Hero Fincorp Ltd vs Rave Scans Pvt. Ltd. & Ors

(Arising out of Order dated 17th October, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi in (IB)-01(PB)/2017)

IN THE MATTER OF:

Hero Fincorp Ltd. ...Appellant

Vs.

Rave Scans Pvt. Ltd. & Ors. ...Respondents

Present: For Appellant: - Dr. U.K. Choudhary, Senior Advocate with Mr. Pulkit Deora, Mr. Dhruv Gupta and Ms. Sylvine Sarmah, Advocates.

For Respondents: - Mr. Rakesh Kumar and Mr. Aashish Khattar, Advocates for R-1.

Mr. Kunal Tandon, Ms. Niti Jain and Ms. Richa, Advocates for R-4 & 5.

Mr. Shah Usman and Ms. Apoorv Sarvaria, Advocates for PNB.

Mr. Krishnendu Datta and Mr. Shivankar, Advocate for Resolution Professional.

Mr. Sanjeev Singh, Mr. Sampanus Pani, Mr. Shivam Ram, Advocates for Religare Finvest.

J U D G M E N T

SUDHANSU JYOTI MUKHOPADHAYA, J.

In the 'Corporate Insolvency Resolution Process' initiated against

'M/s. Rave Scans Private Limited'- ('Corporate Debtor') under Section 10 2

of the Insolvency and Bankruptcy Code, 2016 ("I&B Code" for short), the

revised 'Resolution Plan' submitted by Mr. Rahul Jain has been approved

by the Adjudicating Authority (National Company Law Tribunal),

Principal Bench, New Delhi by impugned order dated 17th October, 2018.

The Appellant- 'Hero Fincorp Limited'- ('Financial Creditor') has

challenged the approved plan as discriminatory.

2. According to the learned counsel for the Appellant, 'Hero Fincorp

Limited' is a 'Secured Financial Creditor', but it has been discriminated

with similarly situated 'Financial Creditors'.

3. It was submitted that other 'Secured Financial Creditors' have been

provided with higher percentage of their claim amount, whereas the

Appellant- 'Hero Fincorp Limited' has been allowed lesser percentage of

its admitted claim.

4. Learned counsel appearing on behalf of the 'Successful Resolution

Applicant' (now 'Corporate Debtor') submitted that the 'Committee of

Creditors' in its meeting held on 13th March, 2018 with the majority of

78.55% of their voting shares approved the 'Revised Resolution Plan'. In

terms of the 'Resolution Plan', the 'Successful Resolution Applicant' has

offered upfront payment of Rs. 54 Crores as against the asset value

(Liquidation Value) of Rs. 36 Crores. The 'Successful Resolution

Applicant' has given a 'Statement of Settlement of Dues with

Stakeholders till 29th November, 2018', as referred to in the next page:

Company Appeal (AT) (Insolvency) No. 745 of 2018 3

"Statement of Settlement of Dues with Stakeholders till 29.11.2018

Sr. Descriptio Claim Liquidati Settlement offered to FCs in CoC % Remarks No n of filed by on Value offere . Secured FC FCs d in final approv ed plan Dated Dated Dated 13.10.2017 12.01.2018 13.03.201 & 8 16.02.2018 Status of Disapproved Disapproved Approved Resolution more than Plan in 78% COC voting A. Secured Public Sector Banks-

IOB 4297.28 1589.56 1804.86 1933.78 45.00 BOB 2593.21 959.23 1089.15 1166.94 45.00 PNB 1616.97 598.12 679.13 727.64 45.00 Total in 8507.45 2209.51 3146.91 3573.14 3828.36 45.00 Consortiu m led by IOB % of claim 71.43% in total FCs claim (D)

