Rights of operational creditors to seek judicial review of resolution plan before NCLT

The IBC Code has provided with different sets of creditors – while financial creditors are to predominantly constitute the committee of creditors; the operational creditors are not allowed to be part of the committee of creditors unless comprise of certain specified percentage of the corporate debt and are thus not empowered to participate or take decisions regarding approval or rejection of resolution plan which affect them as much as it does to the financial creditors. However, operational creditors having the amount of aggregate dues not less than 10% of the debts are allowed to attend the meetings of the committee of creditors (refer section 24) but are not members thereof and thus, are not allowed to vote. It may be noted here that the distinction as made above is irrespective of whether the creditor is secured or unsecured. However, in most of the cases, operational creditors are unsecured, and as per the waterfall specified in Section 53 of the Code, rank much below other creditors.

Liquidation value due to operational creditors
Section 30 (2) of the Code read with Regulation 38 (1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that the liquidation value due to operational creditors and dissenting financial creditors shall be paid in priority before any payment is made to financial creditors, who assented to the resolution plan, within 30 days of the approval of the resolution plan by the adjudicating authority. Liquidation value is the estimated realizable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date. Therefore, in every case, the liquidation value is the most conservative value which a creditor will get in the event of liquidation of the corporate debtor.
Therefore, section 30 (2) of the Code seems to be a fair provision, fair in all aspects that the dissenting creditors and the operational creditors are getting their share before any of the other financial creditors does, however, it must be understood that liquidation is the worst possible case and so liquidation value is the worst possible value and it is rarely adhered to when the liquidated value is defined to be distributed to the Operational Creditors in terms of Water fall mechanism as given in Section 54 of the IBC Code.

Possible solution(s)
The concept of “resolution plan” is not new.
A. There have been schemes under Sick Industries (Special Provisions) Act, 1985 (“SICA”) or Company Voluntary Arrangements under the UK Insolvency Act, 1986 or the repayment plans under US Bankruptcy Code. The schemes of arrangements/compromises under the Companies Act, 1956/2013 are somehow different because in consideration of such arrangement or compromise, every class has arrived together. Super-majority of each class decides on the compromise/arrangement; as such, the arrangement/compromise binds an entire class (including all members, whether assenting or dissenting) which has been separately heard.
B. Limited Judicial Review of the Resolution Plan for ensuring minimum
There has to be a balancing of power and liquidity value between the Financial and Operational Creditors.
This issue had been discussed at length by Hon’ble NCLAT in matter titled as “ HAMMOND POWER SOLUTIONS PVT. LTD. VS. SANJIT KUMAR & Ors.” While discussing the principles laid down by Hon’ble Supreme Court in “Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors.” (Civil Appeal No.8766-67 of 2019) in the Judgement dated 15th November, 2019 and “Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.” (Writ Petition (Civil) No. 99 of 2018) and Para – 46 of the Judgement, the Hon’ble NCLAT gave its findings for justifying limited purpose of Judicial review in favour of the balancing interest of all stakeholders including the Operational creditors in the Resolution plan.

The relevant portion is quoted as follows:-
“10. In the Judgement in the matter of “Essar Steel” (supra) in Paragraphs – 41 and 42, the Hon’ble Supreme Court dealt with the jurisdiction of the Adjudicating Authority and the Appellate Tribunal and held as under:-
“Thus, it is clear that the limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned, the parameters of such
review having been clearly laid down in K. Sashidhar (supra).”

In Para – 44 of the Judgement, Hon’ble Supreme Court has then dealt with dues with regard to Operational Creditors under a Resolution Plan and observed in Para – 45 as follows:-
“However, as has been correctly argued on behalf of the operational creditors, the preamble of the Code does speak of maximisation of the value of assets of corporate debtors and the balancing of the interests of all stakeholders. There is no doubt that a key objective of the Code is to ensure that the corporate debtor keeps operating as a going concern during the insolvency resolution process and must therefore make past and present payments to various operational creditors without which such operation as a going concern would become impossible. Sections 5(26), 14(2), 20(1), 20(2)(d) and (e) of the Code read with Regulations 37 and 38 of the 2016 Regulations all speak of the corporate debtor running as a going concern during the insolvency resolution process. Workmen need to be paid, electricity dues need to be paid, purchase of raw materials need to be made, etc.”

It was observed by the Hon’ble NCLAT that
“12. It is apparent that the decision of the Committee “must reflect the fact that it has taken into account maximising the value of the assets of the Corporate Debtor and the fact that it has adequately balanced the interests of stakeholders including Operational Creditors”.
Judicial review is available to see if the Committee of Creditors has taken into account the fact that the Corporate Debtor needs to be kept as a going concern; that there is necessity to maximise the value of the assets and that the interest of all stakeholders including Operational Creditors has been taken care of.
There is no dispute that so many of the Operational Creditors have been left high and dry giving them nil amount which Hon’ble Supreme Court has observed that giving NIL to Operational Creditors “would certainly not balance the interest of all stakeholders or maximise the value of assets of the Corporate Debtor if it becomes impossible to continue running its business as a going concern.”

Conclusion

IN the conclusion, it can be derived that though the legal provision under the IBC Code and Companies Act 2013 have been mandated to follow the principles of natural justice and equality for all stakeholders but it is the COC and the other participating entities to ensure strict adherence to these norms and legal principles to grant justice to the Operational Creditors who are not the participating entity in the entire resolution process lest they are forced to seek redressal of their grievance through legal process or intervention before Hon’ble NCLT or NCLAT.

The author is Managing Partner at Vidhigya, The Advocates

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