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The authors are Ruchita Vishnoi and Shreya Gupta, third year students at Gujarat National Law University, Gandhinagar.
Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been devised with the true legislative intent of facilitating speedy maximisation of assets to put the Corporate Debtor back on the rails. To this effect, the responsibility entrusted with the Committee of Creditors (“CoC”) for approval of a Resolution Plan assumes elephantine importance and much is left to the commercial wisdom of the CoC. It is a well-established jurisprudential stance that grievances pertaining to modifications of claims in the Resolution Plan attach to the commercial aspect of affairs thereby warranting addressal by the CoC. The Adjudicating Authority i.e., the NCLT, is merely statutorily responsible for ensuring compliance to Section 30 of the IBC.
In ignorance of the said clear limitation on the Adjudicating Authority’s power of judicial review, yet another prayer for an amendment in claims after approval of the Resolution Plan was recently brought to the NCLAT in the case of Paramvir Singh Tiwana v. Puma Realtors (P) Ltd.. The ruling is monumental since while it upheld that the NCLAT does not have residual equity-based jurisdiction, the need to take measures to safeguard the interests of the Operational Creditors in the structure of the Resolution Plans has also been properly voiced for a first.
Brief Facts
The Appellants, a group of small-scale firms, are Operational Creditors who extended their services to the Corporate Debtor, a Real Estate Company. In lieu of the respective claims submitted once the CIRP was initiated, the Resolution Plan put forth by ‘One City Infrastructure Pvt. Ltd.’ and ‘APM Infrastructure Private Limited’ was approved by the CoC. The Appellants preferred to challenge the NCLT Order approving the Plan (“Impugned Order”) before the NCLAT, alleging that the approval was given in disregard of the Appellants' objections. Contentions regarding procedural and material irregularities and discrimination on grounds of natural justice were put forth. Alleging discrimination between the classes of Creditors, a prayer was made for modification of claims while the Resolution Plan was already in the process of implementation.
Judgement
Three major issues were analysed to affirm that the NCLAT does not have equity-based jurisdiction after approval of a Resolution Plan:
Procedural/ Legal Irregularities
In lieu of an older Delhi High Court Order in Paramvir Singh Tiwana v. Union of India, the NCLAT held that because an appeal could have been made solely ‘on merits’ at this point, the Appellants were not at liberty to cite grounds of natural justice. Moreover, the Impugned Order was pronounced and shown on the Cause List in accordance with Rule 150 of the NCLT Rules, 2016 stipulating for immediate pronouncement of an order by the Tribunal post hearing and hence, no case was sustainable for any type of procedural or legal irregularities.
Tribunal’s Equity Based Jurisdiction
Reliance was placed on Pratap Technocrat Private Limited v. Monitoring Committee of Reliance Infratech Ltd. to reiterate that no residual equity-based jurisdiction is vested in the Tribunal. IBC only mandates for determination of compliance with the requirements specified in sub-section (2) of Section 30 by the Adjudicating Authority. There exists no power to interfere with the merits of the ‘business decision of the Committee of Creditors’. NCLAT also placed reliance on the ratio laid down in Bank of Baroda v. MBL Infrastructures Ltd. to ascertain that since the requisite proportion of voting share had been obtained and majority of Creditors had approved the Resolution Plan, the claims could not be modified at the present stage.
Discrimination Between Classes of Creditors
On the contention that the Appellants were not treated in a fair and equitable manner in the Resolution Plan, reliance was placed on Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta and Kalparaj Dharamshi v. Kotak Investment Advisors Ltd. to highlight that the commercial decision taken by the CoC is “based on ground realities, by a majority which binds all stakeholders including dissenting Creditors'' and the said decision is not justiciable. It was held that any differential treatment between the classes of Creditors, based on the nature of business being conducted, cannot be defined as a material irregularity and is not barred by the essence of the IBC.
Analysis
After making careful assessments in the present case, the NCLAT Bench opined that the Government and the IBBI need to frame regulations to protect the interests of the most affected class of Homebuyers in cases of real estate bankruptcies. Interestingly, a concern was also expressed for guarding the interests of the Operational Creditors while structuring Resolution Plans. An analysis of the following three aspects brought out in the judgement becomes imperative:
Interest of Homebuyers
In cases of real estate insolvencies, Homebuyers form a vulnerable group that has been at the receiving end of frauds by willful defaulters for a very long time. The present case involved the interest of around 700 Homebuyers who hoped to array their grievances via the resolution mechanism prescribed by the IBC. It has been rightly highlighted by the Bench that while a majority of Homebuyers voted in the favour of the Resolution Plan in this case, the implications suggest that certain steps by the Government can help in streamlining the process on a larger scale. A speedy implementation of the current proposals by the government to establish a centralised platform for case registration, streamline pre-packaged Resolution Plans, and create customised plans for managing operational and non-viable assets separately can certainly help improve the IBC's low success rate in resolution of matters as in the present case.
