‘Jaypee Kensington judgement is not in consonance with principles of IBC’

While the Supreme Court in Jaypee Kensington Boulevard Apartments Welfare Association & Others v. NBCC (India) Ltd. & Others (Jaypee Kensington),102 dealt with several aspects of the insolvency law, this paper focuses on the aspect of the mode of payment to dissenting FCs. While section 30(2) of the Code provides that dissenting FCs should be paid the minimum of the liquidation value of their debt and regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides that dissenting FCs should be paid in priority of assenting FCs, the Code is silent on the mode of payment to dissenting FCs.

Key facts and the ruling

In this case, the resolution plan provided for payment of liquidation value of their debt to dissenting FCs through the mode of transfer of equity and land parcels. A dissenting FC had challenged this payment mechanism and had contended that payment to dissenting FC can only be in the mode of cash. The Supreme Court held that as per the framework of the Code, the term ‘payment’ used in the context of section 30(2) of the Code is indicative of the requirement to discharge the obligation owed towards dissenting FCs by the mode of payment in cash or to permit ‘recovery’ of debt by enforcement of their security interest in accordance with the entitlement of dissenting FCs. The Supreme Court further held that dissenting FCs cannot be compelled to be associated with the CD by payment in terms of equity or other security and that the Code permits dissenting FCs to not take the ‘voyage’ of sailing with the resolution, but to ‘disembark’ by seeking payment in cash in accordance with their entitlement.

Examination

This paper examines the quandary of the mode of payment to dissenting FCs by seeking to examine and balance the principles of ‘binding nature of the resolution plan’ and ‘minimum assurance to dissenting FCs’. As discussed, section 31 of the Code makes the resolution plan binding on all stakeholders, including creditors, who have not directly participated in the resolution process. Dissenting FCs, who participate in the resolution process, but do not approve the mechanism under the resolution plan, also come within the ambit of section 31 of the Code and are bound by the resolution plan. Section 30(2)(b) of the Code embodies the minimum guarantee of liquidation value assured to dissenting FCs.

Section 30(2)(b) does not, in any manner, dislodge the binding nature of the resolution plan in respect of dissenting FCs and does not enable dissenting FCs to opt out of the resolution plan and undertake recovery action to the extent of their liquidation value. However, the judgment in Jaypee Kensington has the unintended consequence of enabling dissenting FCs to opt out of or ‘disembark’ from the resolution plan and undertake recovery action either in terms of: (a) seeking cash payment (irrespective of the conceived mode of payment to assenting FCs); or (b) enforcing security interest, in complete disregard of the spirt of the Code, which has been envisioned not as a recovery forum but as a beneficial legislation for the resolution of debt. Such an interpretation not only incentivises dissent, but also has the potential to derail the resolution plan and the operation of the debtor as a going concern, particularly in case of enforcement of security interest over assets that are vital for the functioning of the debtor. Further, as the quantum of payment in cash to be made to dissenting FCs or the securities that would be enforced by dissenting FCs can be known only after the resolution plan has been formulated and voted upon, the resolution process can be jeopardised and derailed if the resolution applicant is subsequently required to make provision for substantial payment in cash or take into account that certain critical assets will not be available for the continued operations of the debtor. Further, such an interpretation also violates the principle of equitable treatment, as it allows certain creditors within the same class of ‘FCs’ to be treated differently regarding the mode of payment merely on the basis of their manner of voting on the resolution plan. In this light, regulation 38 of the CIRP Regulations, providing dissenting FCs to be paid in priority of assenting FCs, should be interpreted as a safeguard mechanism to ensure that the rights of dissenting FCs are not impaired by assenting FCs, and whenever any payment is to be made to FCs as per the payment schedule under the resolution plan, the payment should be first applied to discharge the obligations towards dissenting FCs. However, it does not enable dissenting FCs to seek a mode of payment at variance from the one provided under the resolution plan for FCs and seek payment prior to the repayment schedule provided under the resolution plan for FCs. In this context, it may be noted that the UNCITRAL Legislative Guide also envisages that dissenting creditors, who do not support the plan, can be paid as per their entitlement in ‘money or property, such as stock or other securities’.

Thus, the judgment in Jaypee Kensington is not in consonance with the principles of binding nature of the resolution plan, resolution of debtor as a going concern, and equitable treatment of creditors.

This analysis has been done by L Viswanathan, Animesh Bisht and Karan Sangani, and it first appeared in IBBI’s publication Navdrishti: Emerging Ideas of IBC

Also See: An analysis of State Tax Officer vs Rainbow Papers Limited verdict