Dissenting Financial Creditor Entitled To Liquidation Value Commensurate Only With Security Interest: NCLT Delhi

Background Facts

Arena Superstructures Pvt. Ltd. (“Corporate Debtor”) is engaged in the business of Real estate and is a part of Lotus Group promoted by Mr. Nirmal Singh. The name of the Corporate Debtor’s project is Lotus Arena I, situated in Sector 79, NOIDA.

The Corporate Debtor was admitted into Corporate Insolvency Resolution Process (“CIRP”) on 29.10.2020 by the NCLT.

M/s. Purvanchal Projects Pvt. Ltd. (“Successful Resolution Applicant/SRA”) submitted a Resolution Plan for the Corporate Debtor, which was approved by the Committee of Creditors (“CoC”) with 71.11% voting share. Accordingly, the Resolution Professional filed an application under Section 30(6) of IBC before the NCLT, seeking approval of the Resolution Plan.

Objection to the Resolution Plan

Assets Care & Reconstruction Enterprise Limited (“ACRE/Dissenting Financial Creditor”) had acquired the debt owed to PNB Housing Finance Ltd. through assignment and is the sole secured Financial Creditor of the Corporate Debtor. The resolution plan proposes to pay the Secured Financial Creditors an amount of Rs. 70 Crores against an admitted claim of Rs. 200.27 Crores. ACRE has a proportionate voting share of 28.60% in the CoC.

ACRE filed its objections to the Resolution Plan and prayed for payment of liquidation value as per Section 30(2)(b) read with Section 53(1) of IBC,amounting to Rs. 144.9 Crores, as a Dissenting Financial Creditor and in priority over assenting Financial Creditors.

It was argued that the resolution plan ought to have provided the minimum liquidation value to ACRE, an amount which shall not be less than the amount to be paid to Dissenting Financial Creditor in accordance with Section 53(1) of IBC in the event of liquidation of Corporate Debtor.The remaining liquidation value is to be distributed as per Section 53(1)(b) of IBC in equal proportion between workmen’s dues and secured creditor’s dues.

The SRA submitted that alongwith Rs. 70 Crores, ACRE has been given the right to enforce its security interests and encumbrances over the third party assets, properties, guarantees etc. which are available to it even post approval of the Plan. Whereas, as per security interest based on Section 11(4)(h) of RERA Act, the entitlement of ACRE is only around Rs. 37 Crores.

The Resolution Professional submitted thatACRE would be entitled to an amount equivalent to their security interest created in respect of the Corporate Debtor.

It was further submitted when PNB Housing had granted loan in 2017, by that time 806 units having an area of 14,34,750 Sq. Ft. were already sold. Therefore, the mortgage created in favour of ACRE was restricted to the units sold/allotted post commission of mortgage andit represents 25.64% of the project area. This is the extent over which ACRE has mortgage rights.Further, Section 11(4)(h) of The Real Estate (Regulation and Development)Act, 2016 prohibits the promoter of a real estate project from creation of security on sold units.

NCLT Verdict

The Bench observed that as per Section 52, Section 53 and Section 30(2)(b) of IBC, a Dissenting Financial Creditor is at best entitled to the liquidation value commensurate with its security interest. If any amount remains unpaid thereafter, would fall under Section 53(1)(e)(ii) which would rank below the unsecured creditors.

“Section 52 read with Section 53 of IBC and Section 30(2)(b) of IBC would reveal that the DFC would at best be entitled to the liquidation value commensurate with its security interest. Any amount unpaid thereafter, would fall under Section 53(1)(e)(ii) which would rank below the unsecured creditors.”

Further, CoC’s majority decision would prevail and a Dissenting Financial Creditor cannot be permitted to push the Corporate Debtor into liquidation, in the availability of a viable resolution plan.

“Explanation 1 of Section 30(2) of IBC, 2016 in our view read with Section 30 (4) of IBC, 2016 persuade us to believe that the CoC’s majority decision would prevail and a dissenting Financial Creditor cannot be allowed to push the Corporate Debtor into liquidation even there is a viable resolution plan. This will contrary to the objective of the Code. The ACRE has been provided with an amount of Rs. 70 Crore in the plan which is, more than the amount of entitlement commensurate with its security interest. It is also the submission of the Counsel for the SRA that in addition to the amount of Rs. 70 Crore, the Applicant has been given the right to enforce its security interest and encumbrances over the third-party assets, properties, guarantees, etc. which are available to it even after approval of the plan. This satisfies the equitable approach that is required of the COC.”

The Bench declined to interfere in the commercial wisdom of the CoC and to provide the Dissenting Financial Creditor the amount in excess of what is provided in the plan. The objection has been rejected.

The Bench has approved the Resolution Plan of M/s. Purvanchal Projects Pvt. Ltd. for M/s. Arena Superstructures Pvt. Ltd.

Case Title:M/s. Dhankalash Distributors Pvt. Ltd. v Arena Superstructures Pvt. Ltd.

Case No.:CP (IB) No.875(PB)/2020

Counsel For Resolution Professional:Mr. Arvind Nayyar (Sr. Adv.), Adv. Manmeet Singh, Adv. Kamlendra Singh, Adv. Akshay Joshi, Adv. Nitish Kumar Sharma, Adv. Nastassia Khurana, Adv. Chaitanyashil Priyadarshi, Adv. Tejaswi Bhanu, Adv. Aditya Dewan, Adv. Sahil Chandra, Adv. Vivek Kumar Mishra.

Counsel For Objector (ACRE): P. Nagesh (Sr. Adv.), Apporv Agarwal Adv.

Counsel For SRA: Sunil Fernandes, Adv. Diksha Dadu, Adv. Prithu Garg, Adv. Kirti Gupta Adv.

Counsel For NOIDA: Sanjeev Sen., Sr Adv, Abdhesh Chaudhary, Adv. Nishi Kant Singh, Adv. Manisha Suri, Adv. Geetanjali Setia, Adv.

Counsel For IBBI: Madhavi Diwan, ASG, Vikas Mehta, Adv, Rashi Rampal, Adv, Sahil Monga, Adv.

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