NCLAT: Nil payment to operational creditors is permissible under the resolution plan May 25, 2022
Published in: Between The Lines
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The National Company Law Appellate Tribunal (“NCLAT”) has in the judgement dated April 7, 2022 (“Judgement”), in the matter of M/s. Genius Security and Allied Services v. Shivadutt Bannanje and Another [Company Appeal (AT) (Insolvency) No. 110 of 2021] held that nil payment to operational creditors is permissible under the resolution plan if the liquidation value is less than the admitted claims of the corporate debtor.
In the instant case, two appellants had approached the NCLAT under Section 61 (Appeals and Appellate Authority) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the impugned order dated January 29, 2021 (“Impugned Order”) passed by the National Company Law Tribunal, Bengaluru (“NCLT”). Since two appellants had challenged the Impugned Order, the NCLAT disposed off both appeals by passing a common Judgement.
The appellants, namely M/s. Genius Security and Allied Services (“Appellant No. 1”) and M/s. RCC Mix (“Appellant No. 2”) provided security and housekeeping services for the projects undertaken by M/s. Fortuna Urbanscape Private Limited (“Corporate Debtor”). Appellant Nos. 1 and 2 are collectively referred to as “Appellants”.
Upon initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor, the Appellant Nos. 1 and 2, who formed part of the operational creditors, submitted their proof of claims in Form B specifying amounts of INR 8,77,317/- and INR 1,08,55,500/-, respectively, to Mr. Shivadutt Bannanje (“Resolution Professional”) along with details of sales invoices and account statements.
The Resolution Professional duly approved the claim amount of Appellant No. 1 at INR 8,47,147/- by e-mail dated December 9, 2019, and the claim amount of Appellant No. 2 at INR 1,08,55,500/- by e-mail dated February 11, 2020.
M/s. Koncept Shelters, the successful resolution applicant of the Corporate Debtor (“Resolution Applicant”) submitted a resoluton plan dated August 3, 2020 (“Resolution Plan”), which provided for a payment of INR 8,00,00,000/- to financial creditors as against a claim of INR 123,05,76,095/- and a provision was also made for homebuyers who formed part of the financial creditors. However, the Resolution Plan proposed nil payments to the operational creditors as against their admitted claims amounting to INR 99,50,075/-.
The committee of creditors (“CoC”) of the Corporate Debtor by a majority of 95.07% approved the Resolution Plan of the Corporate Debtor and the said Resolution Plan also received approval of the NCLT on January 29, 2021.
Consequently, the Appellants (being operational creditors of the Corporate Debtor) challenged the Impugned Order of the NCLT approving the Resolution Plan of the Corporate Debtor on the ground that the Resolution Plan provided nil payment to the operational creditors.
Whether nil payment to operational creditors is permissible under the resolution plan.
Contentions raised by the Appellants:
Firstly, the Appellants submitted that the security and housekeeping services provided by it to the Corporate Debtor were of due importance and aided timely completion of the Corporate Debtor’s projects. Therefore, the dues payable to the Appellants were to be treated as an operational debt under the provisions of the IBC.
Appellant No. 1 contended that the Resolution Professional by e-mail dated December 9, 2019, had duly admitted its claim amount at INR 8,47,147/-, refusing a sum of INR 30,170/- being with respect to tax deducted at source (TDS). Appellant No. 2 submitted that its entire claim of INR 1,08,55,500/- was admitted by the Resolution Professional by e-mail dated February 11, 2020.
The Appellants submitted that the Resolution Applicant had deliberately kept the claims of the Appellants out of the purview of the Resolution Plan despite the Appellants claims being duly admitted by the Resolution Professional, thereby giving a clear indication on the part of the Resolution Applicant that the claims of the Appellants found no merit in the Resoluton Plan. The failure of the Resolution Applicant to verify and acknowledge the claims of the Appellants was in clear violation and contrary to the provisions of the IBC.
The Appellants submitted that, one Mr. Prakash, a real–estate allottee had also raised concerns with respect to the allocation of funds towards unsecured creditors (which included the Appellants), while considering the Resolution Plan during the 8th CoC meeting held on July 30, 2020.
Lastly, the Appellants contended that the Resolution Plan provided by the Resolution Applicant was not in conformity with Section 30(1) of the IBC and that the NCLT ought not to have approved the Resolution Plan provided by the Resolution Applicant despite the fact that it did not provide for any payments to the operational creditors. Further, the NCLT ought to have liquidated the Corporate Debtor on the ground that the Resolution Plan was not in conformity with Section 30(1) of the IBC. In view of the above, the Appellants prayed for setting aside the Impugned Order passed by the NCLT.
Contentions raised by the Resolution Professional:
The Resolution Professional (being the Resolution Professional in both appeals) submitted that the understanding of the Appellants that every creditor is required to be paid the entire amount due to it regardless of the nature of debt, the quantum of debt, the assets of the Corporate Debtor, and the total amount of investment being brought in by the Resolution Applicant, is fundamentally flawed and squarely contrary to the provisions of the IBC.
The Resolution Professional submitted that Section 30(2)(b) of the IBC mandates that the payment to operational creditors shall not be less than (a) the amount to be paid to them in the event of a liquidation under Section 53 of the IBC; or (b) the amount that would have been paid to them if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority under Section 53(1) of the IBC, whichever is higher. Therefore, in either of these two circumstances, if no sum would have been payable to the operational creditors, no sum needs to be earmarked in the Resolution Plan towards payment to operational creditors.
