Supreme Court: Dissenting Financial Creditors of Resolution Plan Must Be Paid in Accordance with Section 53(1) of IBC

Supreme Court: Dissenting Financial Creditors of Resolution Plan Must Be Paid in Accordance with Section 53(1) of IBC

The Supreme Court by its division bench of Justices M.R. Shah and Sanjiv Khanna while modifying the judgment passed by the National Company Law Appellate Tribunal (NCLAT) and ruled that the appellant-M/s. Vistra ITCL (India) Limited shall be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of the Insolvency and Bankruptcy Code, 2016 (for short Code).

Referring to the amended Section 30(2) of the Code post the substitution by Act No. 26 of 2019, the bench observed that the amendment ensures the operational creditors under the resolution plan should be paid the amount equivalent to the amount which they would have been entitled to, in the event of liquidation of the Corporate Debtor under Section 53 of the Code. The Apex Court further held that the amended provision provides that the financial creditors who have not voted in favor of the resolution plan shall be paid not less than the amount which would be paid to them in accordance with subsection (1) to Section 53 of the Code, in the event of liquidation of the corporate debtor.

In the present case, the Corporate Debtor- Amtek Auto Limited approached the appellants- M/S Vistra Itcl (India) Ltd and Others. to extend a short¬ term loan facility of INR 500 crores to its group companies i.e., Brassco Engineers Ltd. and WLD Investments Pvt. Ltd. for the ultimate end use of the Corporate Debtor.

Three Security Trustee Agreement were executed. First one dated 28 December, 2015 was executed between KKR India Financial Services Pvt. Ltd. as lender and WLD Investments Pvt. Ltd. (WLD) as borrower and Vistra ITCL India Ltd. (earlier known as IL&FS Trust Company Ltd.) as security trustee. Second Security Trustee Agreement dated 28 March, 2016 was executed by and between KKR India Financial Services Pvt. Ltd. as the Lender and BRASSCO Engineering Pvt. Ltd. (BRASSCO) as borrower and Vistra ITCL India Ltd. as security trustee. The third Security Trustee Agreement dated 30 June, 2016 was executed by and between KKR India Financial Services Pvt. Ltd. and L&T Finance Ltd. (Earlier known as L&T Fincorp Limited) as lenders and BRASSCO Engineering Ltd. as borrower and Vistra ITCL India Ltd. as security trustee.

Thereafter an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was admitted against the Corporate Debtor/AAL. The respondent herein was appointed as the resolution professional. The first appellant filed its claim as a secured creditor of the Corporate Debtor and submitted Form C claiming a principal amount of Rs. 500 crores but the same was rejected by the Resolution Professional.

The Resolution Professional received two resolution plans from only two resolution applicants being Liberty House Group Pvt. Ltd. (LHG) and Deccan Value Investors (DVI).

As DVI withdrew its Resolution Plan so the revised plan by M/s LHG was considered by the Committee of Creditors (CoC) and was approved. The Resolution plan was approved by the Adjudicating Authority but as the LHG did not fulfil its commitment, the Adjudicating Authority passed an order directing reconsideration of the CoC for consideration of DVI’s plan.

The appellants filed another application under Section 60(5) claiming the right on the basis of the pledged shares. The Adjudicating Authority dismissed the application filed by the appellants.

The NCLAT dismissed the appeal by observing that the appellants not having advanced any money to the Corporate Debtor as a financial debt would not be coming within the purview of financial creditor of the Corporate Debtor.

Aggrieved by the same the original applicants – M/s Vistra and others approached the Apex Court challenging this judgment.

The Apex Court at the outset remarked that the issue involved in the present appeal was squarely covered by this Court in the case of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited and Phoenix ARC Private Limited vs. Ketulbhai Ramubhai Patel.

In Anuj Jain IRP for Jaypee Infratech Ltd. vs. Axis Bank Ltd. (2020), the issue was whether the lenders of Jaypee Associates Limited (JAL), the holding company of Jaypee Infratech Limited (JIL), the Corporate Debtor, hold the status of ‘financial creditors’ of JIL within the meaning of Section 5(7) & 5(8) of the Code. This issue had arisen as JIL had mortgaged certain land with the creditors of JAL. It was held that a person only having a security interest in the assets of the Corporate Debtor, even if falling in the description of ‘secured creditor’ by virtue of collateral security extended by the Corporate Debtor, would nevertheless stand outside the sect of the ‘financial creditors’, and consequently outside the CoC as well.

In Phoenix ARC Pvt. Ltd. vs. Ketulbhai Ramubhai Patel (2021) concept of ‘pledge’ was elucidated.

The bench observed that, “law of pledge contemplates special rights for the pawnee in the goods pledged, i.e., the right to possession of the security, and in case of default, the right to bring a suit against the pawnor, as well as the right to sell the goods after giving reasonable notice to the pawnor. The general rights or ownership rights in the property remain with the pawnor, and wholly reverts to him on discharge of the debt or performance of the promise. In other words, the right to property vests in the pawnee only as far as it is necessary to secure the debt.”

Averting to the present case the bench opined that the Corporate Debtor – Amtek was not liable to repay the loans advanced by the predecessor interest of the appellant ¬Vistra, in respect of which there were detailed and separate agreements executed by the lenders with Brassco and WLD.

Another aspect which was considered by the Supreme Court was with respect to the contention of Appellant- Vistra being a secured creditor to the extent of the shares pledged to it by the Corporate Debtor Amtek.

The bench noted that Vistra held the first right in pledge on 66.77% shareholding in JMT Auto Limited. The bench on perusal of Section 3(31) of the Code observed that the person in whose favor the security interest is created need not be the creditor who avails the credit facility, and can be a third person. Security interest can be created for credit facilities/loan advanced to another person.

The bench accepted that the appellant- Vistra has security interest in the pledged shares

Thereafter, the bench was posed with a situation wherein, the first Appellant, a secured creditor, was being denied the rights under Sections 52 and 53 in respect of the pledged shares, whereas, the intent of the amended Section 30(2) read with Section 31 was submitted contrary, as it recognises and protects the interests of other creditors who are outside the purview of the CoC.

In this regard, the bench while treating the first Appellant – Vistra as a secured creditor in terms of Section 52 read with Section 53, concluded by ruling, “we give the option to the successful resolution applicant – DVI (Deccan Value Investors) to treat the first Appellant- Vistra as a secured creditor, who will be entitled to retain the security interest in the pledged shares, and in terms thereof, would be entitled to retain the security proceeds on the sale of the said pledged shares under Section 52 read with Rule 21¬A of the Liquidation Process Regulations.”

Accordingly, the bench partly modified the impugned judgment of the NCLAT affirming the view taken by the NCLT by holding that appellant-M/s. Vistra ITCL (India) Limited would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of the Code, and in accordance with the pledge agreement.