Conscious Consideration of Resolution Plan by COC – SVA Family Welfare Trust & Anr. v. Ujaas Energy Ltd. & Ors.; Order dated 21st August 2023 – NCLAT

The Hon’ble Appellate Authority has held that the Security Interest of dissenting Financial Creditor can be dealt with in a Resolution Plan.

Summary:

The Hon’ble Appellate Authority has considered the concept of commercial wisdom of CoC and the security interest of the dissenting financial creditor. As per the judgment of the Hon’ble Appellate Authority, the CoC has every right to include the clause of extinguishment of the security, including the Personal Guarantees, in the resolution plan. This is the first of its kind judgment to be focused upon this particular concept wherein the security interest of the dissenting financial creditor has been ordered to be included in the Resolution Plan and accordingly, the commercial wisdom of the CoC has been given primacy over the rights of the financial creditors.

Facts of the Case:

The National Company Law Appellate Tribunal (NCLAT) was dealing with the appeal arising from the order of the Adjudicating Authority wherein the Ld. Adjudicating Authority rejected the resolution plan after relying upon the submission of the dissenting financial creditor, Bank of Baroda having only 5.83% of the voting share on the ground that the CoC cannot extinguish right of a particular secured creditor of the corporate debtor under the garb of its commercial wisdom and such provision in the resolution plan is not only prejudicial to the right of the secured creditor but also against the provisions of the law. As per the resolution plan, the Appellant proposed INR 45,00,00,000/- towards the value of the Corporate Debtor and INR 23,81,75,744/- towards the release of personal guarantees.

The NCLAT considered a challenge to the said order of the Adjudicating Authority.

Issues raised/ discussed:

The question that was raised for the Hon’ble Appellate Authority’s consideration was whether the resolution plan can bear a clause that proposes extinguishment of the security interest of a Financial Creditor or not.

Judgment:

Before traversing to the contentions of the Appellant and the Respondent in the present case, the Hon’ble Adjudicating Authority considered the provisions of the Insolvency and Bankruptcy Code, 2016 and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, particularly Section 3(31), which defines the term “security interest” and Regulation 37 which deals with the Resolution Plan. After noting down the provisions and the fact that there exists a security interest in favour of the Respondent, Bank of Baroda.

The Appellant contended that the Board of Directors, who are often guarantors, are bound by the terms of the resolution plan and such plan may scale down the debt of the principal debtor. The Hon’ble Adjudicating Authority noted that there may be situations, such as relevant provisions in the resolution plan, through which the personal guarantors can be discharged. It was noted that, in the present case, the CoC consciously considered the clauses in the plan for relinquishing the personal guarantees of the Financial Creditors for a consideration offered by the Successful Resolution Applicant for release of the personal guarantee passed the resolution plan accepting the clause in the plan for release of the personal guarantee. Therefore, the NCLAT held that there was no error committed by the CoC in the consideration of the resolution plan and the commercial wisdom of the CoC by approving the resolution plan has to be given due weightage. It was also held that the security interest of the dissenting financial creditor can be made part of the resolution plan and relinquishment of the security interest is a commercial decision of the CoC which cannot be allowed to be impugned at the instance of the financial creditor.

Analysis:

The CoC is that important body that actually undertakes the whole process of CIRP, effectively taking over the Company from the Board of Directors of the Corporate Debtor. The decision of the CoC has always provided the necessary primacy by the Courts in India, and on the same line, the Hon’ble Appellate Authority has given the same consideration to the commercial wisdom of the CoC. This judgment, however, highlighted some important facets as to the inclusion of the security interest of a financial creditor (dissenting) in the resolution plan and the rights of the secured creditors. On various occasions, the Courts have decided the liability of the personal guarantors towards the secured creditors in case the CIRP is going on against the Corporate Debtor, however, the judgments cannot be read as a whole to consider that there cannot be a way to extinguish the liability and it was pointed out that situations where a relevant clause has been included in the resolution plan, there can be a case of extinguishment of the security interest.