The National Company Law Appellate Tribunal (“NCLAT”) has, in the case of Hero Fincorp Limited v. Rave Scans Private Limited and Others (dated September 17, 2019) held that dissenting financial creditors cannot be discriminated against in a resolution plan.

FACTS
Corporate Insolvency Resolution Process (“CIRP”) was initiated against Rave Scans Private Limited (“Rave Scans”) on January 25, 2017. Accordingly, on October 17, 2019, the National Company Law Tribunal, Principal Bench, New Delhi approved a revised resolution plan submitted by Mr. Rahul Jain, which was earlier passed by Rave Scan’s committee of creditors which had approved the resolution plan with 78.55% of the votes in favour of the same. However, Hero Fincorp Limited (“Hero Fincorp”), which was a secured financial creditor of Rave Scans, challenged the approval of the revised resolution plan before the NCLAT. Hero Fincorp stated that the revised resolution plan submitted and approved is discriminatory, as it treats similar creditors differently.

ISSUE
Whether the revised resolution plan submitted is discriminatory in nature against Hero Fincorp?

ARGUMENTS
The Appellant argued that Hero Fincorp, despite being a secured financial creditor, was discriminated against with respect to similarly situated secured financial creditors. It was argued that the other similarly situated secured financial creditors were provided with a higher percentage of their claim amount, whereas Hero Fincorp was provided with a lower percentage of the same.

The Respondent argued that the resolution plan in question was passed by 78.55% of the votes in favour of the same by the committee of creditors in its meeting held on March 13, 2019. Further, it was argued that as per the resolution plan, the successful resolution applicant has offered upfront payment of INR 54 crores as against the asset value (liquidation value) of INR 36 crores. Therefore, the amount payable to Hero Fincorp vide the revised resolution plan was higher than the liquidation value, which is the estimated realizable value of the assets of Rave Scans.

OBSERVATIONS OF THE NCLAT
The NCLAT perused the statement of settlement of the dues of the stakeholders and observed that Hero Fincorp has been provided with 32.34% of its claim, ostensibly because it has dissented with the revised resolution plan. It was also observed that other secured financial creditors have been provided a higher percentage of their claims. To illustrate the same, Tata Capital Financial Services Limited has been provided with 75.63% of its admitted claim and other financial creditors such as Indian Overseas Bank has been provided with 45% of its admitted claim, the Bank of Baroda was provided with 45% of its admitted claim and the Punjab National Bank has been provided with 45% of its admitted claim.

It was observed, that the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) (Fourth Amendment) Regulations, 2016, amended the provisions of Regulation 38 of the Insolvency and Bankruptcy Board of India (Corporate Insolvency Process of Corporate Persons) Regulations, 2016 (“CIRP Regulations”). Prior to the above amendment, Regulation 38(1)(c) of the CIRP Regulations stated that the resolution plan shall identify specific sources of funds that will be used to pay the liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.

However, pursuant to the NCLAT’s decision in the case of Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Limited and Others (dated September 12, 2019), where it was held that no discrimination can be made between the financial creditors in the resolution plan on the ground that one has dissented and voted against the resolution plan or the other has supported and voted in favour of the resolution plan, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) (Fourth Amendment) Regulations, 2016 was passed, which deleted the above-mentioned Regulation 38(1)(c) of the CIRP Regulations.

Reference was also made to the Hon’ble Supreme Court’s decision in the case of Swiss Ribbons Private Limited and Others v. Union of India and Others (dated January 25, 2019) where it was observed that:

“the NCLAT has, while looking into viability and feasibility of resolution plans as approved by the committee of creditors, always gone into whether the operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are either rejected or modified so that the operational creditors’ rights are safeguarded.”

It was then observed that Insolvency and Bankruptcy Board of India has not provided for separate treatment to dissenting secured financial creditors who do not vote in favour of the resolution plan, and that the amended Regulation 38 of the CIRP Regulations does not discriminate against similarly situated creditors on basis of their affirmative/ dissenting vote on the resolution plan.

DECISION OF THE NCLAT
The NCLAT held that the revised resolution plan in its current form was discriminatory in nature and is violative of Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016. However, the NCLAT did not set aside the approved plan, but gave the successful resolution applicant the opportunity to remove the discriminatory provisions of the revised resolution plan and provide for payment of 45% of Hero Fincorp’s claim. It was also stated that if the successful resolution applicant does not make the above mentioned change, within one month of this order of the NCLAT, the order of the NCLT dated October 17, 2018 approving the resolution plan shall be set aside.

Vaish Associates Advocates View
This judgment correctly stated that a resolution plan cannot discriminate against a creditor merely on the basis of the vote they cast. Now, resolution plans will have to provide for similar treatment to creditors irrespective of their vote.

Interestingly, while the NCLAT directed the successful resolution applicant to repay 45% of Hero Fincorp’s claim in order to equate it with the claims filed by Indian Overseas Bank, Bank of Baroda and Punjab National Bank, it did not direct any changes to the money payable to Tata Capital Financial Services Limited, who were given 75.63% of their claim. This indicates that the NCLAT only was concerned in addressing negative discrimination, as the judgment was silent on the reasons for providing one secured financial creditor a higher percentage of his claims as compared to the other financial creditors.

For more information please write to Mr. Bomi Daruwala at [email protected]

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