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The National Company Law Appellate Tribunal has held that the Committee of Creditors (CoC) has no role to play in the matter of distribution of amount promised in the Resolution Plan among the financial and operational creditors of the corporate debtor.
The distribution of amount to the financial creditors, operational creditors and other stakeholders ought to be made by the Resolution Applicant. The same is required to be reflected in the Resolution Plan, the Appellate Tribunal has clarified.
The Appellate Tribunal has further held that there are no provisions under the Insolvency and Bankruptcy Code which permit the constitution of a ‘Core Committee’ or ‘Sub-Committee’ for delegation of CoC’s duties.
The judgement was passed by a two-member Bench headed by Chairperson Justice SJ Mukhopadhyay and Justice Bansi Lal Bhat in an appeals by Standard Chartered Bank against the approval granted to ArcelorMittal’s resolution plan for Essar Steel.
Standard Chartered Bank, which is one of the financial creditors of Essar Steel, had challenged ArcelorMittal’s resolution plan on the ground that the approval process adopted by the Committee of Creditors was illegal and discriminatory. As per the approved Plan, Standard Chartered was offered merely offered 1.7% of its claim amount as opposed to other financial creditors of Essar, which got as much as 92% of their claim.
Standard Chartered had alleged that the distribution of money promised in the resolution plan was decided by a “core committee/ sub-committee’ of the CoC, which even carried negotiations with ArcelorMittal.
Who has the power to distribute
After hearing the parties, the Appellate Tribunal asserted that as per Section 30(2)(b) IBC, it is the Resolution Applicant who must provide the amount it proposes to pay one or other Creditors, including the ‘Operational Creditors’ and the ‘Financial Creditors’ in its Resolution Plan.
Further, Section 30(3) provides that if a ‘Resolution Plan’ does not show the distribution amongst the ‘Financial Creditors’ and the ‘Operational Creditors’, it cannot be placed before the ‘Committee of Creditors’ by the Resolution Professional, the Appellate Tribunal stated.
The Appellate Tribunal also relied upon Regulation 38 to add that a ‘Resolution Plan’ must include a statement as to how it has dealt with the interests of all stakeholders of the corporate debtor.
It thus held that the distribution of amount to the operational creditors, financial creditors and other stakeholders ought to be made by the Resolution Applicant and the same is required to be reflected in its Resolution Plan.
Scope of Powers of CoC
While deciding on the legality of ArcelorMittal’s resolution plan, the Appellate Tribunal held that the constitution of a ‘Sub-Committee or ‘Core Committee’ was unknown and against the provisions of the IBC.
“There is no provision under ‘I&B Code’ which permits constitution of a ‘Core Committee’ or ‘Sub-Committee’ nor the ‘I&B Code’ or Regulations empowers the ‘Committee of Creditors’ to delegate the duties of the ‘Committee of Creditors’ to such ‘Core Committee’/ ‘Sub-Committee’.”
It further added that the CoC had no power to even decide on the issue of distribution on the money in the Resolution Plan.
“Creditors’ have not been empowered to decide the manner in which the distribution is to be made between one or other creditors..”, it said.
The role of the Committee of Creditors is thus limited to ascertaining the commercial feasibility and viability of the Resolution Plan in terms of Section 30(4), it stated.
“The inter se distribution amongst the ‘Financial Creditors’ cannot be held to be purely commercial in nature. The same cannot, by any stretch of imagination, come within the purview of the ‘Committee of Creditors’ who is supposed to look into viability and feasibility under the ‘I&B Code’ and other prescription as made by the Insolvency and Bankruptcy Board of India. The commercial aspect is one and manner of distribution of the upfront amount is different than that of the commercial aspect.”
Further adding that the ‘Committee of Creditors’ does not enjoy any authority to “delegate to itself the role of the Resolution Applicant” to distribute the amount amongst the creditors, the Appellate Tribunal observed,
“The ‘Financial Creditors’ being Claimants at par with other Claimants like other ‘Financial Creditors’ and the ‘Operational Creditors’ having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other ‘Financial Creditors’ and minimum or ‘NIL’ amount in favour of some other ‘Financial Creditors’ or the ‘Operational Creditors’. The members of the ‘Committee of Creditors’ being interested party are also not supposed to decide the manner in which the distribution is to take place…”
Analyzing the facts of the present case, the Court observed that the negotiation by ‘Sub Committee’ thus resulted in infirmity and that the CoC should have requested ArcelorMittal to distribute the amount amongst the financial creditors, operational creditors’ and other stakeholders.
The Court, however, refused to set aside the resolution plan on the ground that it appeared that ArcelorMittal delegated the power to distribute on a suggestion made by the ‘Sub Committee’ itself.
Role of CoC
The Appellate Tribunal took the opportunity to also lays down the four key commercial decisions which a CoC is required to take in a Corporate Insolvency Resolution Process (CIRP).
Broadly, these are:
Classification of Creditors
The Appellate Tribunal also stressed upon the right of the operational creditors to be dealt in a fair and equitable manner.
It was noted that in the present case, the majority of the financial creditors were allowed 99.19% of their claim amount, whereas 0% was allowed in favour of the ‘Operational Creditors’.
Such distribution is not only discriminatory but also arbitrary, it said.
It further observed that in the present case, financial creditors were also differentiated on the basis of secured and unsecured debt.
The Appellate Tribunal thus ruled that financial creditors cannot be sub-classified as ‘Secured’ or ‘Unsecured Financial Creditor’ for the purpose of preparation of the ‘Resolution Plan’ by the ‘Resolution Applicant’.
It nonetheless accepted that operational creditors could be classified in three different classes, i.e. suppliers of goods and services, employees and Government dues, for distribution of amount.
However, they are to be given the same treatment, if similarly situated, it was added.
Liquidation vs Insolvency
The Appellate Tribunal also highlighted that the distribution of debts to the financial creditors and the operational creditors during the CIRP cannot be equated with the distribution of debts to all stakeholders after the liquidation.
“A ‘Resolution Plan’ shows upfront payment in favour of the Creditors including the ‘Financial Creditors’, ‘Operational Creditors’ and the other Creditors. It is not a distribution of assets from the proceeds of sale of liquidation of the ‘Corporate Debtor’ and, therefore, the ‘Resolution Applicant’ cannot take advantage of Section 53 for the purpose of determination of the manner in which distribution of the proposed upfront amount is to be made in favour of one or other stakeholders namely— the ‘Financial Creditor’, ‘Operational Creditor’ and other creditors.”
Profits earned during CIRP
In a landmark move, the Appellate Tribunal held that any amount of profit generated during the CIRP cannot be given to a successful Resolution Applicant as the successful Resolution Applicant has not invested any money during the CIRP.
The profits should be distributed amongst all the creditors including the financial creditors and the operational creditors, it said.
If one or other financial creditors invest money during the CIRP to keep the corporate debtor as a going concern, it can claim the interest out of the profit amount.
Applying these principles, the Appellate Tribunal approved ArcelorMittal’s Resolution Plan with modifications.
It directed that all financial creditors having a claim amount of over Rs 1 crore would be entitled to 60.7% of their admitted claim. Similarly, it awarded around 60% of the admitted claim to certain operational creditors having claims of more than Rs 1 crore.
The NCLAT also directed that the profits of Essar Steel, if any, during the pendency of the insolvency, would also be distributed among the creditors on a pro rata basis.
Read the Judgement: