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Judgment
Ashok Bhushan, J.
This Appeal has been filed against the judgment dated 18th January, 2021 passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad, Court-1 allowing the IA No.794 of 2019 filed by the Resolution Professional (RP) for approval of Resolution Plan under Section 30, sub-section (6) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’).
Brief facts necessary to be noticed for deciding this Appeal are:
By an order dated 25th April, 2019 Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor – M/s Nijinoy Trading Pvt. Ltd. The Respondent-Parwincharan P. Dwari was appointed as Interim Resolution Professional (IRP).
A public announcement was made in Form-A on 3rd May, 2019, in pursuance of which announcement, the IRP received seven claims of Financial Creditors and one claim by Appellant-Operational Creditor submitted in Form-B amounting to Rs.10,33,415/-.
The RP appointed two IBBI registered Valuers to carry out valuation of securities and financial assets of the Corporate Debtor. The two Valuers have given fair value and liquidation value as Rs.9.19 lakhs and Rs.8.08 lakhs respectively.
Pursuant to publication of Form-G, one Resolution Plan was received from Mr. Ramesh Kumar Talkaji.
Modified Resolution Plan was approved with 100% majority of Committee of Creditors (CoC) on 19th October, 2019. The Resolution Plan provides for payment of Rs.19.36 lakhs. Operational Creditors and Statutory Dues have been provided in the Plan only 0.5.%. The RP submitted an Application to the Adjudicating Authority for approval, which was allowed by the impugned order of the Adjudicating Authority approving the Resolution Plan.
The Adjudicating Authority has noticed that only Operational Creditor, that is, the Appellant, who has claimed Rs.10,33,415/- has been proposed to pay 0.5%, that is, Rs.5,200/-. The Adjudicating Authority found the Plan complying with requirements of Section 30, sub-section (2) and Regulations 37, 38, 38(1A) and 39(4) of IBBI (CIRP) Regulations, 2016. Aggrieved against the said judgment, the Appellant has come up in this Appeal.
The Counsel for the Appellant submits that the claim of the Appellant was based on a Decree of learned Additional City Civil and Sessions Judge in OS No.4378 of 2014. The Court has decreed the suit filed by the Appellant against the Corporate Debtor for Rs.5,00,000/- and interest @ of 25% per annum from the date of its judgment dated 12th February, 2015. The Appellant after coming to know of the CIRP proceedings has filed his claim in Form-B. He submits that Resolution Plan is not in conformity with Section 30, sub-section (2) of the Code and is in violation of Regulation 38. It is submitted that Resolution Plan is inequitable since only 0.5% claim of the Appellant has been proposed to be paid and the Financial Creditors on the other hand are being paid @ of 8%. There is a discrimination in payment to Financial Creditors and Operational Creditor. The Operational Creditor cannot be paid less amount than the Financial Creditor. The claim of Appellant was based on Decree of the Civil Court and ought to have been placed on higher rank.
The learned Counsel for the RP refuting the submissions of the Appellant submitted that the Appellant is an Operational Creditor and payment to the extent of 0.5% is in accordance with provisions of Section 30, sub-section (2) and Regulation 38. It is submitted that the claim based on the Decree is also a claim within the meaning of Section 3, sub-section (6). It is submitted that in the Liquidation, the Appellant could have got only Nil amount.
We have considered the submissions of learned Counsel for the parties and have perused the record.
