India Resurgence Arc Pvt Ltd vs Amit Metaliks Ltd & Anr

[Arising out of Order dated 20th October, 2020 amended on 21st October, 2020 passed by the National Company Law Tribunal, Kolkata Bench, Kolkata in IA (IB) No. 805/KB/2020 in CP (IB) No. 1221/KB/2018]

IN THE MATTER OF:

India Resurgence ARC Private Limited Reg Off: 3rd Floor, Unit 304 Piramal Tower, Peninsula Corporate Park, Lower Parel Mumbai - 400 013. ...Appellant Versus

1. M/s. Amit Metaliks Limited Resolution Applicant, Reg Address: Raturia Angadpur Industrial Area, P.O. Angadpur, Durgapur, West Bengal - 713 215.

Also at: 238B, A.J.C. Bose Road, 3rd Floor, Kolkata - 700 020.

2. VAP Udyog Private Limited Reg Address: Centre Point 21, Hemanta Basu Sarani, 4th Floor, Suite No. - 437 Kolkata, West Bengal - 700 001.

Through Mr. Raj Singhania Resolution Professional Central Plaza, 5th Floor, Room No. 5A, 41 B B Ganguly Street, Kolkata, West Bengal - 700 012. ....Respondents Present: For Appellant: Mr. Sanjeev Singh, Ms. Kajal Bhatia and Mr. Prashant Tripathi, Advocates For Respondents: Mr. Kumarjit Banerjee, Mr. Gaurav Gupta and Mr. Aakash Khattar, Advocates for R-1. Mr. Raj Singhania, Interim Resolution Professional in person for R-2. -2-

J UD G M E N T

BANSI LAL BHAT, J.

Corporate Insolvency Resolution Process qua 'M/s VAP Udyog Pvt. Ltd.'

(Corporate Debtor) was set in motion by Adjudicating Authority (National

Company Law Tribunal) Kolkata Bench Kolkata by admitting CP(IB)No.

1221/KB/2018. Committee of Creditors approved Resolution Plan of 'M/s

Amit Metaliks Ltd.' (Respondent No.1) with 95.35% voting shares. Upon

consideration of application being I.A. (IB) No.805/KB/2020 filed by the

Resolution Professional, the Adjudicating Authority approved the Resolution

Plan of Respondent No.1 (Successful Resolution Applicant) in terms of order

dated 20th October, 2020 which has been assailed by 'India Resurgence ARC

Pvt. Ltd.' - the dissenting Secured Financial Creditor having a vote share of

3.94% and a COC Member, through the medium of instant appeal primarily on

the ground that the approved Resolution Plan failed to deal with the interests

of the all the stakeholders including the Appellant who was offered a meagre

amount of slightly over Rs.2 Crores as against its admitted claim of an amount

exceeding Rs.13 Crores without even considering the valuation of the security

held by the Appellant in its Resolution Plan which had a valuation of

approximately Rs.12 Crores.

2. It is contended on behalf of Appellant that while approving the

Resolution Plan value and quality of security interest of the Appellant was not

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -3-

considered by the Successful Resolution Applicant and the Committee of

Creditors. It is contended that the manner of distribution and priority of share

based on the value of security interest of a Secured Financial Creditor

pursuant to Amendment in Section 30(4) of the Insolvency and Bankruptcy

Code, 2016 (hereinafter referred to as 'I&B Code') has been overlooked.

Reliance is placed on the judgement of Hon'ble Apex Court in 'Committee of

Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta and

Others' (Civil Appeal No. 8766-67 of 2019)', (2019) SCC OnLine SC 1478, to

buttress the point that in considering the fairness of distribution, underlying

security value and the quality of security has to be taken into consideration.

Learned counsel for Appellant has also relied upon Regulation 39(4) of the IBBI

(Insolvency Resolution process for Corporate Persons) Regulations, 2016 as

amended w.e.f. 28th November, 2019 wherein secured, unsecured and

dissenting secured financial creditors are differentiated in terms of the

amounts to be paid under a Resolution Plan. It is submitted that the principle

of equality cannot be stretched to treating unequal's equally as that will

destroy the very objective of the I&B Code. It is further submitted that while

unamended Section 30(4) of the I&B Code failed to consider the value of the

security interest within the ambit of feasibility and viability, the amendment

was effected to ensure that the manner of distribution must take into account

the order of priority among creditors, including the priority and value of

security interest of a secured creditor. It is submitted that Respondent No.1

having failed to consider the underlying security interest in favour of Appellant,

the impugned order approving the Resolution Plan cannot be sustained.

