Introduction
The National Company Law Appellate Tribunal, New Delhi (‘NCLAT’) in Beacon Trusteeship Ltd. v. Jayesh Sanghrajka[i], upheld the order of the National Company Law Tribunal (‘NCLT’) that approved a resolution plan (‘Plan’) that directed haircut to financial creditors (‘FC’)and decided to hand over the units to home buyers. The Appellants, among the dissenting FCs, had opposed the Plan. The NCLAT confirmed that the amounts offered to the dissenting FCs were consistent with s. 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), thereby affirming the NCLT’s approval. This decision highlights the NCLAT's critical role in the resolution process and emphasizes the tribunal's authority in upholding statutory compliance within such proceedings.
Brief Facts
The dissenting FC filed the appeals against the NCLT order, which had approved the Plan.
In this case, a society executed a development agreement with MIG (Bandra) Realtors and Builders Private Limited (‘MIG’), granting it development rights to redevelop land under a long-term lease.
Pursuant to the same, MIG entered into an agreement with the Corporate Debtor (‘CD’), under which, upon discharging certain costs and obligations, including the obligation to complete the construction project, MIG assigned certain rights to the CD.
The CD issued non-convertible debentures to the appellant FC through private placement to raise funds for the project. However, due to financial constraints, construction has not been able to proceed since March 2018.
Further, in 2020, the society terminated the agreement with MIG, which automatically suspended CD’s rights in the project. MIG took the society's cancellation of the agreement to arbitration.
Meanwhile, the appellant initiated a corporate insolvency resolution process (‘CIRP’) against the CD, which was admitted by the NCLT in 2021. Consequently, the committee of creditors (‘CoC’) approved the Plan, which was dissented by the appellant. Subsequently, the Plan was approved by the NCLT, holding that the Plan was in compliance with s.30 of the IBC.
The amounts remitted to the appellant under the Plan were accepted under protest. The appeals challenging the NCLT’s approval of the Plan were then filed before the NCLAT.
The Plan was challenged by the appellant on the following grounds: -
The NCLT failed to consider that the Plan contravened s. 30(2) of the IBC as it was unfair and inequitable, providing a 93% haircut to the appellant's claim for secured FC. On the other hand, it provided 100% recovery to the Homebuyer.
The valuation report was prepared without relevant information. Hence, without proper valuation, the CoC's decision cannot be an exercise of commercial wisdom.
The payments made to the appellant were in contravention of s. 30(2)(b)(ii) read with s.53(1) of the IBC since the appellant was not paid liquidation value as per the security interest.
Held
The NCLAT held that the CoC exercised its commercial wisdom in approving the Plan, which imposed a haircut on FCs and allocated units to home buyers. Therefore, there was no violation of s. 30(2) of the IBC, a decision the Appellant had approved.
Further, the dissenting FCs are entitled to receive their payment as per s.30(2)(b)(ii), and the amount has been paid to the appellant in accordance with the said provision. Thus, no interference with the order of NCLT on this ground was called for.
The NCLAT found no merit in the appellant's contention that the resolution professional had conducted the CIRP quickly and violated the procedural requirements.
Regarding the contention that the valuation was properly conducted, the NCLAT held that the report considered all relevant factors. Further, the NCLT considered the objections to the valuation report and upheld it, with no fault in the valuation methodology opted by the valuer and the report reflecting the accurate fair value and liquidation value.
The NCLAT further noted that valuing immovable property is not an exact science, and no straightforward formula can determine the precise value of land. Further, the NCLAT held that the valuation experts could not be disregarded merely on the objections filed by dissenting FCs.
Addressing the contention that FCs received a 93% haircut while home buyers were allocated flats without price escalation, the NCLAT recognized home buyers as a distinct class of FC. Homebuyers, assigned houses at a predetermined price per the allotment, are entitled to receive the units from the CD upon paying the agreed consideration. There is no basis for objecting to transfer units to the homebuyers once the consideration has been paid.
The Appellant further contended that they were entitled to payment based on the value of their security interest in the CD's assets. The NCLAT, while answering the issue of whether an FC or a dissenting FC is entitled to receive the amount in a Plan as per his security interest, relied on a catalogue of judgments of the Supreme Court and the NCLAT itself.
The NCLAT, referencing judgments from the Hon’ble Supreme Court (‘SC’), rejected the appellant's contention that FCs were entitled to payments in the Plan based on their security interests.
The NCLAT held that the SC's judgment on the said issue is pending reference; however, until the SC expresses a different view, the law declared by the SC will be binding. Thus, the appellant was not entitled to claim the payment as per their security interest in the assets of the CD.
Our Analysis
The NCLAT has reiterated that the payments to dissenting FCs under the Plan were made in accordance with s. 30(2)(b) of the IBC, affirming that there is no infirmity in the Plan. Further, the NCLAT observed that the valuation report cannot be dismissed based solely on the objections raised by the FC.
The central issue was whether the payments to FCs under the Plan should align with their security interests. The NCLAT relied on the settled position in India Resurgence ARC Pvt Ltd. v. Amit Metaliks Ltd. and Anr.[ii], where the SC held that an FC's entitlement under the Plan should not be proportional to their security interest.
End Notes:
[i] [2024] 163 taxmann.com 777 (NCLAT- New Delhi)[27-05-2024].
[ii] 2021 SCC OnLine 409.
Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.