The National Company Law Tribunal, Kolkata (“NCLT”) has, in its order dated March 1, 2023 (“Order”), in the matter of ICICI Bank Limited v. Pratim Bayal and Another [Interlocutory Application (IB) No. 471/KB/2022 in Company Petition (IB) No. 2078/KB/2019], held that just because a creditor enjoys security interest, it cannot be treated higher than other creditors who have financed the corporate debtor.

Facts

ICICI Bank Limited (“Applicant”) was a secured financial creditor of BKM Industries Limited (“Corporate Debtor”). Pursuant to the admission of the Corporate Debtor into corporate insolvency resolution process, the Applicant submitted its claim for an amount of INR 15.52 Crores with the interim resolution professional on January 14, 2021. The claim of the Applicant was admitted.

The resolution plan (“Plan”) that the resolution professional of the Corporate Debtor, Pratim Bayal (“Respondent”) had accepted and recommended to the committee of creditors (“CoC”) treated the Applicant at par with the other creditors who were eligible to get the realizations from the Plan in terms of Section 53 (Distribution of assets) of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Aggrieved by the Plan, the Applicant (being the dissenting creditor) filed the present interlocutory application (“IA”) before the NCLT, seeking directions on the Respondent to consider the priority of distribution of the realisations entailed in the Plan and to specifically take into account the priority assigned to the dissenting financial creditors, who were also secured creditors.

Issue

Whether dissenting secured creditor can be treated higher than other creditors under Section 53 of the IBC, merely because they enjoy security interest.

Arguments

Contentions of the Applicant:
The Applicant submitted that it was the sole term lender having first pari passu charge over the movable and immovable properties of the Corporate Debtor situated at Medak, Andhra Pradesh and Silvassa, Dadra and Nagar Haveli, as security for its outstanding dues vis-à-vis the Corporate Debtor.

The Applicant contended that at the time of determining the calculation methodology for the creditors proportional share, the interest of the Applicant, who had a security interest in its favour, had not been taken into consideration by the Respondent, and that the Applicant had been treated at par with the other creditors who were eligible to get their realisations from the Plan in terms of Section 53 of the IBC.

The Applicant submitted that it had been grossly prejudiced by the Plan under which it had been treated at par with the other creditors, thereby making it eligible to get a far lesser value of the proceeds of the Plan than it otherwise would have been entitled to under the IBC. Moreover, the security interest created in favour of the Applicant was being taken away by way of the Plan.

The Applicant also placed emphasis on Section 30(2)(b) (Submission of resolution plan) of the IBC which inter alia provides for payment of debt to financial creditors who do not vote in favour of the resolution plan, in such a manner as may be specified by the Insolvency and Bankruptcy Board of India (“IBBI”), but which cannot be less than the amount paid to such creditors in accordance with Section 53(1) of the IBC, in the event of liquidation of the corporate debtor.

Further, the Applicant contended that since there are no provisions under the IBC that abrogate security interest during insolvency resolution, its principles would be governed by Section 48 (Priority of rights created by transfer) of the Transfer of Property Act, 1882, under which the claim of the first charge holder prevails over the claim of the second charge holder.

The Applicant also alleged that there would be no incentive for a secured creditor to opt for the resolution of a corporate debtor, if the priority of a secured creditor having first charge as its security interest is ignored. The secured creditor would rather opt for the liquidation of the corporate debtor by enforcing its security interest outside the purview of the IBC, which would in turn, not only defeat the primary objective of the IBC, that is, maximization of the value of assets of a corporate debtor through insolvency regime in a time bound manner, but would also result in the loss of essence of the IBC.

Contentions of the Respondent:
The Respondent submitted that the Plan was approved by 78.79% of the CoC in their commercial wisdom and an application for approval of the Plan had already been filed by the Respondent before the NCLT. The Respondent submitted that the Applicant’s contention regarding the security interest created in the Applicant’s favour being taken away by way of the Plan was legally flawed in light of Regulation 37(1)(d) (Resolution plan) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, under which a resolution plan can include satisfaction or modification of any security interest.

The Respondent further submitted that while the Applicant had disputed the methodology of computation of its proportional share of the liquidation value receivable under Section 30(2)(b) of the IBC read with Section 53(1)(b)(ii) of the IBC; however, Section 30(2)(b) of the IBC read with Section 53(1) of the IBC only presupposes a notional relinquishment of security interest by a dissenting financial secured creditor, to the liquidation estate as per Section 52(1)(a) (Secured creditor in liquidation proceedings) of the IBC.