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -4-

3. Per contra it is submitted on behalf of Respondent No.1 that the

interpretation sought to be given by Appellant to Section 30(4) of the I&B Code

as amended has already been dealt with by the Hon'ble Apex Court in

'Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar

Gupta and Others' (Supra), wherein it was held that the I&B Code gives the

Committee of Creditors flexibility to approve or not to approve a Resolution

Plan which may take into account different classes of creditors specified in

Section 53 and different priorities and values of security interests of a secured

creditor. It is pointed out that the Hon'ble Apex Court has categorically stated

that the Committee of Creditors, while exercising its discretion may look into

these considerations including different priorities and values of security

interests of secured creditors only as a guideline in arriving at a business

decision for acceptance or rejection of a Resolution Plan. It is accordingly

submitted that only a discretion is vested in the Committee of Creditors to take

into account value of security interest of a Creditor in approving a Resolution

Plan, it being only a guideline and the discretionary consideration being a

business decision. Such discretion itself is a commercial consideration reserved

for the Committee of Creditors and as such beyond the purview of review in

appeal under I&B Code. It is lastly submitted that an appeal on account of

purported non-compliance under Section 30(4) of I&B Code is not

maintainable.

4. Heard learned counsel for the parties and perused the record. Section

3(10) of the I&B Code provides that the "Creditor'' means any person to whom a

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -5-

debt is owed and includes a financial creditor, an operational creditor, a

secured creditor, an unsecured creditor and a decree holder. Holding that the

equitable treatment of creditors is equitable treatment only within the same

class, the Hon'ble Apex Court in 'Committee of Creditors of Essar Steel

India Limited Vs. Satish Kumar Gupta and Others', (2019) SCC OnLine SC

1478, observed that reorganization is a collective remedy designed to find an

optimum solution for all parties connected with a business in the manner

provided by the Code. Protecting creditors in general is, no doubt, an

important objective but protecting creditors from each other is also important

which means that the I&B Code should not be read so as to imbue creditors

with greater rights in a bankruptcy proceeding than they would enjoy under

the general law, unless it is to serve some bankruptcy purpose. Dealing with

the importance of valuing security interest separately from interests of

creditors who do not have security, the Hon'ble Apex Court taking note of the

World Bank Report of 2015 which stated that a cramdown on dissentient

creditors would pass muster under an insolvency law if such creditors will

receive, under a resolution plan, an amount at least equal to what such

creditors would receive in a Liquidation Proceeding being "Liquidation Value"

dealt with the issue of all creditors being treated identically as under:-

"85. Indeed, if an "equality for all" approach recognising the

rights of different classes of creditors as part of an insolvency

resolution process is adopted, secured financial creditors will,

in many cases, be incentivised to vote for liquidation rather

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -6-

than resolution, as they would have better rights if the

corporate debtor was to be liquidated rather than a resolution

plan being approved. This would defeat the entire objective of

the Code which is to first ensure that resolution of distressed

assets takes place and only if the same is not possible should

liquidation follow.

86. Financial creditors are in the business of lending money.

The RBI Report on Trend and Progress of Banking in India,

2017-2018 reflects that the net interest margin of Indian

banks for Financial Year 2017-2018 is averaged at 2.5%.

Likewise, the global trend for net interest margin was at 3.3%

for banks in the USA and 1.6% for banks in the UK in the year

2016, as per the data published on the website of the bank.