B. Secured NBFCs-

Tata 407.23 307.99 150.63 308.00 308.00 75.63 Maintain Capital ed LV Financial under Services Reg. 38 Ltd. Hero 2306.68 745.29 853.74 746.00 746.00 32.34 Maintain FinCorp ed LV Ltd. under (Dissented) Reg 38 Religare 654.03 335.17 241.06 336.00 336.00 51.37 Maintain Finvest Ltd. ed LV under Reg. 38 Total Term 3367.94 1388.45 1245.43 1390.00 1390.00 41.27 Maintain Loan ed LV under Reg. 38 % of claim 28.28% in total FCs claim (D)

C. Secured Car Loan - HDFC Bank 9.86 2.46 2.46 2.46 2.46 24.95 Ltd. ICICI Bank 2.80 0.70 0.70 0.70 0.70 25.00 Ltd. Axis Bank 1.79 0.44 0.44 0.44 0.44 24.58 Kotak 11.43 2.85 2.85 2.85 2.85 24.93 Mahindra Prime Ltd.

Company Appeal (AT) (Insolvency) No. 745 of 2018 4

M&M 7.45 1.86 1.86 1.86 1.86 24.97 Financial Services Ltd.

Total Car 33.33 8.31 8.31 8.31 8.31 24.93 Loan % of claim 0.29 in total FCs claim (D)

D. Total 11908.73 3606.27 4400.65 4971.45 5226.67 Secured Financial Creditors

E. Unsecured 429.68 0 21.49 21.49 21.49 5.00 Loan from NBFC

F. Unsecured 775.54 0 38.77 38.77 38.77 5.00 Loan other than NBFC

G. Total 13112.16 4460.91 5031.71 5286.93 Financial Creditors: (A+B+C)

H. Operationa 0 93.09 68.29 113.07 l Creditors & WC

I. Total Fund 4554.00 5100.00 5400.00 offered to be infused

5. From the tabulated chart given by the 'Successful Resolution

Applicant'/ 'Corporate Debtor', we find that the Appellant- 'Hero Fincorp

Limited' has been provided with 32.34% of its admitted claim as it has

dissented with the plan. On the other hand, 'Tata Capital Financial

Services Ltd.' has been provided with 75.63% of its admitted claim and

other 'Financial Creditors' i.e. 'Indian Overseas Bank' has been provided

with 45% of its admitted claim; the 'Bank of Baroda' has been provided

with 45% of its admitted claim and the 'Punjab National Bank' has been

provided with 45% of its admitted claim.

Company Appeal (AT) (Insolvency) No. 745 of 2018 5

6. In the Chart, 'Secured Public Sector Banks' have been placed in

Category-A, whereas 'Tata Capital Financial Services Ltd.' and 'Hero

Fincorp Limited' (Appellant) have been shown as 'Secured NBFCs' in

Category-B. From the aforesaid chart, it is clear that the 'Successful

Resolution Applicant' has accepted that the Appellant is a 'Secured

Financial Creditor'.

7. From the description of 'Secured Financial Creditors', it shows that

the Appellant has dissented with the plan. On the other hand, in the

'Remarks Column', it is shown that it is based on 'Maintained LV under

Regulation 38 (old Regulation)' of the 'Insolvency and Bankruptcy Board

of India (Insolvency Resolution Process for Corporate Persons)

Regulations, 2016'.

8. The old (un-amended) Regulation 38 fell for consideration before

this Appellate Tribunal in "Central Bank of India v. Resolution

Professional of the Sirpur Paper Mills Ltd. & Ors.─ Company Appeal

(AT) (Insolvency) No. 526 of 2018", wherein this Appellate Tribunal

while noticed the provisions of the (un-amended) Regulation 38 of the

'Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016' observed and held as

follows:

"8. From the aforesaid provisions of I&B Code it

is clear that the Board may make regulation but it

Company Appeal (AT) (Insolvency) No. 745 of 2018 6

should be consistent with the I&B Code and rules

made therein (by Central Government) to carry out

the provisions of the Code. therefore, we hold that

the provisions made by the Board cannot override

the provisions of I&B Code nor it can be inconsistent

with the Code.

