Section 30(4) Of IBC Directory In Nature, Does Not Compel COC To Distribute Payments Based On Value Of Security : NCLT Hyderabad

The National Company Law Tribunal (“NCLT”), Hyderabad Bench, comprising of Shri Dr. N. V. Rama Krishna Badarinath (Judicial Member) and Shri Satya Ranjan Prasad (Technical Member), while adjudicating a petition filed in Stressed Assets Stabilisation Fund, Mumbai vs. M/s. Galada Power and Telecommunications Ltd., has held that Section 30(4) of IBC is directory in nature and does not compel the CoC to distribute payments to creditors based on the value of security held by them. The Bench has dismissed the application filed by a Financial Creditor claiming that resolution fund must be distributed as per voting share in CoC and not as per the kind of charge a financial creditor has on the assets of the Corporate Debtor. The Bench has reiterated that a dissenting secured creditor cannot seek a higher amount to be paid to them on the basis of the value of their security interest by pleading dissatisfaction. Background Facts M/s. Galada Power and Telecommunications Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”). Subsequently, several resolution applicants submitted Resolution Plans for the Corporate Debtor. In the Joint Lenders Meeting (“JLM”) held on 19.08.2021 & 27.08.2021, the ratio of 88:12 was fixed between Secured Financial Creditors holding first charge against fixed assets and Secured Financial Creditors holding second charge against fixed assets of the Corporate Debtor. Canara Bank (“Financial Creditor”) is a Financial Creditor of the Corporate Debtor which holds 28.63% voting share in CoC; has first charge over current assets and second charge over fixed assets of the Corporate Debtor. The Financial Creditor was allotted 12% from the resolution fund alongwith other financial creditors who hold second charge over fixed assets. The Financial Creditor objected to the decided ratio of 88:12, while contending that inter se sharing of the resolution fund should be in ratio of voting share of the CoC members, in order to ensure equitable treatment amongst same class of financial creditors. Further, the Section 30(4) & 53(1) of IBC also imply that Secured Creditors are to be treated equitably. However, the CoC declined to interfere in the JLM’s decision. The Financial Creditor filed an application before the NCLT, seeking direction to the Resolution Applicant to provide 28.63% amount to be paid to the Financial Creditor (in accordance to its voting shares), instead of 12% of the resolution fund. Relevant Law Section 30(4) of IBC Section 30. Submission of resolution plan. 30(4). The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:…xxxx Issue Whether the COC’s decision regarding payment to different classes or sub-classes of creditors under the Resolution Plan can be interfered with, especially on the ground of alleged discrimination among the same class of financial creditors? NCLT Verdict The Bench observed that the language used in Section 30(4) of IBC with respect to considering the security interest, is “may” and is therefore directory and not mandatory. The CoC is under no compulsion to distribute payments to creditors based on the value of security held by them. “Section 30(4) of the IB Code only says that the COC may take into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53 of the IB Code, including priority and value of security interest of secured creditors, while approving the resolution plan, so much so, the argument that, as the COC failed to take into the account the pre-CIRP preferential financial bargains made by the Applicants with the Corporate Debtor, as such, the impugned decisions are liable to be set aside, is untenable.” The Bench opined that a dissenting secured creditor cannot seek a higher amount to be paid to them, on the basis of the value of their security interest by pleading dissatisfaction. The decision pertaining to priority of payments to different classes of creditors lies in the commercial wisdom of the CoC. Accordingly, the application has been dismissed. Case Title: Stressed Assets Stabilisation Fund, Mumbai vs. M/s. Galada Power And Telecommunications Ltd. Case No.: CP(IB) No.384/7/HDB/2018 Counsel For the Applicant: Mr. Dishit Bhattacharjee, Advocate Counsel For the RP/R.1: Mr. V.V.S.N. Raju, Advocate Counsel For the R6 & R7: Mr. Raja Shekar Rao Salvaji, Advocate Click Here To Read/Download Order

Section 30(4) Of IBC Directory In Nature, Does Not Compel COC To Distribute Payments Based On Value Of Security : NCLT Hyderabad

Pallavi Mishra

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