Approval of resolution plan & distribution of funds during CIRP, are governed by Section 30 of the Code. Section 30 of the Code after amendment w.e.f. 16.08.2019 , reads as under;
Section 30. Submission of resolution plan. -
(1) A resolution applicant may submit a resolution plan along with an affidavit stating that he is eligible under section 29A to the resolution professional prepared on the basis of the information memorandum.
(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 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.
(3) The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm the conditions referred to in sub-section (2).
(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, 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 and such other requirements as may be specified by the Board: …………………...
The portion in italics is after amendment, and the present discussion is centered on the impact of the amendments shown in bold letters.
Relevant / corresponding CIRP regulations reads as under;
# Regulation 35. Fair value and Liquidation value.
(2) After the receipt of resolution plans in accordance with the Code and these regulations, the resolution professional shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section (2) of section 29:
(3) The resolution professional and registered valuers shall maintain confidentiality of the fair value and the liquidation value.”.
# Regulation 38. Mandatory contents of the resolution plan.
(1) The amount payable under a resolution plan -
- (a) to the operational creditors shall be paid in priority over financial creditors; and
- (b) to the financial creditors, who have a right to vote under sub-section (2) of section 21
and did not vote in favour of the resolution plan, shall be paid in priority over financial
creditors who voted in favour of the 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.
From the above it can be observed that
i) Sub-section (2) of section 30 has inherent contradictions.
- “The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan” ……... “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”,
The quantum of distribution to dissenting FC will be known only after the approval of the resolution plan, than how RP can confirm to the CoC that the Resolution Plan being submitted provides for the payment of dissenting FC as per section 30(2).
ii) In the recent amendments (w.e.f. 16.08.2019), the concept of minimum amount [in terms of Section 53(1)] to be paid to operational creditor, has been extended to dissenting financial creditor also, which has far reaching consequences. A financial creditor will be tempted to become a dissenting creditor if his proposed share in the resolution plan is lower than the liquidation value of the underlying assets in his secured credit, increasing the chances of pushing greater number of cases towards liquidation. This view has been upheld by Hon’ble SCI in CoC of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors.(Civil Appeal no. 8766-67 of 2019)
- # 54. …… , secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This would defeat the entire objective of the Code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.
iii). The amended provisions of the Code now mandates that the resolution plan approved by the CoC provides for the distribution of funds as per Section 53(1) of the Code. Prerequisite to the distribution of funds of resolution plan as per Section 53(1) is the preparation of the list of creditors accordingly. In my view the said amendments, have indirectly thrust upon RP, the duty to follow the provisions of Section 38 to 42 of the Code in preparing the list of creditors, to facilitate CoC in distribution of funds as per section 30(4) of the Code.
iv). After the receipt of valuation report, RP is to recast the list of creditors in terms of Section 53(1), including the priority and value of the security interest of a secured creditor, thus incorporating the value of security interest, to facilitate the CoC to approve the resolution plan, which has to 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.
v). Value of security interest can be taken from the valuation report. A resolution applicant is not privy to the valuation report, as per CIRP regulation no 35. The implications of these amendments are that distribution of funds can not be proposed in the resolution plan, which will be decided by the CoC, on the basis of recasted list of creditors, as per the provisions of section 30 & determining the share of dissenting FC.
vi). The position in respect of the value of security interest is also not clear. Whether it is, the fair value or liquidation value of the security interest, or average of the both (reserve price as per liquidation regulations), which is to be taken for the purpose of approval of distribution by the CoC under section 30(4) read with section 53(1).
vii). An unsecured financial creditor has 4th priority in distribution of funds u/s 53(1). Inclusion of a portion of financial credit, in excess of value of security interest, as secured credit, in 2nd priority [Section 53(1) does not speak about the value of security interest] will affect the rights of employees who have 3rd priority under the waterfall. Amendments in section 30(4) of the code have implications to identify and determine the secured and unsecured portion of the credit, on the basis of value of security interest. which has further widened the function of IRP/RP from simply collecting and collating the claims of creditors in CIRP.
viii). In a nutshell, the resolution applicant, as per the amended section 30(4), is not left in a position to propose the distribution of funds to creditors, in the resolution plan, as the funds will be distributed as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor.
Here observations of NCLT Allahabad (24.07.2018) in J.R. Agro Industries P Limited V/s. Swadisht Oils P Ltd. [CA 59 of 2018 in CP 13/ALD/2017] are worth noting:-
- (Page 33/50) “Notably, distinction under section 53 is a two-fold distinction – (i) secured/unsecured, and (ii) operational/financial. As regards secured creditors, it does not matter whether the creditor is financial or operational, since section 53(1)(b) uses the expression “secured,” and there is no indication as to the nature of debt (financial/operational) owed to such secured creditor. However, when it comes to unsecured creditors, unsecured financial creditors appear in the 4th rank; but unsecured operational creditors come in the 6th rank.”
On collation / verification of claims during CIRP, the provisions of Code & Regulations are in variance. As per section 18(b) of the Code, one of the duties of an IRP is to receive and collate all claims submitted by creditors to him pursuant to the public announcement & as per section 25, RP’s duty, is to maintain an updated list of claims. Whereas Regulation 13 of the CIRP Regulations mandates that the IRP/RP shall verify the claims submitted to him / her within a period of seven days from the last date of receipt of claims.
Recent amendments in Section 30, has added confusion on the role to be played by the IRP / RP on verification / collation of the claims & / or to facilitate the CoC to decide distribution of funds as per section 30(4).
Despite the above amendments, NCLAT (24.10.2019) in Commissioner of Income Tax-6 Chennai Vs. Star Agro Marine Exports Pvt. Ltd.[CA (AT)(Insolvency) no.717 of 2019] had ordered as under;
“Prima facie, we find that the amount as proposed by the “Successful Resolution Applicant” is discriminatory and the same treatment has not been given to the “Operational Creditors” as given to the “Financial Creditors”
In the circumstances, we grant one opportunity to the “Successful Resolution Applicant” providing the same treatment to the “Operational Creditors” including the Appellant. Affidavit be filed within two weeks.”
So the Resolution Professional is in a catch 22 situation. Whether he is to;
1. Collate the claims of creditors as per the provisions of the Code [Section 18(b)]
2. Verify the claims of creditors as per CIRP Regulations (Regulation 13).
3. Follow the Law laid down by the Hon’ble SCI in Swiss Ribbons Pvt. Ltd. & Anr. V/s Union of India & Ors. [Writ Petition (Civil) No. 99 of 2018].
4. Facilitate CoC in distribution of funds as per Section 30(4) r/w Section 53(1) of the Code.
5. Follow / abide by the dictates of NCLAT.
Board should immediately look into the matter & initiate suitable steps to amend the provisions of the Code and/or CIRP Regulations in consonance with the amendments to section 30 of the Code, to remove confusion & unnecessary litigation.
References;-
1. Insolvency and Bankruptcy Code (Amendment) Act, 2019 (w.e.f. 16.08.2019)
2. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) (Third Amendment) Regulations, 2019. (w.e.f. 27.11.2019)
'Disclaimer: The sole purpose of this blog is of creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog
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