Thus, it is clear that financial creditors earn profit by earning

interest on money lent with low margins, generally being

between 1 to 4%. Also, financial creditors are capital providers

for companies, who in turn are able to purchase assets and

provide a working capital to enable such companies to run

their business operation, whereas operational creditors are

beneficiaries of amounts lent by financial creditors which are

then used as working capital, and often get paid for goods

and services provided by them to the corporate debtor, out of

such working capital. On the other hand, market research

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -7-

carried out by India Brand Equity Foundation, a trust

established by the Ministry of Commerce and Industry, as

regards the oil and gas sector, has stated that the business

risk of operational creditors who operate with higher profit

margins and shorter cyclical repayments must needs be

higher. Also, operational creditors have an immediate exit

option, by stopping supply to the corporate debtor, once

corporate debtors start defaulting in payment. Financial

creditors may exit on their long-term loans, either upon

repayment of the full amount or upon default, by recalling the

entire loan facility and/or enforcing the security interest which

is a time consuming and lengthy process which usually

involves litigation. Financial creditors are also part of a

regulated banking system which involves not merely declaring

defaulters as non-performing assets but also involves

restructuring such loans which often results in foregoing

unpaid amounts of interest either wholly or partially.

87. All these differences between financial and operational

creditors have been reflected, albeit differently, in the

judgment of Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of

India, (2019) 4 SCC 17]. Thus, this Court in dealing with some

of the differences has held:

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -8-

"50. According to us, it is clear that most financial

creditors, particularly banks and financial

institutions, are secured creditors whereas most

operational creditors are unsecured, payments for

goods and services as well as payments to workers

not being secured by mortgaged documents and the

like. The distinction between secured and unsecured

creditors is a distinction which has obtained since the

earliest of the Companies Acts both in the United

Kingdom and in this country. Apart from the above,

the nature of loan agreements with financial creditors

is different from contracts with operational creditors

for supplying goods and services. Financial creditors

generally lend finance on a term loan or for working

capital that enables the corporate debtor to either set

up and/or operate its business. On the other hand,

contracts with operational creditors are relatable to

supply of goods and services in the operation of

business. Financial contracts generally involve large

sums of money. By way of contrast, operational

contracts have dues whose quantum is generally

less. In the running of a business, operational

creditors can be many as opposed to financial

creditors, who lend finance for the set-up or working

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -9-

of business. Also, financial creditors have specified

repayment schedules, and defaults entitle financial

creditors to recall a loan in totality. Contracts with

operational creditors do not have any such

stipulations. Also, the forum in which dispute

resolution takes place is completely different.

Contracts with operational creditors can and do have

arbitration clauses where dispute resolution is done

privately. Operational debts also tend to be recurring

in nature and the possibility of genuine disputes in

case of operational debts is much higher when

compared to financial debts. A simple example will

suffice. Goods that are supplied may be substandard.

Services that are provided may be substandard.

Goods may not have been supplied at all. All these

qua operational debts are matters to be proved in

arbitration or in the courts of law. On the other hand,

financial debts made to banks and financial

institutions are well documented and defaults made

are easily verifiable.

51. Most importantly, financial creditors are, from the

very beginning, involved with assessing the viability

of the corporate debtor. They can, and therefore do,

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -10-

engage in restructuring of the loan as well as

reorganisation of the corporate debtor's business

when there is financial stress, which are things

operational creditors do not and cannot do. Thus,

preserving the corporate debtor as a going concern,

while ensuring maximum recovery for all creditors

being the objective of the Code, financial creditors are

clearly different from operational creditors and

therefore, there is obviously an intelligible differentia

between the two which has a direct relation to the

objects sought to be achieved by the Code.

***

75. Since the financial creditors are in the business of

moneylending, banks and financial institutions are

best equipped to assess viability and feasibility of the

business of the corporate debtor. Even at the time of

granting loans, these banks and financial institutions

undertake a detailed market study which includes a

techno-economic valuation report, evaluation of

business, financial projection, etc. Since this detailed

study has already been undertaken before

sanctioning a loan, and since financial creditors have

trained employees to assess viability and feasibility,

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -11-

they are in a good position to evaluate the contents of

a resolution plan. On the other hand, operational

creditors, who provide goods and services, are

involved only in recovering amounts that are paid for

such goods and services, and are typically unable to

assess viability and feasibility of business. The BLRC

Report, already quoted above, makes this abundantly

clear.