The Appellant has filed the copy of Decree of the Civil Court dated 12th February, 2015 passed in OS No.4378 of 2014. The Appellant had filed a suit in Court of Additional City Civil and Sessions Judge, Bengaluru claiming an amount of Rs.5,00,000/- for his services, pertaining to tax matter in conducting two Appeals before KAT, Bengaluru. The Trial Court passed a Decree in the suit for Rs.5,00,000/- and interest @ 24% per annum from the date of suit till realization. The Corporate Debtor filed a Miscellaneous Application under Order 9 Rule 13 of CPC in the above suit, which had proceeded ex-parte, the same was rejected on 6th August, 2018. After publication, the Appellant filed his claim in Form-B. The claim of the Appellant was admitted by the RP. In the reply filed by RP, the fair value and liquidation value by two registered Valuers has been referred to in Para 11. One Valuer has given a report assessing fair value and liquidation value at Rs.9.19 lakhs and another Valuer has reported fair value and liquidation value as Rs.8.08 lakhs. It is stated in paragraph 13 of the reply that Resolution Plan provides for payment of Rs.19.36 lakhs. The amount admitted by the Financial Creditors is Rs.1,24,49,127/-. There were statutory dues payable for more than Rs.10 crores. In paragraph 13 of the reply, following details have been given regarding Resolution Plan:
| Particulars | Amount Admitted (Rs.) | Amount proposed to be distributed (Rs.) | Percentage to claim admitted (Approx) |
|---|---|---|---|
| CIRP Cost | - | 3,00,000 | - |
| Financial Creditors | 1,24,49,127 | 10,00,000 | 8% |
| Operational Creditors & Statutory Dues | 10,72,23,255 | 5,36,400 | 0.5% |
| Contingent Liabilities | - | 1,00,000 | - |
| Total | 11,96,72,382 | 19,36,400 |
The Operational Creditors and Statutory Dues having been paid @ 0.5%, the submission of the Appellant is that the payment of 0.5% is contrary to Section 30, sub-section (2) and not in conformity with the Code and is in violation of Regulation 38. Section 30, sub-section (2) and Regulation 38 are as follows:
“The Insolvency And Bankruptcy Code, 2016
30(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan -
(a)provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the 3 payment of other debts of the corporate debtor;
(b)provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-
(i)the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or
(ii)the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be 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.
Explanation 1. — For removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.
Explanation 2. — For the purpose of this clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor-
(i)where a resolution plan has not been approved or rejected by the Adjudicating Authority;
(ii)where an appeal has been preferred under section 61 or section 62 or such an appeal is not time barred under any provision of law for the time being in force;
or (iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;
(c)provides for the management of the affairs of the Corporate debtor after approval of the resolution plan;
(d)The implementation and supervision of the resolution plan;
(e)does not contravene any of the provisions of the law for the time being in force
(f)confirms to such other requirements as may be specified by the Board.
Explanation. — For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013(18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law.”
“Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
38. Mandatory contents of the resolution plan.
(1)A resolution plan shall identify specific sources of funds that will be used to pay the –
(a)insolvency resolution process costs and provide that the insolvency resolution process costs will be paid in priority to any other creditor;
(b)liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority; and
(c)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.
(1A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.
(2)A resolution plan shall provide:
(a)the term of the plan and its implementation schedule;
(b)the management and control of the business of the corporate debtor during its term; and (c) adequate means for supervising its implementation.
(3)A resolution plan shall contain details of the resolution applicant and other connected persons to enable the committee to assess the credibility of such applicant and other connected persons to take a prudent decision while considering the resolution plan for its approval.
Explanation : For the purposes of this sub-regulation,-
(i)‘details’ shall include the following in respect of the resolution applicant and other connected person, namely:-
(a)identity;
(b)conviction for any offence , if any, during the preceding five years;
(c)criminal proceedings pending, if any;
(d)disqualification, if any, under Companies Act, 2013, to act as a director;
(e)identification as a willful defaulter, if any, by any bank or financial institution or consortium thereof in accordance with the guidelines of the Reserve Bank of India;
(f)debarment, if any, from accessing to, or trading in, securities markets under any order or directions of the Securities and Exchange Board of India,; and
(g)transactions, if any, with the corporate debtor in the preceding two years.
(ii)the expression ‘connected persons’ means-
(a)persons who are promoters or in the management or control of the resolution applicant;
(b)persons who will be promoters or in management or control of the business the corporate debtor during the implementation of the resolution plan;
(c)holding company, subsidiary company, associate company and related party of the persons referred to in items (a) and (b).”
Sub-section (2) of Section 30, sub-clause (b) requires that Resolution Plan should provide for payment of debts of Operational Creditors in such manner as may be specified by the Board which shall not be less than an amount paid to such creditors under Section 53. The RP has submitted that the payment to the Operational Creditors in Liquidation shall be Nil in view of the extent of the claim of the Financial Creditors.
Hon’ble Supreme Court in (2020) 8 SCC 531 in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Others had examined in detail Section 30, sub-section (2) and Regulation 38 and 39. In paragraph 70 of the judgment, the Hon’ble Supreme Court had noticed that the minimum value to be paid to the Operational Creditor should not be less than the amount to be paid to such creditors in event of Liquidation of Corporate Debtor under Section 53. The Hon’ble Supreme Court has also laid down that equitable treatment of creditors is equitable treatment only within the same class. It has been clearly laid down that the different treatment to Financial Creditor and Operational Creditor cannot be said to be unequitable treatment. In paragraphs 77 and 88, following has been laid down:
“77.That equitable treatment of creditors is equitable treatment only within the same class is echoed in American Jurisprudence, 2d, Vol. 9 (hereinafter referred to as “American Jurisprudence”) as follows:
“6.Distribution.—Equality of distribution is the theme of a bankruptcy act and a prime bankruptcy policy. The bankruptcy system is designed to distribute an estate as equally as possible among similarly situated creditors. Thus, creditors of equal status must be treated equally and equitably.
