Supreme Court says a creditor can't dictate higher security interest

Supreme Court says a creditor can't dictate higher security interest

The Court held that the submissions regarding the value of security interest do not carry any meaning nor any substance

The Supreme Court while dismissing this appeal filed u/S 62 of the Insolvency Bankruptcy Code, 2016 (IBC) observed that the dissenting financial creditor cannot suggest a higher amount to be paid in reference to the security interest held by it over the corporate debtor.

The National Company Law Appellate Tribunal (NCLAT) upheld the order passed by the National Company Law Tribunal (NCLT) at Kolkata, where the resolution plan was approved in the Corporate Insolvency Resolution Process (CIRP) concerning the Corporate Debtor – VSP Udyog Private Limited as submitted by the Resolution Applicant – Amit Metaliks Limited who are the Respondents in this appeal.

The facts of the case are that the Financial Creditor – India Resurgence Arc Private Limited who is the Appellant, chose to remain a dissenting financial creditor because the Resolution Applicant had offered the Appellant an amount of Rs 2.026 crore without even considering the valuation of the security held by the Appellant, which admittedly had the valuation of more than Rs 12 crore.

The Division Bench comprising of Justices Vineet Saran and Dinesh Maheshwari after going through the financial proposal in the resolution plan concluded that no case of denial of fair and equitable treatment or disregard of priority was made out. It further observed the following:

"It has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors."

The Appellant placed reliance on the amended provisions of sub-section (4) of Section 30 of the IBC but the bench did not make out any case for interference with the resolution plan by observing:

"The NCLAT was, therefore, right in observing that such amendment to sub-section (4) of Section 30 only amplified the considerations for the Committee of Creditors while exercising its commercial wisdom so as to take an informed decision in regard to the viability and feasibility of resolution plan, with fairness of distribution amongst similarly situated creditors; and the business decision taken in exercise of the commercial wisdom of CoC does not call for interference unless creditors belonging to a class being similarly situated are denied fair and equitable treatment."

The Court added that the submissions of the Appellant with reference to the value of its security interest do not carry any meaning nor any substance. It concluded that what amount is to be paid to different classes or subclasses of creditors in accordance with the provisions of the IBC and the related regulations, is essentially the commercial wisdom of the Committee of Creditors. A dissenting secured creditor like the appellant cannot suggest a higher amount to be paid to it with reference to the value of the security interest.

The bench noted that the extent of value receivable by the Appellant is distinctly given out in the resolution plan i.e., a sum of Rs 2.026 crore which is in the same proportion and percentage as provided to the other secured financial creditors with reference to their respective admitted claims. Therefore, it held that the value of the security as claimed by the Appellant at about Rs 12 crore is wholly inapt and is rather ill-conceived.

The Court dismissed the appeal by emphasising that if the propositions of the Appellant were to be accepted, the result would be that rather than insolvency resolution and maximisation of the value of assets of the corporate debtor, the processes would lead to more liquidations, with every secured financial creditor opting to stand on dissent.