NCLT: Dissenting Creditors Cannot be Treated Higher than other Creditors Merely because they Enjoy Security Interest

NCLT: Dissenting Creditors Cannot be Treated Higher than other Creditors Merely because they Enjoy Security Interest

The National Company Law Tribunal (NCLT), Kolkata comprising of Rohit Kapoor (Judicial Member) and Balraj Joshi (Technical Member), while hearing an application filed under Section 60(5) of Insolvency and Bankruptcy Code, 2016 (IBC) observed that just because of the fact that a creditor enjoys the protection of a security interest he cannot be treated any higher than the other creditors, who may have financed the Corporate Debtor while not enjoying any kind of protection in the shape of a security interest.

In the present case, ICICI Bank Limited (“Applicant”) is a secured Financial Creditor of BKM Industries Limited (“Corporate Debtor”). Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor and the Applicant submitted its claim which was admitted.

It was submitted that Applicant was the sole term lender having first pari passu charge over the movable and immovable properties of the Corporate Debtor situated at Medak (Andhra Pradesh) and Silvassa (Dadra and Nagar Haveli) as security for its outstanding dues vis-a-vis the Corporate Debtor.

However, the Applicants contended that it has been grossly prejudiced because of decision of the Resolution Professional for accepting and recommending a plan to the Committee of Creditors (“CoC”) wherein the Applicant had been treated at par with the other creditors thereby making him eligible to get a far lesser value of the proceeds of the plan than he otherwise was entitled to as per IBC.

Further, it was submitted that there are no provisions under IBC which abrogate security interest during insolvency resolution, thus its principles are governed by Transfer of Property Act, 1882 under which the claim of first charge holder shall prevail over the claim of the second charge holder. The Applicants further alleged that there would be no incentive for a Financial Creditor to opt for resolution if the priority of a secured creditor having first charge as its security interest is ignored.

Per contra, the Resolution Professional stated that the Applicant was a dissenting secured Financial Creditor, who did not vote in favor of the Resolution Plan. It was submitted that the contention regarding the security interest in favor of the Applicants being taken away by the Resolution Plan is flawed in light of Regulation 37(1)(d) of CIRP Regulations, 2016 under which a Resolution Plan can include satisfaction or modification of any security interest.

It was further alleged that the Applicant had disputed the methodology of computation of its proportional share of the Liquidation Value receivable under section 30(2)(b) of IBC read with section 53(1)(b)(ii) however, section 30(2)(b) read with section 53(1) only presupposes a notional relinquishment of security interest to the liquidation estate as per section 52(1)(a) of IBC.

The bench at the outset placed reliance on the decision passed by the Supreme court in India Resurgence ARC Private vs. Amit Metaliks Limited and Another 2021 and reiterated that just because of the fact that a creditor enjoys the protection of a security interest he cannot be treated any higher than the other creditors, who may have financed the Corporate Debtor while not enjoying any kind of protection in the shape of a security interest.

Thus the bench observed, “such creditors have consistently run the risk of not getting paid their dues in the shape of realization from the security interest or otherwise for a considerably longer period while the secured creditor was very happily staying put with the protection of a security interest for if it so happens, then all the secured creditors would like to give dissenting view in the CoC, which will not lead to the maximization of the value of the Corporate Debtor and thus defeating the very purpose of resolution envisaged in the Code.”

Accordingly, the NCLT rejected the application.