Payment to dissenting Financial Creditors assumes priority under Amendment to Regulation 38(1) of CIRP Regulations

Payment to dissenting Financial Creditors assumes priority under Amendment to Regulation 38(1) of CIRP Regulations

The NCLAT has dismissed two Appeals connected with an order passed by the NCLT whereby it has approved the Resolution Plan filed by Sterlite Power Transmission Limited mainly on grounds that the Resolution Plan encompasses assets of third-parties and not just of the Corporate Debtor which is contrary to law

The Hon'ble National Company Law Appellate Tribunal (NCLAT) has dismissed the two Appeals which emanated from the common Impugned Order passed by the Adjudicating Authority/National Company Law Tribunal (NCLT), Cuttack Bench, Cuttack whereby the Adjudicating Authority (AA) approved the Resolution Plan filed by Respondent No.3 Sterlite Power Transmission Limited ( SPTL), mainly on grounds that the Resolution Plan encompasses assets of third parties (including the Appellant herein) and not just of the Corporate Debtor which is contrary to Law, thus violative of the I&B Code, 2016.

In addition to the above, it was submitted that the Resolution Plan of Respondent No.3 did not factor in the value of shares of Facor Power Limited (FPL),i.e. the subsidiary and principle borrower, wherein the Respondent No.4 along with its associate companies, invested a sum of Rs.230 Crores in equity capital and Rs.11 Crores in preference shares. The above investments, which are assets as recorded in the books of Respondent No.4 Ferro Alloys Corporation Limited ('FACL') and its associate company were not valued, thus defeating the very object of the Code, i.e. maximisation of the value of assets.

In the other Company Appeal, the Appellant/ Toplight Corporate Management Private Limited had challenged the approved Resolution Plan on the grounds that the Adjudicating Authority (AA) had approved the Resolution Plan which is contrary to Law as it violates Section 30(2) of the Code and is against the objectives of the Code, as it gives unequal treatment to the same category of Financial Creditors (including the Appellants herein) purely on the basis that the Appellant dissented/abstained from voting to the said Resolution Plan.

The Appellate Tribunal opined that the shareholding pattern in any company demonstrates the extent of control that a shareholder has and can exercise over the said Company. Hence, even in the absence of such an express provision in the Resolution Plan, the Resolution Applicant after taking over the Corporate Debtor is entitled to exercise its right over its subsidiary company. The Appellant's objection regarding the inclusion of the subsidiary company of the Corporate Debtor in the Resolution Plan was held to be not sustainable.

The Hon'ble NCLAT affirmed that the voting on the approved Resolution Plan took place on 13 November 2019, on which date only Operational Creditors were to be paid on priority. The Amendment to Regulation 38(1) of the CIRP Regulations mandates priority in payment to dissenting Financial Creditors. This amendment came into effect on27 November 2019, i.e. post the approval of the Resolution Plan by the erstwhile COC (Committee of Creditors) of the Corporate Debtor.

Therefore, as on the date of approval of the Resolution Plan by the erstwhile COC, the only requirement under the provision of the Code qua the dissenting Financial Creditors was the payment of the minimum liquidation value, which was duly complied with in the present Case.

It is a settled position in Law that provisions in a Statute would operate prospectively unless the retrospective operation is expressly provided for. There being no clarification provided to that effect, the amended Regulation 38 cannot be said to have retrospective application.

As per the Appellate Tribunal, the approved Resolution Plan contemplated the simultaneous payment in cash and issuance of the nonconvertible debenture to the dissenting Financial Creditors and thus, even otherwise, there was no breach of requirement under the Amended Regulation 38, which admittedly did not apply in this case.

Thus, according to the Appellate Tribunal, the approved Resolution did not give differential treatment among the same Class of Financial Creditors merely based on assenting or dissenting Financial Creditors. Thus, the approved Resolution Plan was not discriminatory.

It was also clear that the Appellant abstained from voting but participated in the Resolution Process. The Appellant was fully aware of the developments from the Resolution Process from up to the approval of the Resolution Plan before the Adjudicating Authority but never raised any objection. The Appellant directly filed the Appeal before this Appellate Tribunal after withholding of material information from this Tribunal.

The Appellate Tribunal opined that an approved Resolution Plan can deal with the related party claim and extinguish the same which shall ensure that the Successful Resolution Applicant can take over the Corporate Debtor on a clean slate. The related Parties are being kept out to ensure continuity of operation of both FACL and FPL following the provisions of the Code. There was no substance based on which it could be inferred that the Resolution Plan was not in conformity with the provisions of the Code as provided under Section 30(2) of the Insolvency and Bankruptcy Code, 2016.