[By Atharva Kulkarni]
The author is a student of Maharashtra National Law University, Mumbai.
Introduction
On 24 December 2024, the National Company Law Appellate Tribunal (NCLAT) pronounced its decision in NCC Ltd. V. Golden Jubilee Hotels Pvt. Ltd. Through this order, the tribunal has tackled a long-standing debate on inter-se classifications of Operational Creditors (“OCs”) and has permitted the Committee of Creditors (“CoC”) to conduct such classifications provided doing so is crucial for the existence of a Corporate Debtor (“CD”).
This article aims to deconstruct the order in light of the pre-existing jurisprudence on sub-classification of OCs and the supremacy of the ‘Commercial Wisdom’ as employed by the CoC while modifying and approving a resolution plan (“RP”).
Facts
Golden Jubilee Hotels Pvt. Ltd. had leased land from Telangana State Tourism Corporation Limited and Shilparam Arts & Crafts Society Ltd. (hereinafter “Special OCs”) for the construction of a Hotel Trident in Hyderabad. After being admitted into CIRP, the CoC through the Successful Resolution Applicant (“SRA”) had determined that the liquidation value (“LV”) of the OCs as per Section 53 of the Insolvency & Bankruptcy Code 2016 (hereinafter “IBC”) was nil and thus their original submitted claims were not admitted by the SRA. As per the RP, FCs were allocated Rs. 949 Crores which was almost the entirety of their claims, whereas the claims of the OCs were Rs. 112 Crores, of which only Rs. 50.02 Crores were admitted, everyone except Special OCs was allocated nil payments, and the latter ones were paid their entire claim. However, in the approved RP, special OCs had been allotted all of their payments. Leading to the plan being challenged in NCLT, which in turn upheld the RP and rejected the challenges lodged. Following this order multiple petitions were filed in the NCLAT against the RP primarily by the OCs. The NCLAT bench clubbed all these petitions together and adjudicated on them in the present case. The gravamen of the allegations of NCC Ltd. lies in the RP allocation, they argue that such a differential allocation of payments among the OCs is invalid under law, and that there is no provision in the code approving the existence of special OCs or the discrimination suffered by them.
Deconstructing the Order
The bench noted that Section 21 makes the CoC the primary supervising body managing the insolvency resolution process of a corporate debtor, under Section 30(4) it is also empowered to approve, reject or modify a resolution plan as submitted by the resolution applicant.
In Swiss Ribbons v. Union of India, the apex court had observed that the CoC exclusively consist of FCs who, as per the Court’s rationale, are better equipped at governing the insolvency resolution of a corporate debtor owing to their vested interest in keeping the its business a going concern. The OCs on the other hand are not privy to the workings of the CoC, therefore, to safeguard their interests, Section 30(2)(b) mandates the allocation of minimum payments to such OCs which are proportional to their LV as detailed under Section 53.
The bench observed that as per Section 5(21) of IBC, an ‘operational debt’ is any claim spawning out of trade credits, employment dues, or any other dues owed to the state or Central government whereas under Section 5(8) financial debt arises when money is disbursed against consideration of time value of money.
It cited the judgement of the SC in Pratap Technocrats v Monitoring Committee of Reliance where the court had held that a standard of fairness and equity needs to be employed while distributing payments to the OCs in a resolution plan, as per the explanation 1 attached to Section 30(2), distribution of payments in accordance with the LV of OCs would be considered to be fair and equitable.
NCC Ltd. relied on the ratio of Akashganga Processors v Ravindra Kumar Goyal to argue that such a subclassification of OCs is invalid, the tribunal had held that inter se classifications among the OCs who are similarly placed cannot be made in a resolution plan, this as per the tribunal was in keeping with the principles laid down in Committee of Creditors of Essar Steel v Satish Kumar Gupta & Ors (Essar Steel). However, the NCLAT ended up disagreeing with the objections of NCC Ltd. and upheld the RP, thereby approving the subclassification.
