Commercial Wisdom Of CoC To Distribute Amount Based On Security Interest Under Resolution Plan Cannot Be Interfered With: NCLAT

The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mita (Technical Member) and Mr. Arun Baroka (Technical Member) has held that commercial wisdom of the CoC to distribute the amount under the Resolution Plan based on security interest of the respective financial creditors cannot be interfered with provided provisions of the code are complied with.Brief Facts:Birla Tyres Limited (corporate debtor) was admitted into insolvency on May 5, 2022. In the 16th meeting of the CoC held on 31.07.2023, the CoC approved the distribution mechanism as per security interest of the respective Financial Creditors. The Resolution was passed with 75.67% vote shares, the Resolution Plan submitted by the Resolution Applicants was also approved by the CoC with requisite vote share. On 02.08.2023, Appellant sent an e-mail to the Resolution Professional objecting to the distribution methodology proposed by the Axis Bank on the basis of security interest.An IA was filed by the Appellant against the distribution methodology approved by the CoC.The Application filed by the Appellant was opposed by the Resolution Professional. The Adjudicating Authority by the impugned order upheld the distribution mechanism. It was held that the CoC in its commercial wisdom approved the distribution of plan value based on the value of the security held by the CoC members, which is in line with Section 30(4) of the IBC.Contentions:The appellant submitted that under Section 53(1)(b)(ii), the distribution among lenders has to be as per vote share and which provision does not contemplate distribution as per security interest. Section 53(1)(b)(ii) uses expression 'debt' which debt has to be paid in equal proportion to all Financial Creditors including Dissenting Financial Creditor. Per contra, the respondent submitted that the decision taken by the CoC on distribution as per security interest and accordingly approval of the Resolution Plan is in the commercial wisdom of the CoC which need no interference in exercise of jurisdiction by the NCLT or NCLAT. It was further argued that a Dissenting Financial Creditor is at best entitled for liquidation value as per Section 53(1)(b)(ii) read with Section 30(2)(b) and the liquidation value payable to the Appellant is only Rs. .97 Crores. Observations:The tribunal while referring to section 30(4) of the code observed that after the amendment of Section 30, the priority and value of the security interest of a secured creditor has also become one of the factors which may be considered by the CoC for approval of a plan.It further added that section 30(2)(b) also provided that the Financial Creditor who do not vote in favour of the Resolution Plan shall be paid an amount not less than the amount to be paid to such creditors in accordance with sub-section (1) of Section 53 in the event of a liquidation of the corporate debtor takes place.The tribunal while referring to the Supreme Court judgment in Essar Steel India Ltd. Committee of Creditors vs. Satish Kumar Gupta (2020) noted that the amending act gives the flexibility to the CoC to approve or not to approve the Resolution Plan and which may take into account different classes of creditors, different priorities and values of security interest of a secured creditor. The tribunal also referred to the Supreme Court judgment in India Resurgence ARC (P) Ltd. vs. Amit Metaliks Ltd.(2021) where the argument that the appellant was entitled to receive as per the security interest was rejected. It was held that after the amendment in section 30(2) & (4) of the code, the approval of a resolution plan is a commercial wisdom of the CoC which cannot be interfered with under the limited scope of judicial review.The tribunal also observed that however, the dissenting financial creditor as per Section 30(2)(b)(ii) is entitled for an amount which is not less than the amount to be paid to such creditors in accordance with Section 53(1). Present is not a case where amount offered to the Appellant is less than the liquidation value which has also been noticed by the Adjudicating Authority.Based on the above it observed that after amendments made in Section 30(4), the CoC have been given jurisdiction to decide the manner in which the amount shall be distributed. It can either decide to distribute based on vote share or security interest of the financial creditors. Any method chosen while exercising its commercial wisdom cannot be interfered with and shall be binding on all including the dissenting financial creditors and dissenting financial creditors at best is entitled for minimum of liquidation value. It further opined that the use of expression “may” in Section 30(4) clearly indicates the discretion vested in the CoC to take into account of the matter of security interest of the secured creditors in approving the Resolution Plan.The tribunal concluded that “We, thus, are of the view that no error has been committed by the Adjudicating Authority rejecting...

Commercial Wisdom Of CoC To Distribute Amount Based On Security Interest Under Resolution Plan Cannot Be Interfered With: NCLAT

Mohd Malik Chauhan

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