One of the conditions placed upon the debtor's use of the Bankruptcy Code to obtain a fresh start is that the debtor treat all creditors fairly.
The bankruptcy process is the process by which a res, under the constructive possession of the bankruptcy court, is administered for the purpose of allowing, disallowing, organizing, and prioritizing claims of creditors in, to, and upon the res. Although the central policy of the Bankruptcy Code is equality of distribution among all creditors, exceptions are made by granting priority to certain claims and subordinating others. Pursuant to the central policy, creditors of equal priority should receive a pro rata share of the debtor's property; thus, when there is not enough to go around, the bankruptcy judge must establish priorities and apportion assets among creditors with the same priority.” (emphasis supplied)
88.By reading para 77 (of Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] ) dehors the earlier paragraphs, the Appellate Tribunal has fallen into grave error. Para 76 clearly refers to the Uncitral Legislative Guide which makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors. This being so, the observation in para 77 cannot be read to mean that financial and operational creditors must be paid the same amounts in any resolution plan before it can pass muster. On the contrary, para 77 itself makes it clear that there is a difference in payment of the debts of financial and operational creditors, operational creditors having to receive a minimum payment, being not less than liquidation value, which does not apply to financial creditors. The amended Regulation 38 set out in para 77 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster. Fair and equitable dealing of operational creditors' rights under the said regulation involves the resolution plan stating as to how it has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their debt proportionately. Also, the fact that the operational creditors are given priority in payment over all financial creditors does not lead to the conclusion that such payment must necessarily be the same recovery percentage as financial creditors. So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors.”
It is further observed in paragraph 90:
“….Quite clearly, secured and unsecured financial creditors are differentiated when it comes to amounts to be paid under a resolution plan, together with what dissenting secured or unsecured financial creditors are to be paid. And, most importantly, operational creditors are separately viewed from these secured and unsecured financial creditors in Sl. No. 5 of Para 7 of statutory Form H. Thus, it can be seen that the Code and the Regulations, read as a whole, together with the observations of expert bodies and this Court's judgment, all lead to the conclusion that the equality principle cannot be stretched to treating unequals equally, as that will destroy the very objective of the Code — to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.
Thus, the mere fact that Financial Creditors are paid @ 8% and Operational Creditors are paid @ 0.5% cannot be said to be unequitable treatment. It is relevant to note that statutory dues, which are more than of Rs.10 crores have also been only allocated 0.5%. It is true that the claim of the Appellant was based on Decree of Civil Court. But when we look into the definition of Section 3, sub-section (6), it is clear that the IBC contemplates all claims whether or not such right is reduced to judgment, had to be filed in IBC. Section 3, sub-section (6) is as follows:-
“3(6) “claim” means –
(a)a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;
(b)right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;”
Even if, right to payment is reduced to judgment of a Civil Court, the same is also a claim at par with other claimants as referred to in Section 3, sub-section (6). The judgment of Apex Court in Committee of Creditors of Essar Steel India Limited (supra) has settled the legal position regarding payment to Operational Creditors and Financial Creditors.
The challenge to impugned order of Adjudicating Authority approving the Resolution Plan has to be on the grounds as mentioned in Section 61-sub-sectoin (3), which is to the following effect:
“61(3) An appeal against an order approving a resolution plan under section 31 may be filed on the following grounds, namely:–
(i)the approved resolution plan is in contravention of the provisions of any law for the time being in force;
(ii)there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;
(iii)the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board;
(iv)the insolvency resolution process costs have not been provided for repayment in priority to all other debts; or (v) the resolution plan does not comply with any other criteria specified by the Board.”
From the grounds raised in the Appeal, we do not find that any of the ground is covered by grounds enumerated in sub-section (3) of Section 61, so as to exercise any jurisdiction by this Tribunal to interfere with the order of Adjudicating Authority approving the Resolution Plan. The Adjudicating Authority has considered claim of the Appellant and approved the Resolution Plan. We are of the view that no error has been committed by the Adjudicating Authority in approving the Resolution Plan. We, thus, do not find that any grounds have been made to interfere with the order of the Adjudicating Authority, the appeal is dismissed. No order as to costs.