9. Clause (b) and (c) of Regulation 38(1) being

inconsistent with the provisions of I&B Code, and

the legislators having not made any discrimination

between the same set of group such as 'Financial

Creditor' or 'Operational Creditor', Board by its

Regulation cannot mandate that the Resolution Plan

should provide liquidation value to the 'Operational

Creditors' (clause (b) of regulation 38(1)) or

liquidation value to the dissenting Financial

Creditors (clause (c) of regulation 38(1)). Such

regulation being against Section 240 (1) cannot be

taken into consideration and any Resolution Plan

which provides liquidation value to the 'Operational

Creditor(s)' or liquidation value to the dissenting

'Financial Creditor(s)' in view of clause (b) and (c) of

Regulation 38(1), without any other reason to

discriminate between two set of creditors similarly

situated such as 'Financial Creditors' of the

Company Appeal (AT) (Insolvency) No. 745 of 2018 7

'Operational Creditors' cannot be approved being

illegal."

9. The aforesaid Regulation 38 also fell for consideration before this

Appellate Tribunal in "Binani Industries Limited v. Bank of Baroda

& Anr.─ Company Appeal(AT) (Insolvency) No. 82 of 2018 etc."

wherein this Appellate Tribunal held:

"28. Therefore, the Appellant- 'Rajputana

Properties Private Limited' cannot take plea that

dissenting 'Financial Creditors' can be

discriminated on the basis of Regulation 38. At this

stage, it is desirable to notice that after the decision

of this Appellate Tribunal in "Central Bank of

India (Supra)" the Insolvency and Bankruptcy

Board of India also amended/repealed the

Regulation 38 aforesaid having found it

discriminatory."

10. (Un-amended/ old) Regulation 38 having held to be discriminatory

was substituted on 5th October, 2018 by new Regulation 38. Sub-clause

(c) of clause (1) of Regulation 38 shows that the liquidation value payable

to dissenting financial Creditors has been deleted.

Company Appeal (AT) (Insolvency) No. 745 of 2018 8

11. The un-amended (old) Regulation 38 and post amended Regulation

38 (amended on 5th October, 2018) fell for consideration before the

Hon'ble Supreme Court in "Swiss Ribbons Pvt. Ltd. & Anr. vs. Union

of India & Ors.─ 2019 SCC OnLine SC 73", wherein the Hon'ble

Supreme Court observed:

"71. The NCLAT has, while looking into viability

and feasibility of resolution plans that are

approved by the committee of creditors, always

gone into whether operational creditors are given

roughly the same treatment as financial

creditors, and if they are not, such plans are

either rejected or modified so that the

operational creditors' rights are safeguarded. It

may be seen that a resolution plan cannot pass

muster under Section 30(2)(b) read with Section

31 unless a minimum payment is made to

operational creditors, being not less than

liquidation value. Further, on 05.10.2018,

Regulation 38 has been amended. Prior to the

amendment, Regulation 38 read as follows:

"38. Mandatory contents of the

resolution plan.-- (1) A resolution plan

Company Appeal (AT) (Insolvency) No. 745 of 2018 9

shall identify specific sources of funds that

will be used to pay the--

(a) insolvency resolution process costs

and provide that the [insolvency

resolution process costs, to the extent

unpaid, will be paid] in priority to any

other creditor;

(b) liquidation value due to operational

creditors and provide for such

payment in priority to any financial

creditor which shall in any event be

made before the expiry of thirty days

after the approval of a resolution plan

by the Adjudicating Authority; and

(c) liquidation value due to dissenting

financial creditors and provide that

such payment is made before any

recoveries are made by the financial

creditors who voted in favour of the

resolution plan."

Company Appeal (AT) (Insolvency) No. 745 of 2018 10

Post amendment, Regulation 38 reads as

follows:

"38. Mandatory contents of the

resolution plan.-- (1) The amount due to the

operational creditors under a resolution plan

shall be given priority in payment over

financial creditors.

(1-A) 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.