In the present case, it was evident that the liquidation value of the Corporate Debtor was far lower than the total admitted claims made against the Corporate Debtor and that in light of the waterfall mechanism set out in Section 53 of the IBC, no payment would be made to operational creditors in the event of liquidation of the Corporate Debtor.
Moreover, the Resolution Plan clearly stated that payment to operational creditors as a class was not contemplated at all due to the insufficiency of the liquidation value of the Corporate Debtor and that such non-payment to the operational creditors is permissible in accordance with Section 30(2)(b) read with Section 53(1) of the IBC.
The Resolution Professional further contended that the CoC had approved the Resolution Plan by majority vote of 95.07% after considering the feasibility and viability of the Resolution Plan. The said plan had also received approval of the NCLT by its Impugned Order. On account of the foregoing, the Resolution Professional prayed for dismissal of the appeals.
Contentions raised by the Resolution Applicant:
The Resolution Applicant (being the successful Resolution Applicant in both appeals) has contended for dismissal of the appeals on the ground that they were time barred debts. The Resolution Applicant making similar submissions as those of the Resolution Professional, stressed on the fact that the liquidation value of the assets of the Corporate Debtor were evidently lower than the total admitted claims made against the Corporate Debtor and in light of the waterfall mechanism set out in Section 53 of the IBC, no payment would be made to operational creditors in the event of liquidation of the Corporate Debtor.
The Resolution Applicant submitted that it had in its Resolution Plan, contemplated to invest a sum of INR 8,80,00,000/- inclusive of CIRP cost. Therefore, if these sums were to be distributed in accordance with the waterfall mechanism set out in Section 53 of the IBC, no amount would be payable to the operational creditors.
Further, the Resolution Applicant submitted that the Resolution Plan was approved by the CoC in their commercial wisdom.
Observations of the NCLAT
The CoC in its 8th meeting approved the Resolution Plan and declared that the Resolution Plan would be binding on the Corporate Debtor and its employees, members, creditors including the Central Government and any State Government.
The NCLT observed that out of the total claims filed by the operational creditors, claims aggregating to INR 99,50,075/- were verified and admitted for the purposes of CIRP by the Resolution Professional.
Further, with regard to payments to operational creditors, the following proposal was made in Schedule-4(xii) of the Resolution Plan:
“ii. The Liquidation Value is insufficient for payment to the Operational Creditors of the Company as the Liquidation Value is insufficient to satisfy the claims of even the Secured Financial Creditors in full and nil payment has been proposed under the Resolution Plan towards claims of Operational Creditors whether filed or not, whether admitted or not, whether asserted or not and whether or not set out in the balance sheets of the company or the profit and loss account statements of the Company or the List of Creditors and no source has been identified for such payment under this Resolution Plan.”
Moreover, no claims in relation to workmens’ dues were admitted by the Resolution Professional. Similarly, nil payments were proposed towards payment of any outstanding Government dues, taxes, etc. which were admitted as operational creditor debt.
Schedule-4(iv) of the Resolution Plan earmarked a sum of INR 8,00,00,000/- for payment to financial creditors against a claim of INR 123,05,76,095/-. Further, a sum of INR 30,00,000/- was earmarked for payments to employees against a claim of INR 13,99,74,125/-, whereas a sum of INR 50,00,000/- was earmarked for payment towards CIRP cost.
The NCLAT observed that the Resolution Plan made only three categories of payments, that is, (i) CIRP cost, (ii) Employees dues, (iii) Financial creditor dues. No payments were earmarked to any other category including the operational creditors and were shown as nil.
The NCLAT observed that due procedure as contemplated under the IBC is to be followed to submit a resolution plan and that once the plan has received approval of the CoC followed by the approval of the adjudicating authority, the same becomes binding on a corporate debtor, its employees, members, creditors and other stakeholders.
Decision of the NCLAT
The NCLAT came to a resultant conclusion that the approval of the Resolution Plan was legal and valid and that there was no infirmity or illegality in the Resolution Plan approved by the CoC (by majority vote of 95.07%) and the NCLT. With respect to the allegation of the Appellants that a discriminatory treatment was made between the Appellants and similarly situated operational creditors, the NCLAT held that the question of discrimination would arise only when part of the operational creditors are paid their dues in exclusion of other operational creditors. In the present case, there is no discrimination amongst the operational creditors for the reason that no amounts were earmarked for any of the operational creditors of the Corporate Debtor.
Therefore, there being no grounds to interfere with the Impugned Order of the NCLT approving the Resolution Plan, the NCLAT dismissed the appeals filed by the Appellants.
The NCLAT in this judgement has correctly observed that the Resolution Plan was neither in violation of any provision of the law nor made any discriminatory treatment towards the Appellants and similarly situated operational creditors. Pertinently, when no payments were made to any operational creditors including government dues, the question of dismininatory treatment towards the Appellants did not arise. Owing to the fact that the liquidation value of the assets were far lower than the total admitted claims made against the Corporate Debtor, no payments would have been made to the operational creditors even in the event of liquidation of the Corporate Debtor.
Affirming NCLT’s decision, the NCLAT reiterated the well settled law that the commercial wisdom of the CoC cannot be interfered with by the NCLT/NCLAT. Therefore, it can be stated that, a resolution plan which takes into consideration the interest of ‘all’ the creditors and is not discriminatory against one or other operational creditor, is said to be in accordance with the provisions of the IBC.
The principle emerging from this NCLAT ruling is that resolution plan once approved by the NCLT becomes binding on operational creditors. Further, nil payment to operational creditors is permissible under the resolution plan.
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