Interest of Operational Creditors
The distinction between an Operational Creditor and Financial Creditor is set forth in the Code based on their contributions to the operation of the business while it remains solvent. In the present case, the appeals by Operational Creditors were rightfully dismissed since the Resolution Plan was already being implemented and it would not have been wise to backtrack and stall the process. However, here lies an issue that amplifies the disparity between theory and practice: while the minimum payment to Operational Creditors cannot be less than the operational debt's liquidation value, such value amounts to zero in almost all cases owing to the size of the majority of the Corporate Debtors' outstanding debt. This creates an illusion of a false security for the Operational Creditors and hence, it is important that certain measures are taken to protect them as highlighted in the judgement. It is important to consider the inclusion of an incentive structure in the IBC to encourage a shift in this attitude and make sure that the CoC does not surrender to a probable bias owing to the lopsided voting share distribution between Financial Creditors and Operational Creditors. In this regard, most often it becomes rather simple for Financial Creditors to do what is in their own best interests due to the lack of formal recourse for the Operational Creditors.
Cues can be taken from the manner in which a committee of unsecured Creditors is formed under the US Law whereby twenty major unsecured Creditors of the company who are willing to participate are allowed. Such a committee ensures that unsecured Creditors, who could only be due modest amounts and might not otherwise receive proper attention, are well represented. For all foregoing reasons, such a committee mechanism needs to be considered for India as well.
Defining Tribunal’s Jurisdiction
The view that the Adjudicating Authority cannot review on merits the business decision of the CoC again puts the Operational Creditors on the periphery as they fail to have a say in the Resolution Plan without any recourse whatsoever. Due to the inference from this judgement that their rights are not protected or guaranteed by the Code, many Operational Creditors may refrain from seeking remedy or protection under the Code. Further, this can lead to the beginning of numerous legal actions including recovery lawsuits, actions under the Commercial Courts Act of 2015, etc. against the Corporate Debtor, thus defeating the whole objective of enacting the IBC in the first place.
There is a clear need to make possible a course of action that would make the IBC more effective on this front. Here, it is interesting to highlight that in the UK, under the Corporate Insolvency and Governance Act, 2020, the authorities have the power to approve the resolution plan if it is "fair and equitable," which opens the door to additional actions by the courts. This is in contrast to Section 31 of the IBC whereby the Adjudicating Authority has limited authority to approve the plan adopted by the CoC.
Conclusion
While the IBC itself defines what constitutes a fair and equitable treatment in the legal process of insolvency, the ruling in the case under consideration assumes importance as it touches upon the issue of bringing about a necessary balance in the composition of the CoC for the Resolution Plan to be fairly reflective of the interests of all classes of Creditors. Even though the intelligible reason behind providing only the Financial Creditors with the voting rights in the CoC is commendable, the dispute in the present case has made apparent the need for steps to protect the interest of Operational Creditors as well. This can be attributed to the assertion that the apparent exclusion of the Operational Creditors from a substantial say in the CoC is not only without adequate basis but is also contrary to the legal standing in other jurisdictions. To this effect, the availability of a recourse for the Operational Creditors via the residual equity jurisdiction of the Tribunal becomes pertinent.
It has been clarified that the Indian position of law regarding the Adjudicating Authority’s jurisdiction being limited only to reviewing the Resolution Plan in accordance with statutory prescriptions is static. However, a comprehensive analysis signifies that in the background of certain foreign jurisdictions such as the United States and the United Kingdom permitting challenges to the Resolution Plans on grounds of fairness and equity in the courts even after their approval, it is now integral that relevant Regulations are framed to balance the interests of the Financial Creditors and the Operational Creditors in cases of real estate bankruptcies in India as well. The availability of residual equity jurisdiction would further present a partial cure for the CoC’s susceptibility to bias in light of the unresolved contention of safeguarding the interests of Operational Creditors.