NCLAT rules farmers a separate creditor group in sugar industry's resolution plan

NCLAT rules farmers a separate creditor group in sugar industry's resolution plan

The matter arose when the appellant of the corporate debtor challenged the order of the adjudicating authority

The principal bench of the National Company Law Appellate Tribunal (NCLAT) has urged the government and the Insolvency and Bankruptcy Board of India (IBBI) to examine a minimum entitlement to operational creditors based on the amount realized in the resolution plan above the liquidation value.

The bench comprising Justice Anant Bijay Singh (judicial member) and Shreesha Merla (technical member) was adjudicating an appeal filed in the Excel Engineering & Ors vs Vivek Murlidhar Dabhade & Anr case.

New Phaltan Sugar Works Ltd. (corporate debtor) was admitted into the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional (RP) had filed an application under the Insolvency and Bankruptcy Code (IBC), 2016, seeking approval of the resolution plan submitted by Shri Dutt India Pvt Ltd (resolution applicant).

Vide the November 2019 order, the Adjudicating Authority (AA) approved the plan, which was implemented. But the operational creditor (appellant) of the corporate debtor challenged the order and appealed before NCLAT.

The operational creditor contended that the total amount of the operational debt from the operational creditors (other than the employees, workmen, and farmers) was Rs.63,45,09,539 against the total debt of Rs.193,58,53,515. This meant 32.78 percent of the total debt.

It argued that the approved resolution plan was discriminatory as it paid 100 percent to the farmers as against a mere 1 percent of the total admitted claim of the appellants. This was discriminatory, as, under IBC, the farmers did not form a class by themselves.

The tribunal observed that the corporate debtor was a sugar industry, and the farmers were an integral part of it. Over 4500 farmers and their families depended on the corporate debtor's factory for their survival. The resolution plan would not be implementable without making the payments to the farmers, as the dues were pending for the past two years. The secured financial creditors also accepted that 100 percent payment should be made to the farmers who were the backbone of the sugar industry.

The bench further noted that IBC provided different priorities of payments and dues for employees and other operational creditors. It depended on the facts and circumstances, the nature of the industry, and the functioning of the corporate debtor. It held that there was no embargo for the classification of the operational creditors into different classes for deciding how the Committee of Creditors would distribute the amount.

The tribunal ruled, "The plan was approved by 100 percent voting share in November 2019 and was also implemented. The operational creditors were paid as per IBC read together with CIRP Regulations. The operational creditors are entitled to receive only such money that is payable to them as per the IBC. It is at the discretion of the collective commercial wisdom about the amount and the quantum of money to be paid to a certain category or the incidental category of the creditors by balancing the interests of the stakeholders and the operational creditors. The limited judicial review available to the AA lies within IBC."

While dismissing the appeal, the bench urged the government and IBBI to examine some minimum entitlement to the operational creditors.