[By Arya Mittal & Naman Keswani]
The authors are students at the Hidayatullah National Law University.
Recently, the Hon’ble Supreme Court of India gave its judgement in the case of India Resurgence Arc Private Limited v. M/s Amit Metaliks Limited & Anr. wherein it held that a dissenting secured financial creditor cannot claim a priority over other creditors based on the security interest held by it. The legal provision in question was Section 30(4) of the Insolvency and Bankruptcy Code, 2016 [“the Code”] which was amended in 2019.
The current post seeks to analyse the case in light of the provisions of the Code with regards to the priority of the share of a secured creditor.
Facts of the Case
India Resurgence Arc Private Limited (“India Resurgence Arc”) is the assignee of rights, title, and interest of Religare Finvest Limited, a secured creditor of the corporate debtor VSP Udyog Private Limited. The resolution plan for the corporate debtor was approved by 95.35% of the creditors, with India Resurgence Arc holding its dissenting opinion. It was of the view that it only received one-sixth of the amount of security interest held by it and it would be more beneficial if the corporate debtor was liquidated since, in that case, it could have enforced its security.
The resolution plan was approved by the National Company Law Tribunal, Kolkata and it held the resolution plan to be compliant with all legal requirements provided in the Code. However, India Resurgence Arc appealed to the National Company Law Appellate Tribunal (“NCLAT”) under Section 61(3) of the Code, contending that the approved plan contravened the provisions of the Code but the Appellate Authority dismissed the appeal. Hence, an appeal was preferred before the Supreme Court under Section 62 of the Code.
Critical Analysis
Priority-based on Security Interest
The main contention of India Resurgence Arc was based on the amendment to sub-section 4 of Section 30 of the Code which provided to consider, “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”. India Resurgence Arc failed to consider that the provision uses the word ‘may’ which leaves it to the discretion and commercial wisdom of the Committee of Creditors (CoC) to consider if such priority should be given to any of the financial creditors. Thus, in the event of not being given any priority, a financial creditor cannot challenge it as a contravention of the law. To substantiate further, the resolution plan approved by CoC is valid in the eyes of law if requirements of Section 30 of the Code are fulfilled. The Supreme Court has also agreed with the same in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. (“Essar Steel”) wherein it observed that the amendment “only amplified the considerations for CoC” and was not meant to give any undue advantage to any one of the similarly situated class of creditors.
Furthermore, the contention of the India Resurgence Arc for enforcement of entire security interest in its favour was also negated. The Court referred to Essar Steel, wherein it clarified that the amendment has been beneficial for operational and unsecured financial creditors who were now entitled to receive a minimum amount since prior to the amendment, the dissenting operational and unsecured financial creditors could be crammed down by the secured financial creditors. However, post-amendment, this is not possible since their interest is now secured. As regards the secured financial creditors, the proposition remains the same and a higher amount could contend only if it is not fair and equitable to such creditor. Therefore, a creditor can only claim a minimum amount that should be paid to it and cannot contend for a higher amount based on the security interest held by it.
Addressing the contention of India Resurgence Arc to liquidate the corporate debtor, the Court referred to the judgement of Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors. wherein the Supreme Court has held that a financial creditor can enforce the security interest but only to the extent which is receivable by it. The Court also clarified that enforcement to such an extent would satisfy its debts and would not contravene any of the provisions of the Code. It held that it was never intended by the legislature that a creditor having a security interest, be entitled to enforce the entire security interest but rather a proportionate part receivable by it. If any creditor is allowed to do the former, it will lead to inequality and be unjust to other secured creditors.
Requirements of Law
India Resurgence Arc preferred an appeal under Section 61(3) of the Code on the ground that “the approved resolution plan was in contravention of provisions of the Code”. It contended that the plan was not fair and equitable since it allowed for payment of nearly just one-sixth of the amount of the total security interest held by it. Explanation 1 to Section 30(2) of the Code states that the distribution should be fair and equitable to the creditors. The Court was of the view that the contention had no substance since all the secured creditors within that class had been provided with the same proportionate percentage share as India Resurgence Arc. Since it was provided with the same proportionate share as other creditors, it cannot raise an issue of unfair and inequitable treatment. If such an approach (as India Resurgence Arc) is adopted, then the creditors will be motivated to liquidate the company, as the appellant in the present case, which would defeat the objective of the Code. The same was also held in Essar Steel.
In Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court very well emphasised that the objective of the Code is to revive the corporate debtor and restructure it so that it can continue as a going concern rather than to provide a recovery mechanism for the creditors to satisfy their debts.
The requirements of the law of a resolution plan are satisfied if it is in accordance with Section 30 of the Code. As held in Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Ors., a quantitative analysis of the resolution plan is beyond the scope of judicial review if the mandatory requirements are complied with. The same is left on the commercial wisdom of the CoC and a creditor, who is dissatisfied with the decision of CoC, cannot call it a legal grievance if the requirements are satisfied.
Conclusion
From the aforementioned contentions, it is clear that it is not mandatory to give priority to a dissenting creditor who has held a security interest over the corporate debtor. Additionally, a creditor cannot claim a higher amount based on the security interest held by it if it has been given a proportionate share as other creditors of the same class. The interest of one stakeholder during insolvency proceedings should not be detrimental to the interests of other stakeholders, who, in the current case, are in majority. Moreover, if such a contention would have been accepted, then more corporate persons would have been liquidated than revived, which would be contrary to the objective of the Code.
To conclude, the Supreme Court took the right step by protecting the interest of majority stakeholders rather than giving priority to one dissenting secured creditor who has already been given fair and equitable treatment by way of a proportionate share in the resolution plan.