving the resolution plan in meeting dated 05.08.2021, the modification of the said distribution mechanism,which is impermissible, cannot be saved in the name of commercial wisdom of the CoC. ”, the Tribunal observed. While interpreting Clause 3.3.20, the Appellate Tribunal held that the term such other entity cannot be construed to include dissenting financial creditors. It held that “When the Approving Financial Creditors amongst themselves were to decide about the assignment of Reliance Bhutan Loan, it clearly means that they amongst themselves may agree to assign Reliance Bhutan Loan to Approving Financial Creditor(s) or any other entity of their choice but the said provision cannot be read to mean that they can identify a Dissenting Financial Creditor as entity to whom the Reliance Bhutan Loan can be assigned.” Rejecting the contention that earlier orders directing reconvening of a CoC meeting operated as res judicata, the Tribunal observed that earlier NCLT orders merely directed convening of a CoC meeting and did not decide any issue on merits. It held that “Neither the order dated 17.10.2023 nor order dated 10.11.2023 could be read to mean to decide any issues between the parties. There is no decision...

CoC Cannot Modify Distribution Mechanism After Approving Resolution Plan: NCLAT Dismisses Bank of Baroda's Appeal In RCIL CIRP

Mohd Malik Chauhan

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