76. Quite apart from this, the United Nations

Commission on International Trade Law, in its

Legislative Guide on Insolvency Law (the UNCITRAL

Guidelines) recognises the importance of ensuring

equitable treatment to similarly placed creditors and

states as follows:

'Ensuring equitable treatment of similarly situated

creditors

7. The objective of equitable treatment is based on the

notion that, in collective proceedings, creditors with

similar legal rights should be treated fairly, receiving

a distribution on their claim in accordance with their

relative ranking and interests. This key objective

recognises that all creditors do not need to be treated

identically, but in a manner that reflects the different

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -12-

bargains they have struck with the debtor. This is

less relevant as a defining factor where there is no

specific debt contract with the debtor, such as in the

case of damage claimants (e.g. for environmental

damage) and tax authorities. Even though the

principle of equitable treatment may be modified by

social policy on priorities and give way to the

prerogatives pertaining to holders of claims or

interests that arise, for example, by operation of law,

it retains its significance by UNCITRAL Legislative

Guide on Insolvency Law ensuring that the priority

accorded to the claims of a similar class affects all

members of the class in the same manner. The policy

of equitable treatment permeates many aspects of an

insolvency law, including the application of the stay

or suspension, provisions to set aside acts and

transactions and recapture value for the insolvency

estate, classification of claims, voting procedures in

reorganisation and distribution mechanisms. An

insolvency law should address problems of fraud and

favouritism that may arise in cases of financial

distress by providing, for example, that acts and

transactions detrimental to equitable treatment of

creditors can be avoided.""

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -13-

5. Again, dealing with equitable treatment to similarly situated creditors the

Hon'ble Apex Court observed:-

"88. By reading para 77 (of Swiss Ribbons [Swiss Ribbons (P)

Ltd. v. Union of India, (2019) 4 SCC 17]) de hors the earlier

paragraphs, the Appellate Tribunal has fallen into grave error.

Para 76 clearly refers to the UNCITRAL Legislative Guide

which makes it clear beyond any doubt that equitable

treatment is only of similarly situated creditors. This being so,

the observation in para 77 cannot be read to mean that

financial and operational creditors must be paid the same

amounts in any resolution plan before it can pass muster. On

the contrary, para 77 itself makes it clear that there is a

difference in payment of the debts of financial and operational

creditors, operational creditors having to receive a minimum

payment, being not less than liquidation value, which does not

apply to financial creditors. The amended Regulation 38 set

out in para 77 again does not lead to the conclusion that

financial and operational creditors, or secured and unsecured

creditors, must be paid the same amounts, percentage wise,

under the resolution plan before it can pass muster. Fair and

equitable dealing of operational creditors' rights under the said

regulation involves the resolution plan stating as to how it has

dealt with the interests of operational creditors, which is not

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -14-

the same thing as saying that they must be paid the same

amount of their debt proportionately. Also, the fact that the

operational creditors are given priority in payment over all

financial creditors does not lead to the conclusion that such

payment must necessarily be the same recovery percentage as

financial creditors. So long as the provisions of the Code and

the Regulations have been met, it is the commercial wisdom of

the requisite majority of the Committee of Creditors which is to

negotiate and accept a resolution plan, which may involve

differential payment to different classes of creditors, together

with negotiating with a prospective resolution applicant for

better or different terms which may also involve differences in

distribution of amounts between different classes of creditors.

89. Indeed, by vesting the Committee of Creditors with the

discretion of accepting resolution plans only with financial

creditors, operational creditors having no vote, the Code itself

differentiates between the two types of creditors for the

reasons given above. Further, as has been reflected in Swiss

Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC

17], most financial creditors are secured creditors, whose

security interests must be protected in order that they do not

go ahead and realise their security in legal proceedings, but

instead are incentivised to act within the framework of the

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Code as persons who will resolve stressed assets and bring a

corporate debtor back to its feet. Shri Sibal's argument that the

expression "secured creditor" does not find mention in Chapter

II of the Code, which deals with the resolution process, and is

only found in Chapter III, which deals with liquidation, is for

the reason that secured creditors as a class are subsumed in

the class of financial creditors, as has been held in Swiss

Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC

17]. Indeed, Regulation 13(1) of the 2016 Regulations

mandates that when the resolution professional verifies claims,

the security interest of secured creditors is also looked at and

gets taken care of. Similarly, Regulation 36(2)(d) when it

provides for a list of creditors and the amounts claimed by

them in the information memorandum (which is to be submitted

to prospective resolution applicants), also provides for the

amount of claims admitted and security interest in respect of

such claims."