Section 30(2)(b) of the IBC does not provide any value that could notionally be realized by the Applicant if it were to proceed under Section 52(1)(b) of the IBC. Section 52 of the IBC is merely invoked in Section 53(1) of the IBC insofar as a relinquishment of security interest is governed by Section 52(1)(a) of the IBC. Any notional realisation by the Applicant as per Section 52(1)(b) of the IBC and further subsections of Section 52 of the IBC is irrelevant in the context of determining entitlement of a dissenting financial creditor under Section 30(2)(b) of the IBC.

The CoC had worked out the distribution of proceeds in accordance with the law and that there was no reason for any misapprehension on this account. Moreover, the Applicant was being paid a sum of money to achieve compliance with Section 30(2)(b) of the IBC, which stipulates a minimum payment of the liquidation value receivable by such dissenting secured financial creditor under Section 53(1) of the IBC.

The Respondent contended that inter-se priority of charges held by the secured creditors is irrelevant for the determination of pay-out to secured creditors under Section 53(1) of the IBC and to support its argument, the Respondent placed reliance on the case of Technology Development Board v. Anil Goel [Company Appeal (AT) (Insolvency) No. 731 of 2020] wherein the National Company Law Appellate Tribunal opined that “the view taken by the Adjudicating Authority on the basis of judgment of Hon’ble Apex Court in “ICICI Bank vs. Sidco Leathers Ltd. (supra)” (which is pre-IBC), ignoring the mandate of Section 53 of I&B Code which has an overriding effect and came to be enacted subsequent to the aforesaid judgment rendered by Hon’ble Apex Court explicitly excluding operation of all Central and State legislations having provisions contrary to Section 53 of I&B Code, is erroneous and cannot be supported. For the foregoing reasons, the impugned order holding that the inter-se priorities amongst the Secured Creditors will remain valid and prevail in distribution of assets in liquidation cannot be sustained.”

Reliance was also placed by the Respondent on the case of India Resurgence ARC Private Limited v. M/s. Amit Metaliks Limited and Another [2021 SCC Online SC 409] (“India Resurgence Case”) wherein the Hon’ble Supreme Court of India opined as that: “Thus, what amount is to be paid to different classes or subclasses of creditors in accordance with provisions of the Code and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors; and a dissenting secured creditor like the appellant cannot suggest a higher amount to be paid to it with reference to the value of the security interest.”

Observations of the NCLT

The NCLT observed that the IA pertained to the prayer of the Applicant to treat it at par with the assenting financial creditors as they were also in the category of secured financial creditors.

The NCLT observed in the India Resurgence Case that, “It needs hardly any emphasis that if the proposition suggested on behalf of the appellant were to be accepted, the result would be that rather than insolvency resolution and maximization of the value of assets of the Corporate Debtor, the processes would lead to more liquidations, with every secured financial creditor opting to stand on dissent. Such a result would be defeating the very purpose envisaged by the Code; and cannot be countenanced. We may profitably refer to the relevant observations in this regard by this Court in Essar Steel as follows: — “Indeed, if an “equality for all” approach recognizing the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivized to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This would defeat the entire objective of the code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.”

The NCLT opined that just because a creditor enjoys the protection of a security interest, he cannot be treated any higher than the other creditors who may also have financed the Corporate Debtor while not enjoying any kind of protection in the shape of a security interest. Moreover, such creditors have consistently run the risk of not getting paid their dues in the shape of realizations from the security interest or otherwise, for a considerably longer period, while the secured creditor was very happily staying put with the protection of a security interest. If that were to be the case, all secured creditors would want to give a dissenting view to the CoC which would not lead to the maximization of the value of the corporate debtor and thus defeating the very purpose of resolution envisaged under the IBC.

Decision of the NCLT

In view of the aforesaid observations and precedents, the NCLT did not find any reason to interfere with the commercial wisdom of the CoC and accordingly, rejected the IA filed by the Applicant.

VA View:

The NCLT rightly did not interfere with the commercial wisdom of the CoC and based on the current judicial precedents, held that a dissenting secured creditor cannot be treated higher than other creditors under Section 53 of the IBC just because they enjoy security interest.

The NCLT has rightly relied on the India Resurgence Case and re-emphasised that entitlements extended to the creditors based on the value of security would result in more liquidation with every secured financial creditor opting to dissent, as against insolvency resolution and value maximization of the assets of the corporate debtor, thereby defeating the very purpose envisaged under the IBC.

Therefore, through this Order, the NCLT has upheld the primary objective of the IBC, being value maximization of the assets of the corporate debtor, and insolvency resolution, as against liquidation.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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