The insolvency resolution process can be initiated by a financial creditor, operational creditor, or the corporate debtor. Once the corporate debtor is admitted into insolvency, an interim resolution professional (IRP) takes over the management and issues a public announcement. Based on this, creditors file their claims, after which a committee of creditors (CoC) is constituted. Thereafter, the CoC can either confirm the IRP as the resolution professional (RP) or replace them with a new RP.
An Expression of Interest is issued to prospective resolution applicants, who then submit their plans. The RP receives these plans and presents them to the CoC. After considering the feasibility and viability of the plans, the CoC either approves or rejects the plans. The methodology for distributing the amount proposed in the plan is decided by the RP, but it must be approved by the CoC. The distribution can be based either on the security interest or the voting shares of the respective financial creditors.
Any decision taken by the CoC in its commercial wisdom while approving a resolution plan, including the method of distribution, cannot be interfered with. The Adjudicating Authority is mandated only to verify whether the plan satisfies the requirements of the provisions of the Code. If the Authority is satisfied that the plan meets these requirements, it has no option but to approve the plan. In light of this statutory scheme, we will analyze how judicial authorities have interpreted the CoC’s decision to distribute the amount based on either the security interest or the voting shares of financial creditors.
Distribution Based On Security Interest– HDFC Bank Ltd
The question that then arises is whether dissenting financial creditors can challenge the approval of a resolution plan if the CoC approves a plan that provides for the distribution of amounts based on security interest.
This question was addressed by the NCLAT in HDFC Bank Ltd. Versus Pratim Bayal, Resolution Professional of Birla Tyres Ltd. & Ors., where the appellant, dissatisfied with the distribution of the amount based on security interest, argued that it should have been based on the voting shares of the respective financial creditors.
The tribunal examined the scheme of the Code, particularly Section 30, which was amended in 2019. After the amendment, the CoC was given significant leeway in deciding which methodology to adopt for distributing the amount in the resolution plan. Once the CoC has made its decision, exercising its commercial wisdom, the adjudicating authority has little to do except approve the plan, provided it does not contravene the provisions of the code.
The CoC may take into consideration the order of priority among creditors as laid down under Section 53(1) of the Code, including the priority and value of the security interest of secured creditors. A bare perusal of the above section makes it clear that the priority and value of the security interest have become factors to be considered by the CoC while approving or rejecting the resolution plan.
Furthermore, Section 30(2)(b) provides that financial creditors who do not vote in favor of the resolution plan shall be paid an amount not less than what they would have received under Section 53 if the corporate debtor were to be liquidated.
The constitutionality of these amendments introduced in section 30 of the code was challenged before the Supreme Court in Essar Steel India Ltd. Committee of Creditors vs. Satish Kumar Gupta where it was held that “the Code gives to the Committee of Creditors to approve or not to approve a resolution plan and which may take into account different classes of creditors as is mentioned in Section 53, and different priorities and values of security interests of a secured creditor.”
The court further observed that the discretionary nature of the decision is reinforced by the use of the word ‘may,’ which clearly indicates that the CoC is not bound to follow the provisions under this section. Instead, it serves as a set of guidelines for the CoC while taking a decision either to approve or reject a resolution plan.
Based on the above discussion, the tribunal concluded that “the decision of the CoC approving the Resolution Plan as per security interest was in accordance with Section 30(4) and has rightly been not interfered with by the Adjudicating Authority in the impugned order.”
Distribution Based on Voting Shares-India Resurgence and SIDBI
In India Resurgence ARC (P) Ltd. vs. Amit Metaliks Ltd., the CoC had approved a resolution plan in which the distribution was based on the voting shares of the financial creditors. This approval was challenged before the Adjudicating Authority on the ground that the distribution should have been based on the security interest of the respective financial creditors. However, the objections were rejected, and the plan was approved. The decision was subsequently upheld by the NCLAT.
The matter eventually reached the Supreme Court, where the key question was whether the CoC’s decision to distribute the amount based on the voting shares of financial creditors could be interfered with. The Court examined the statutory scheme, particularly the amended provisions of Sections 30(2) and 30(4) of the Code, and held that the approval of the resolution plan falls within the commercial wisdom of the CoC. It further ruled that the scope of judicial review in such matters is very limited.
It held that “financial proposal in the resolution plan forms the core of the business decision of Committee of Creditors. Once it is found that all the mandatory requirements have been duly complied with and taken care of, the process of judicial review cannot be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction.”
The court also observed that what amount is to be paid to different classes or sub-classes of creditors in accordance with provisions of the Code and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors; and a dissenting secured creditor like the appellant cannot suggest a higher amount to be paid to it with reference to the value of the security interest.
This decision was followed by the NCLAT in Small Industries Development Bank of India (SIDBI) vs. Vivek Raheja, Resolution Professional, M/s. Gupta Exim (India) Pvt. Ltd. & Ors., where the resolution plan was challenged on similar grounds. It was argued that the distribution approved by the CoC, based on the voting shares of financial creditors, was incorrect and that the distribution should instead be based on the security interest of the financial creditors. However, the tribunal rejected this submission and relied on the Supreme Court judgment in Resurgence (supra) .
It observed that the entitlement of dissenting financial creditor is to receive liquidation value of their debt and not the distribution as per their security value as sought to be contended.
It also held that “the decision of the Committee of Creditors and the Adjudicating Authority deciding to distribute the proceeds of the plan value as per voting share of the secured creditor in no manner contravenes the provisions of Section 30(2)(b) of the Code.”
Similarly, the NCLAT in Jet Aircrafts Maintenance Engineers Welfare Association vs. Ashish Chhawchharia Resolution Professional and Ors rejected the submission that the distribution should be based on security interest.
From the above discussion, it is clear that after amendments made in Section 30(4), the CoC have been given jurisdiction to take a decision as to distribute the amount as per vote share of the financial creditor or as per the security interest which is in their commercial wisdom and decision taken by requisite vote share by the CoC is final and binding on all including the dissenting financial creditors and dissenting financial creditors at best is entitled for minimum of liquidation value.
The use of expression “may” in Section 30(4) clearly indicate the discretion vested in the CoC to take into account of the matter of security interest of the secured creditors in approving the Resolution Plan.
Conclusion
It can be concluded that there is no hard and fast rule that distribution must be based solely on security interest or voting shares. Ultimately, it is within the discretion of the CoC to decide the manner of distribution. The commercial wisdom of the CoC in determining whether the distribution should be based on security interest or the voting shares of financial creditors cannot be questioned, provided that all provisions of the Code are complied with. Several judgments delivered by the Supreme Court and the NCLAT have affirmed this principle, with the courts refraining from interfering in the CoC’s decisions regarding the approval of resolution plans—whether the distribution was based on security interest or voting shares.