6. Section 30(4) of the I&B Code provides that the Committee of Creditors

may approve a Resolution Plan by a vote which shall not be less than 66% of

voting share of Financial Creditors. Such approval is to be done after

considering the feasibility and viability of the Resolution Plan, the manner of

distribution proposed therein having regard to the order of priority amongst the

creditors in terms of the waterfall mechanism laid down in Section 53 of the

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I&B Code including the priority and value of security interest of Secured

Creditor besides other requirements specified by IBBI. On a plain reading of

this provision it is manifestly clear that the considerations regarding feasibility

and viability of the Resolution Plan, distribution proposed with reference to the

order of priority amongst creditors as per statutory distribution mechanism

including priority and value of security interest of Secured Creditor are matters

which fall within the exclusive domain of Committee of Creditors for

consideration. These considerations must be present to the mind of the

Committee of Creditors while taking a decision in regard to approval of a

Resolution Plan with vote share of requisite majority. As regards amendment

introduced in Section 30(4), be it seen that the amendment that it, introduced

vide Section 6 (b) of Amending Act of 2019 vests discretion in the Committee of

Creditors to take into account the value of security interest of a Secured

Creditor in approving of a Resolution Plan. It's a guideline and not imperative

in terms, which may be taken into account by the Committee of Creditors in

arriving at a decision as regards approval or rejection of a Resolution Plan,

such decision being essentially a business decision based on commercial

wisdom of the Committee of Creditors. In this regard the observations of

Hon'ble Apex Court in 'Committee of Creditors of Essar Steel India Limited

Vs. Satish Kumar Gupta and Others' (Supra) are significant. The Hon'ble

Apex Court observed as under:-

"131. The challenge to sub-clause (b) of Section 6 of the

Amending Act of 2019, again goes to the flexibility that the

Company Appeal (AT) (Insolvency) No. 1061 of 2020 -17-

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. This flexibility is referred to in the BLRC Report, 2015

(see para 56 of this judgment). Also, the discretion given to the

Committee of Creditors by the word "may" again makes it clear

that this is only a guideline which is set out by this sub-section

which may be applied by the Committee of Creditors in arriving

at a business decision as to acceptance or rejection of a

resolution plan. For all these reasons, therefore, it is difficult to

hold that any of these provisions is constitutionally infirm."

7. It abundantly clear that the considerations including priority in scheme

of distribution and the value of security are matters falling within the realm of

Committee of Creditors. Such considerations, being relevant only for purposes

for arriving at a business decision in exercise of commercial wisdom of the

Committee of Creditors, cannot be the subject of judicial review in appeal

within the parameters of Section 61(3) of I&B Code. While it is true that prior

to amendment of Section 30(4) the Committee of Creditors was not required to

consider the value of security interest obtaining in favour of a Secured Creditor

while arriving at a decision in regard to feasibility and viability of a Resolution

Plan, legislature brought in the amendment to amplify the scope of

considerations which may be taken into consideration by the Committee of

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Creditors while exercising their commercial wisdom in taking the business

decision to approve or reject the Resolution Plan. Such consideration is only

aimed at arming the Committee of Creditors with more teeth so as to take an

informed decision in regard to viability and feasibility of a Resolution Plan,

fairness of distribution amongst similarly situated creditors being the

bottomline. However, such business decision taken in exercise of commercial

wisdom of Committee of creditors would not warrant judicial intervention

unless creditors belonging to a class being similarly situated are not given a

fair and equitable treatment.

8. We find no merit in this appeal, it is accordingly dismissed.

[Justice Bansi Lal Bhat] Acting Chairperson

[Dr. Ashok Kumar Mishra] Member (Technical)

NEW DELHI

2nd March, 2021

AM

Company Appeal (AT) (Insolvency) No. 1061 of 2020