Case: RAHUL JAIN Vs. RAVE SCANS PVT. LTD

The Corporate Insolvency Resolution Process (CIRP) was initiated against M/s. Rave Scans Private Limited (hereafter the Corporate Debtor) under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC or the Code for short). The revised resolution plan submitted by the appellant was approved by the NCLT on 17th October, 2018. The second respondent, M/s Hero Fincorp Ltd. (hereafter the Financial Creditor or Hero) appealed against the NCLTs order on grounds of discrimination between financial creditors, which resulted in the NCLAT modifying the NCLTs final order2. The facts of the case are as follows. The CIRP was initiated on 25 th January, 2017 against the Corporate Debtor under Section 10 of the IBC. The appellant was the resolution applicant of the Corporate Debtor, whose liquidation value was ascertained as 36 crores. Against the said amount, the ? appellant offered 54 crores to revive the Corporate Debtor in ? terms of the resolution plan. The resolution plan was then revised and the revised resolution plan submitted by the appellant was approved by the adjudicating authority, i.e., the Principal Bench of the NCLT. This resolution plan was challenged before the NCLAT by the second respondent in the present appeal, Hero Fincorp Ltd. as being discriminatory. Discrimination was alleged on the ground that the secured financial creditors were provided with a higher percentage of their claim amounts; however, Hero had been allowed a lesser percentage of its admitted claim. Hero, who had dissented with the resolution plan, had been provided with 32.34% of its admitted claim, whereas other financial creditors had been provided with 45% of their admitted claims. The remarks column in the resolution plan showed that the plan was based on Maintained liquidation value (LV) under Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The reference herein was to the unamended Regulation 38, pertaining to the mandatory contents of a resolution plan3. The NCLAT in its impugned order which set aside the NCLTs directions and required the appellant to increase the liquidation value of the offer to Hero, relied on Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 526 of 2018 and Binani Industries Ltd. v. Bank of Baroda & Anr., Company Appeal (AT) (Insolvency) No. 82 of 2018, and noticed that Regulation 38 had been held to be discriminatory in these cases. Accordingly, an amendment was made on 5 th October, 2018, and the provision in Regulation 38(1)(c) on liquidation value payable to financial creditors was deleted. The amended regulation was also considered by the Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India, 2019 SCC Online SC 73, which noticed that the amendment strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors rights, together with priority in payment over financial creditors. Swiss Ribbons (supra) also observed that the NCLAT, while looking into the viability and feasibility of resolution plans approved by the committee of creditors, has always gone into the question of whether operational creditors are given roughly the same treatment as financial creditors, and if not, such plans have been rejected or modified so that the rights of operational creditors are safeguarded4. The order approving the resolution plan, which was impugned before the NCLAT was passed by the adjudicating authority on 17 th October, 2018. The NCLAT held that this order failed to notice that no resolution plan could be approved discriminating against the dissenting financial creditor, in terms of the amended Regulation 38. The NCLAT further held that the adjudicating authority failed to notice that the NCLAT had declared the unamended Regulation 38(1)(c), which stipulated the liquidation value for dissenting financial creditors as illegal. It was held that the resolution plan in this instance, which had been approved by the impugned order of the NCLT, did not conform to the test in Section 30(2)(e) of the IBC, and was discriminatory against similarly situated Secured Creditors5. The NCLAT further observed that under Section 30(2)(b) (ii), such differential treatment must only be made in such a manner as may be specified by the Board, which shall not be less than the amount to be paid to these creditors in accordance with Section 53(1) in the event of liquidation of the corporate debtor. The NCLAT held that the amended Regulation 38 would still be applicable, and the Corporate Debtor could not take advantage of the repealed provision. In light of this reasoning, the NCLAT held the resolution plan to be discriminatory and violative of Section 30(2)(e) of the IBC, and directed that the successful resolution applicant remove the discrimination by providing similar treatment to the appellant before the NCLAT, as other similarly situated financial creditors6. It was observed that the successful resolution applicant had noticed that Regulation 38 was amended on 5 th October, 2018; the applicant, however, failed to bring this fact to the notice of the adjudicating authority when the matter was taken up for approval, and also did not amend the resolution plan to make it in accordance with the amended Regulation 38. The grounds for discrimination alleged by the Corporate Debtor were that firstly, Regulation 37(1) requires a resolution plan to offer maximization of value of its assets, which is fulfilled by offering 54 crores against the liquidation value of 36 crores ? ? only; secondly, Regulation 38(1)(c) mandatorily provided for the maintenance of the liquidation value of dissenting financial creditors before the amendment dated 5 th October 2018; thirdly, the committee of creditors, in its meeting, directed the resolution professional to seek a legal opinion on differential value of financial creditors. The committee of creditors accepted the opinion obtained by the resolution professional stating that liquidation value has to be maintained for dissenting creditors. Accordingly, in the next revised resolution plans dated 12 th January, 2018, 16 th February, 2018, and 5 th October, 2018, the resolution applicant offered minimum liquidation value (not a percentage of the claim).

Court's reasoning:
13. In the present case, it is noticeable that no doubt, Hero was provided with 32.34% of its admitted claim as it has dissented with the plan. On the other hand, Tata Capital Financial Services Ltd. was provided with 75.63% of its admitted claim; other financial creditors (Indian Overseas Bank, Bank of Baroda and Punjab National Bank) were provided with 45% of their admitted claims. Given that the resolution process began well before the amended regulation came into force (in fact, January, 2017) and the resolution plan was prepared and approved before that event, the wide observations of the NCLAT, requiring the appellant to match the pay-out (offered to other financial creditors) to Hero, was not justified. The court notices that the liquidation value of the corporate debtor was ascertained at 36 crores. Against the ? said amount, the appellant offered 54 crores. The plan was ? approved and, except the objections of the dissenting creditor (i.e Hero), the plan has attained finality. Having regard to these factors and circumstances, it is held that the NCLATs order and directions were not justified. They are hereby set aside; the order of the NCLT is hereby restored.