72. The aforesaid Regulation further

strengthens the rights of operational creditors

by statutorily incorporating the principle of

fair and equitable dealing of operational

creditors' rights, together with priority in

payment over financial creditors."

12. The impugned order approving the 'Resolution Plan' has been

passed by the Adjudicating Authority on 17th October, 2018, but the

Adjudicating Authority failed to notice that no 'Resolution Plan' can be

approved discriminating the dissenting 'Financial Creditor' in terms with

Company Appeal (AT) (Insolvency) No. 745 of 2018 11

the post amended Regulation 38. It also failed to notice that this Appellate

Tribunal much prior to the same, declared the un-amended (old)

Regulation 38(1) (c), which stipulated liquidation value for the dissenting

'Financial Creditor', as illegal which resulted in amendment of Regulation

38.

13. In "Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors."

(Supra), the Hon'ble Supreme Court observed that "the NCLAT while

looking into viability and feasibility of resolution plans as approved by

the committee of creditors, always gone into whether the operational

creditors are given roughly the same treatment as financial creditors, and

if they are not, such plans are either rejected or modified so that the

operational creditors' rights are safeguarded".

14. In the present case, the 'Resolution Plan' approved by the

'Committee of Creditors' do not confirm the test of Section 30(2) (e), being

discriminatory, as having discriminated the similarly situated 'Secured

Creditors'.

15. Learned counsel appearing on behalf of the 'Successful Resolution

Applicant' has shown in its grounds that it has been discriminated on the

basis of (old) Regulation 38(1) (c), though the Regulation 38 (1) (c) was

deleted have been held discriminatory by this Appellate Tribunal prior to

the impugned order dated 17th October, 2018 giving approval of the

'Resolution Plan'.

Company Appeal (AT) (Insolvency) No. 745 of 2018 12

16. Similar plea has been taken by learned counsel for the 4th and 5th

Respondents.

17. The 'important points' as pointed out by the 'Successful Resolution

Applicant' below the Chart in its written submissions shows that the

'Successful Resolution Applicant' had noticed that Regulation 38 has

been amended on 5th October, 2018, but has failed to bring the said fact

to the notice of the Adjudicating Authority while matter was taken up for

approval nor took liberty to amend the distribution as per amended

Regulation 38. The grounds for discrimination has been highlighted by

the 'Successful Resolution Applicant' (now 'Corporate Debtor') as follows:

"Important Points:

1. Reg. 37(1) of CIRP requires a plan to offer- "maximization of value of its assets" which is fulfilled by offering Rs. 54.00 Cr. against liquidated value of Rs. 36.06 Cr. only.

2. Reg. 38 (1) (c) mandatory provides to maintain liquidated value of dissenting Financial Creditors before the amendment dt. 05.10.2018-

Resolution Applicant offered LV.

3. COC in its meeting directed RP to seek legal opinion on differential value of FCs. COC accepted opinion obtained by RP stating that LV has to be maintained for dissenting creditors. Accordingly in the next Revised Resolution Plan dt. 12.01.2018, 16.02.2018 and 13.03.2018, Resolution Applicant offered minimum LV (not % of claim).

4. PSU banks had higher stake in total claim value and liquidated value of assets. Having security of fixed assets, plant & machinery, debtors, inventory & personal guarantee etc.

5. NBFCs were having only security against specific Plant & Machinery & personal guarantee of promoters.

6. Resolution Plan has been fully implemented and financial creditors (except Hero Fincorp) have released the security to the Corporate Debtor.