Analysis
In Binani Industries v Bank of Baroda the apex court observed that no subclassification and its resultant differential treatment can be allowed among similarly placed OCs as the objective of the IBC is not sole profit and asset maximization of the CD but also to satisfy the interests of all the stakeholders involved in the debt-ridden CD. The aforesaid bar is applicable to creditors who are similarly placed.
An identical stance was echoed by the NCLT in the recent case of Amit Goel v Piyush Shelters India Pvt. Ltd. where it observed that creditors in similar situations cannot be discriminated against in RP. Implying that the CoC is allowed to make such differential payments to OCs not similarly placed. The criterion for such a differentiation is the capacity of the creditor to keep the CD a going concern.
Although the IBC does not explicitly categorize OCs into classes, it does recognize the existence of separate classes among them on the basis of their claims. It has also been argued that such classes of creditors are distinct even within the definition of OCs. The NCLAT in Gail India v Ajay Joshi used this reasoning to argue that the Code does not inflict an embargo on the CoC from classifying OCs in separate classes in order to determine the distribution and priority of payments. It is up to the ‘collective commercial wisdom’ of the CoC to determine the method and quantum of payments to the creditors, even in this case, the CoC chose to pay in full the dues which were essential for the corporate debtor to remain a going concern.
In Essar Steel the court observed a similar position, the CoC is free to modify a resolution plan to suit the immediate and essential needs of the CD required to keep it a going concern. In Excel Engineering v Mr. Vivek Muralidhar Dhabade, farmers were considered essential creditors to the operations of the CD and thus were delineated full payments for their dues while the other OCs were not paid anything. Such a classification would also depend on the nature of industry where the corporate debtor is functioning and as per the deliberation of the CoC. This is also in line with international standards of insolvency law as determined by UNCITRAL, stating that creditors should be treated in a manner which reflects their bargains with the CD.
Therefore, the commercial wisdom of the CoC is paramount barring a limited judicial review beyond which the NCLT cannot interfere. In K Shashidhar v Indian Overseas Bank (along with many other judgements) the SC has repeatedly observed that under Section 31 of the IBC the NCLT is merely allowed to adjudge whether the plan is in accord with the provisions of Section 30(2), it cannot go into analysing the veracity of the commercial wisdom applied by CoC.
Citing the recent judgement of the SC in SBI v Consortium of Murari Lal & Florian Frisch, the NCLAT in the present case stated that the rationale behind such a limited judicial review was to fasten up the insolvency resolution process and avoid futile delays. NCLT cannot debate whether the nuances of the resolution plan related to distribution of payments and dues to creditors are ‘just’ or ‘fair’, provided the stipulations of Section 30(2) have been followed.
However, such position can lead to further disenfranchisement of trade OCs from the CIRP, as even the safeguard offered by Section 30(2) often is of no use. Because of the existing waterfall mechanism and its payment requirements, the LV of OCs in overwhelming cases is zero. This leaves the OCs at the mercy of the CoC, where they already have no representation, subjecting them to an arbitrary treatment. As per the 2023-24 annual report of the IBBI, the FCs realise nearly 156% of their amounts as a percentage of their LV, whereas for the OCs the same is merely 5.1%. This coupled with the fact that the time value adjusted recovery rates of OCs in CIRPs are merely 22% while the same being 35% for the FCs can worsen the effect of the OC subclassification turning them away from the insolvency process.
Conclusion
NCLAT has in essence approved subclassifications of OC provided it is deemed prudent by the CoC to keep the CD a going concern. This precedent does reinforce creditor autonomy in resolving insolvencies, however, there is no clarity on the statutory qualifiers of keeping a debtor a ‘going concern’, owing to such vagueness, there practically are no limits on the commercial wisdom as exercised by the CoC, possibly rendering trade OCs payment-less as, most of the times, liquidation value of such creditors is nil. Further dissuading them from opting for the IBC processes.