Introduction
In a recent ruling, the National Company Law Appellate Tribunal (‘NCLAT’) in Rajat Metaal Polychem Pvt. Ltd. v. Neeraj Bhatia[i] upheld a resolution plan under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) that excluded payment to operational creditors (‘OC’). The NCLAT’s decision emphasised the commercial wisdom of the Committee of Creditors (‘CoC’) while affirming the statutory framework governing insolvency proceedings. The case has raised crucial questions about the rights of OCs, the powers of the CoC and the potential inequities under the current legislative framework.
Brief Facts
Corporate Insolvency Resolution Process (‘CIRP’) - Vinayak Rathi Steels Rolling Private Limited, the corporate debtor (‘CD’), was placed under CIRP following an application by the Jammu and Kashmir Bank, the sole financial creditor (‘FC’), which had claims amounting to Rs. 6013. 50 lakhs. The insolvency proceedings commenced on 16.06.2020 under the supervision of a resolution professional (‘RP’), Neeraj Bhatia, the respondent in this case.
OC’s Claim - Rajat Metaal Polychem Pvt. Ltd., an OC (‘appellant’), submitted a claim for Rs. 1,54,64,626. However, the RP admitted only Rs. 93,00,564 of the total claim. After submitting the resolution plan, the appellant was not allocated any amount, prompting the creditor to challenge the plan's approval before the National Company Law Tribunal (‘NCLT’), which dismissed the objection on 21.04.2022.
Claim in Resolution Plan- The resolution plan approved by the CoC proposed a payout of Rs. 23.12 crores for the FC while allocating NIL payment for OCs. The FC was also to receive 100% of the CIRP costs, which amounted to Rs. 30.50 lakhs. No payments were proposed for OCs like the appellant.
Issue
The core issue in this case was whether approving the resolution plan that allocated no payment to the OCs was legally valid under the provisions of s. 30(2)(b) of the IBC. The important questions that arose from this case are:
Does the resolution plan violate the rights of OCs by not providing for their dues?
Can the NCLAT interfere with the commercial decisions of the CoC if OCs are not compensated under the resolution plan?
What role do the liquidation value and CoC’s commercial wisdom play in approving or rejecting a resolution plan?
Held
The NCLAT upheld the NCLT’s approval of the resolution plan, dismissing the appeal brought by the appellant. The crux of NCLAT’s reasoning rested on the application of s. 30(2)(b) of the IBC governs the treatment of OCs during the CIRP. As per the above-stated provision, OCs should receive at least as much as they would have if the company were liquidated. Since the liquidation value payable to OCs was assessed as NIL, the NCLAT found no legal basis to challenge the exclusion of payments to OCs within the approved resolution plan.
The judgment relied on the Supreme Court’s decision in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta[ii], which held that OCs are entitled to at least the liquidation value. The commercial wisdom of the CoC in approving differential payments between different classes of creditors should not be interfered with unless it violates statutory provisions. The same reasoning was also entrenched in the ruling of Swiss Ribbons (P) Ltd. v. Union of India[iii], where it was held that OCs are not necessarily entitled to any payments, especially in scenarios where the liquidation value does not cover the claims of FCs. These cases solidified the position that differential treatment of FCs and OCs is permissible as long as statutory obligations are met.
Further, NCLAT also referred to the case of K. Sashidhar v. Indian Overseas Bank[iv] to examine the limited jurisdiction of NCLT and NCLAT in reviewing the commercial decisions taken by the CoC. The judgement in this case also reinforced that as long as the resolution plan complies with the IBC’s statutory provisions, courts are constrained from questioning the fairness or equity of the CoC’s decision.
NCLAT took note of the point that though OCs, as the law stands now, are denied any payment when the amount payable to them in the event of liquidation is NIL till the Legislatures come to the aid of OCs by amending the legislative scheme hands of the courts are tied to take any other view. For the same, NCLAT also referred to the judgment in the case of Damodar Valley Corporation’ v. `Dimension Steel and Alloys Pvt. Ltd. & Ors.[v], which observed that the government should examine and find out whether there are any grounds for considering the change in the legislative scheme towards the payment to the OCs, which also consists of the government dues.
Our Analysis
The judgment highlights the tussle between compliance with laws and equitable treatment, especially concerning OCs. These creditors are typically an important part of a debtor's support system for its operations but often find themselves at the end of the recovery line while supplying essential goods or services to debtors.
In this judgment, the NCLAT acknowledged the intent behind IBC, which aims to revive financially distressed companies by prioritising FCs. These creditors typically have claims directly linked to the debtor’s continued business operations and financing. This approach keeps the insolvency process efficient and focused on restoring economic stability, even though it is unfavourable for certain stakeholders.
By holding that OCs shall be excluded from the resolution plan, NCLAT itself admitted to the hard realities of the present framework. This judgment could spark conversations about reforming the IBC better to balance the interests of both FCs and OCs, ensuring a fairer treatment for all the stakeholders. Hopefully, this decision may pave the way for potential legislative changes.
End Notes
[i] (Company Appeal (AT) (Insolvency) No. 1063 of 2022 & I.A. No. 3101 of 2022 [04.09.2024].
[ii] (2020) 8 SCC 531.
[iii] (2019) 4 SCC 17.
[iv] (2019) 12 SCC 150.
[v] Comp. App. (AT) (Ins.) No. 62/2022.
Authored by Muskaan Jain, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.