Company Appeal (AT) (Insolvency) No. 745 of 2018 13

18. Learned counsel appearing on behalf of the 'Successful Resolution

Applicant' as also counsel for the 4th & 5th Respondents relied on

amended Section 30(2) (b) of the Insolvency and Bankruptcy Code

(Amendment) Act 2019, (26 of 2019) which came into force on 16th

August, 2019 and read as follows:

"30. Submission of resolution plan.─

xxx xxx xxx

(2) The resolution professional shall examine

each resolution plan received by him to confirm that

each resolution plan─

Xxx xxx xxx

(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

Company Appeal (AT) (Insolvency) No. 745 of 2018 14

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 the 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 purposes 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;

Company Appeal (AT) (Insolvency) No. 745 of 2018 15

(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;"

19. It was submitted that as per Section 30 (2) (b) (ii), the 'Resolution

Plan' allows to treat the 'Financial Creditors', who do not vote in favour

of the 'Resolution Plan' separately. However, they have failed to notice

that as per amended Section 30(2) (b) (ii), 'Resolution Applicant' may treat

the dissenting 'Financial Creditor', but such treatment can be given 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'.

20. The Insolvency and Bankruptcy Board of India has not provided for

separate treatment to dissenting 'Secured Financial Creditors' who do not

vote in favour of the 'Resolution Plan'. No such amendment has been

made in Regulation 38 since amended Section 30(2) (b) came into force

i.e. 16th August, 2019.

21. The Regulation 38 including clause (1A) therein as amended on 5th

October, 2018 is still applicable, which reads as follows:

Company Appeal (AT) (Insolvency) No. 745 of 2018 16

"38. Mandatory contents of the resolution

plan.─ (1) The amount due to the operational

creditors under a resolution plan shall be given

priority in payment over financial creditors.

[(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.]

(2) A resolution plan shall provide:

(a) the term of the plan and its

implementation schedule;

(b) the management and control of the

business of the corporate debtor during its

term; and

(c) adequate means for supervising its

implementation.

(3) A resolution plan shall demonstrate that -

(a) it addresses the cause of default;

(b) it is feasible and viable;

(c) it has provisions for its effective

implementation;

Company Appeal (AT) (Insolvency) No. 745 of 2018 17

(d) it has provisions for approvals required

and the timeline for the same; and

(e) the resolution applicant has the

capability to implement the resolution

plan."

22. The Regulation 38 do not discriminate between similarly situated

'Secured Financial Creditors' on the ground of dissenting vote, therefore,

the 'Successful Resolution Applicant' cannot take advantage of (un-

amended/ (old)) Regulation 38(1) (c), which was repealed.

23. In view of the fact that the Appellant a 'Secured Financial Creditor'

has been discriminated with other 'Secured Financial Creditors', we hold

that the 'Resolution Plan' is violative of Section 30(2) (e) of the 'I&B Code'.

However, we are not inclined to set aside the approved plan on such

ground. The 'Successful Resolution Applicant' is given opportunity to

remove the discrimination of Appellant by providing similar treatment as

provided to other similarly situated 'Financial Creditors'. We, accordingly,

pass the following order:

(i) The 'Successful Resolution Applicant'/ Mr. Rahul Jain

('Corporate Debtor') is directed to provide the Appellant (a 'Secured

Financial Creditor') 45% of its admitted claim in place of 32.34%

as shown in the 'Resolution Plan' and thereby equate it with all

other similarly situated 'Secured Financial Creditors' namely

Company Appeal (AT) (Insolvency) No. 745 of 2018 18

'Indian Overseas Bank', 'Bank of Baroda' and 'Punjab National

Bank'. The 'Resolution Plan', as approved, is modified to the extent

above.

(ii) Though 'Tata Capital Financial Services Ltd.' has been

provided with higher percentage, we are not disturbing the same.

(iii) If the 'Successful Resolution Applicant' do not remove the

discrimination by paying 45% admitted claim of the Appellant-

'Hero Fincorp Ltd.' within one month as per modification as ordered

above, the impugned order dated 17th October, 2018 approving the

'Resolution Plan' shall stand set aside and the Adjudicating

Authority will proceed in accordance with law.

The appeal is allowed with aforesaid observations and directions.

No costs.

(Justice S.J. Mukhopadhaya) Chairperson

(Justice A.I.S. Cheema) Member(Judicial)

(Kanthi Narahari) Member(Technical) NEW DELHI 17th September, 2019

AR

Company Appeal (AT) (Insolvency) No. 745 of 2018