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TMI Blog2019 (9) TMI 1440X X X X Extracts X X X X X X X X Extracts X X X X ..... ted (hereinafter referred to as "RPIF") and the Resolution Professional has filed an application MA no. 315 of 2019 u/s 31 of the Insolvency & Bankruptcy Code, 2016 (I&B Code) for approval of Resolution Plan. 2. The present Miscellaneous Application in hand is filed by an Operational Creditor of the Corporate Debtor i.e. 'Indian Oil Corporation Limited' (IOCL) challenging the Resolution Plan on the ground that it is arbitrary and discriminatory as it provides for 'nil' payment to Operational Creditors. The applicant's case is that the resolution plan is not fair and equitable as per the requirements of the I&B Code, therefore, it seeks modification or deletion of certain provisions of the Resolution Plan which adversely affects the interests of the Applicant. 3. The grievance of the Applicant is that the Resolution Plan of RPIF provides for liquidation value as 'NIL' and therefore, the Operational Creditors in the said plan are not being given anything. The Applicant states that the 'nil' liquidation value as given in the plan is incorrect as the two valuation reports given by RBSA Valuation Advisors LLP and Rakesh Narula & Co. have provided fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 169. Sub-clause (b) of sub-section (2) of Section 30 of the 'I&B Code' mandates that the 'Resolution Plan' must provide for the payment of the debts of 'Operational Creditors' in such manner as may be prescribed by the Board which shall not be less than the amount to be paid to the 'Operational Creditors' in the event of a liquidation of the 'Corporate Debtor' under Section 53. That means, the 'Operational Creditors' should not be paid less than the amount they could have received in the event of a liquidation out of the asset of the 'Corporate Debtor'. It does not mean that they should not be provided the amount more than the amount they could have received in the event of a liquidation which otherwise amount to discrimination. 170. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor. 12. The above said provision clarifies that the payment to the operational creditors under a resolution plan should be higher of the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53 or the amount that would have been paid to such creditors, in the event the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in subsection (1) of section 53. Hence, it is clarified that section 53 of the I&B Code is applicable to distribution under resolution mechanism also. 13. It may be further noted that the Statement of Obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being made to revive the Corporate Debtor is Rs. 901.74 crore, out of which Rs. 420 Crore is the upfront payment to the Financial Creditors, and Rs. 480 Crore is the deferred payment to financial creditors realisable in a period of 5 years by issuing Non-Convertible Debentures. In addition, Rs. 1.74 Crore is being paid to Workmen and Employees. It is seen that as against zero payment to Operational Creditors, the financial creditors are getting only around 12% of their debt, therefore, this contention of the Applicant that the Operational Creditors are being discriminated against, is wrong in law. 17. The Hon'ble Supreme Court while discussing the constitutionality of the I&B Code, throws light on Section 53 in the case of Swiss Ribbons Pvt. Ltd. & Ors. V. Union of India & Ors. [Writ Petition (Civil) No. 99 of 2018], order dated 25.01.2019, reproduced below for ready reference: 84. It will be seen that the reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the Insolvency Code. We have already seen that re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to apply to all those resolution plans which approved or rejected by the Adjudicating Authority-NCLT or even at the stage of appeal etc. Therefore, we are of form opinion that the legislative intent has to be given effect and the resolution plan must be read to mean that it will release the amount the Operational Creditors in accordance with priorities given in section 53(1)." 19. In view of the above facts, this Bench holds that section 53 of the I&B Code is applicable to resolution mechanism, and the Operational Creditors being placed below the financial creditors is not arbitrary or unreasonable. The value being paid to operational creditors is determined pursuant to and in accordance with the recent amendment in section 30(2)(b) of the I&B Code which provides that the RP shall examine each Resolution Plan received to confirm that the plan provides for the payment of debts of operational creditors in such manner which shall not be less than the amount to be paid to the operational creditor in the event of liquidation of the Corporate Debtor under section 53 of the I&B Code. By insertion of this sub-section, simply a mechanism is provided, which is in nature of a helping guidel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant was classified as financial creditor of the Corporate Debtor upon filing of claim with the IRP. 26. The Applicant states that RPIF submitted a Resolution Plan in respect of the Corporate Debtor during the CIRP period. The Resolution Plan, inter alia, provides that upon approval of the Resolution Plan by this Tribunal, all guarantee, security, letter of credit or pledge provided by the promoters of the Corporate Debtor in respect of any debt at any time prior to the date of approval of the resolution plan would be automatically released and all liabilities in respect thereof would be extinguished. 27. It is further submitted that the Resolution Plan sought to protect the interests of the promoters and guarantors of the Corporate Debtor over the rights of creditors, which is against the object of the Code and hence the Applicant voted against the Resolution Plan in the CoC meeting dated 10.01.2019, when the resolution plan was approved by majority of the creditors i.e. by 73.17%. 28. It is contended that the very purpose of the guarantee is to recover the amount from the guarantor in case the principle debtor is unable to repay the debt. In this case, when the resolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or modification of any security interest. Security interest is defined by Section 3(31) of the Code as follows: "3. Definitions.-In this Code, unless the context otherwise requires,- xxx xxx xxx (31) "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee; xxx xxx xxx" This would certainly include a guarantor who may be a member of the erstwhile Board of Directors. Further, under Regulation 37(1)(f), a resolution plan may provide for reduction in the amount payable to the creditors, which again vitally impacts the rights of a guarantor. Last but not least, a resolution plan which has been approved or rejected by an order of the Adjudicating Authority, has to be sent to "participants" which would include members of the erstwhile Board of Directors - vide Regulation 39(5) of the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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