An application for initiation of corporate insolvency resolution process (“CIRP“) against V.S.P. Udyog Private Limited (“Corporate Debtor“) was admitted in the National Company Law Tribunal (“NCLT“) and a Committee of Creditors (“CoC“) was constituted.
One of the financial creditors viz. India Resurgence ARC Private Limited (“Appellant“), with 3.94% of voting share in the CoC, was the assignee of the rights and interest carried by Religare Finvest Limited as secured financial creditor of the Corporate Debtor. A resolution plan was proposed by M/s Amit Metaliks Limited (“Respondent“). When the resolution plan submitted by the Respondent was taken up for consideration by the CoC, the Appellant expressed dissatisfaction on its proposed share, particularly in respect of the value of the security interest held by it and remained a dissentient financial creditor. But with 95.35% voting share of other financial creditors of the Corporate Debtor, such resolution plan proposed by the Respondent was approved by the CoC.
Consequently, the said plan was submitted for approval to NCLT, which after examining its salient features, approved it and held it as compliant with all the mandatory requirements.
The Appellant had challenged the said NCLT order dated 20.10.2020, which approved the resolution plan proposed by the Respondent, before the National Company Law Appellate Tribunal under Section 61(1) read with Section 61(3) of the Insolvency and Bankruptcy Code, 2016 (“Code“). The key ground of appeal was that the approved resolution plan was not in compliance with the Code since the value of the secured asset on which security interest was created by the Corporate Debtor, in its favour, was not taken into consideration. However, the appeal was dismissed. Aggrieved by this, the Appellant approached the Supreme Court.
The key ground, on which the Appellant challenged the resolution plan, remained the same viz. that the valuation of security held by it which amounted to more than Rs. 12 crores, wasn’t considered while giving effect to its proposed share in the resolution plan, which was a meagre Rs. 2 crores (approx.), while its admitted financial claim was Rs. 13.38 crores. It was further contended by the Appellant that after the amendment to Section 30(4) of the Code with effect from 16.08.2019, it ought to be ensured by the CoC that the manner of distribution takes into account the order of priority among the creditors and also the value of the security interest of a secured creditor, which wasn’t done in the present case. The Appellant relied upon the Apex Court’s decision in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors.  to advance its arguments and emphasize upon the meaning and contours of the order of priority of creditors.
Whether, by virtue of the amended Section 30 and Section 53 of the Code, a dissenting secured creditor is entitled to a disproportionate higher amount in the approved resolution plan OR over & above the liquidation value proposed for the same class of creditors, in view of the value of the security held by it.
Supreme Court’s verdict
While arriving at its decision, the Court relied upon various judgements. Discussing Essar Steel , the Court held that once it has been established that all mandatory requirements have been abided by, the judicial review cannot be broadened and stressed upon, simply to carry out quantitative analysis qua a particular creditor or stakeholder who might be dissatisfied. Therefore, the treatment of any debt or asset is required to be left to the wisdom of the CoC.
The Court further held that the scope of judicial review has to remain limited within Section 31 and Section 32 read with Section 61 of the Code. This limited scope of judicial review is there only to assess if the resolution plan isn’t contravening any laws, and is not present to judge the correctness or question the decision of the CoC.
With regard to the Appellant advancing that amendment to Section 30 of the Code resulted in priority of secured creditors, the Court relied on its ruling in Essar Steel  and stated that, Section 30(2)(b) in fact specifies, what the dissenting financial creditor is entitled to. Before the amendment, there was a possibility that secured financial creditors might cramdown dissentient unsecured financial creditors, the majority vote being 66% voting, giving them almost nothing for their dues. But Section 30(2)(b) post-amendment, is indeed an advantageous provision favouring operational creditors and dissenting financial creditors as they are now to be paid a certain minimum amount, i.e. the higher of the two sums calculated under Section 30(2)(b)(i) and 30(2)(b)(ii). The Court also pointed out that the order of priority of payment of creditors mentioned in Section 53 is not embedded in the amended sub-section (2)(b). In fact, Section 53 should only be looked up in order that a certain minimum amount is to be paid to different classes of operational and financial creditors. It is only for this purpose that Section 53(1) is to be looked and not otherwise, since this amendment only serves the purpose of assisting the CoC so it takes informed decisions in regard to what amounts are to be paid to secured creditors, with fairness of distribution amongst similarly situated creditors. As a result, the amendment in no way makes it binding for the CoC to take into account the priority of secured interest and value of the security, unless creditors belonging to the same class are treated inequitably.
Therefore, no claim by the Appellant can be put forth in terms of amended Section 30(2)(b) to assert that it should be given precedence due to the value of its security interest.
The Supreme Court also made reference to Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors.  to make it apparent that “a dissenting financial creditor would be receiving the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him” and hence, it will be conditioned by the extent of value receivable and never the entire value of the security available.
The Court held that “it has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor given him some right over and above the other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors”.
It was noted that the extent of the value receivable by the Appellant in the present case is distinctly given out in the resolution plan i.e. a sum of Rs. 2.026 crores which is in the same proportion and percentage as provided to the other secured financial creditors with reference to their respective admitted claims.
The Court held that what amount is to be paid to different classes or sub-classes of creditors in accordance with the provisions of the Code and the related regulations, is essentially the commercial wisdom of the committee of creditors and dissenting secured creditor like the Appellant cannot suggest higher amount to be paid to it with reference to the value of the security interest held by it.
Now, in our view, we have some apathy with the dissenting financial creditor having security interest in the assets of the Corporate Debtor against its financial credit; and where such security is far higher in value than what it receives in the resolution plan. This is particularly since, arguably, such a financial creditor could have foreclosed such a security and recovered higher amount. Nonetheless, and most certainly, if the proposition suggested on behalf of such financial creditor is to be accepted, then “the result would be that rather than insolvency resolution and maximization of the value of the assets of the corporate debtor, the processes would lead to more liquidations, with every secured financial creditor opting to stand on dissent“. This will obviously defeat the very purpose envisaged by the code.
Therefore, a balanced approach could be that the rights and priorities of the financial creditors of any corporate debtor should be given full weightage to, while determining the distribution under a resolution plan, including a first and a second or subordinate charge holder, value of securities and other inter creditor arrangements. These are essential ingredients for achievement of financial closures and consequently for the projects and companies. In our view most of the lenders, banks, financial institutions and other financial stakeholders will welcome the same whether through an amendment to the Code or a judicial pronouncement by the Supreme Court. We will keep tracking to see if this wish does come true. So, watch this space for more…
 (2020) 8 SCC 5316
 Civil Appeal No. 3395 of 2020
Hardeep Sachdeva, Senior Partner
Akshara Grover, Associate