Distribution of funds under Resolution Plan & Liquidation Process.
Under Resolution Plan & Liquidation Process, the process culminates into distribution of funds to the creditors & stakeholders. However the following question still remains unresolved, with particular reference to distribution under section 30(2) & section 53, of the Code.
“Whether the concept of “Value of Security Interest” is inherent under section 30(2) & section 53(1)”
The concept of liquidation value mentioned in section 30(2) is intertwined with the concept of distribution of funds under section 53(1). Thus the concept of “Value of Security Interest” is either applicable or not-applicable under both the sections.
Case laws on distribution of funds to Dissenting Financial Creditor under section 30(2).
2. Dissenting FC (DBS Bank Ltd) having security interest of 90% of the claim, requested CoC to take into account the value of its security interests while considering distribution of proceeds from the ‘Resolution Plan’. However, on 23rd April, 2019, the ‘CoC, negating and non applicability of the concept of “Value of security interest” approved, pari-passu with secured creditors, distribution of the proceeds ignoring the Appellant’s (DBS Bank Ltd) concerns. AA approved the plan on 24.07.2019. Hence the appeal was filed with the appellate authority. NCLAT rejected the appeal.
2.1. NCLAT (2019.11.18) in DBS Bank Ltd., Singapore Vs. Mr. Shailendra Ajmera & Anr.[Company Appeal (AT) (Insolvency) No. 788 of 2019] held that;
As per amended Section 30(2)(b)(ii), the distribution is to be made in the manner as prescribed under Section 53(1) giving preference to the secured creditor. However, even at that stage no discrimination can be made between two similarly situated ‘secured creditor’.
Section 30(2)(b)(ii) cannot be interpreted in a manner to give advantage to a ‘dissenting secured financial creditor’. In fact Section 30(2)(b)(ii) has been amended only to ensure that ‘dissenting financial creditor’ should not get anything ‘less than liquidation value’ but not for ‘getting maximum of the secured assets’.
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3. DBS Bank Ltd. aggrieved with the above order, preferred as appeal before Hon’ble Supreme Court, who accepted the appeal for consideration with the following orders;
3.1. SCI (2020.12.15) in DBS Bank Ltd., Singapore Vs. Mr. Shailendra Ajmera & Anr. [IA No.98611/2020 in Civil Appeal No(s). 9133/2019] held that;
At the request of Mr. Shyam Divan, learned senior counsel appearing for the appellant(s), we direct that the amount of approximately Rupees one hundred crore lying in the holdback escrow account with the Resolution Professional shall be invested in Fixed Deposit in a Nationalised Bank for a period of one year.
We have heard learned counsel appearing for the parties and perused the instant applications for early hearing.
List the main appeals on 07.04.2021 before the appropriate court. The applications for early hearing stand disposed of accordingly.
4. Pending decision in the matter of M/s. DBS Bank Ltd. in the matter of distribution of funds under section 30(2) Appellate Hon’ble Supreme Court. Negating and non applicability of the concept of “Value of security interest”, ruled as under;
4.1. SCI (2021.05.13) in India Resurgence ARC Private Limited Vs Amit Metaliks Limited & Anr. [Civil Appeal No. 1700 of 2021] held that;
# 11. . . .Once it is found that all the mandatory requirements have been duly complied with and taken care of, the process of judicial review cannot be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction.
# 13.1. Thus, what amount is to be paid to different classes or subclasses of creditors in accordance with provisions of the Code and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors; and 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.
14.1. That a dissenting financial creditor would be receiving the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him.
It has never been laid down that if a dissenting financial creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him.
It is but obvious that his dealing with the security interest, if occasion so arise, would be conditioned by the extent of value receivable by him.
# 15. 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.
# 16. . . . .We may profitably refer to the relevant observations in this regard by this Court in Essar Steel as follows:- “85. Indeed, if an "equality for all" approach recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This would defeat the entire objective of the Code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.”
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5. Hon’ble Supreme court in the matter of M/s. DBS Bank Ltd. took a different view and ratio from India Resurgence ARC Private Limited (supra) on interpretation of Section 30(2)(b)(ii) of the IBC, referred the matter to a bigger bench for consideration.
5.1. SCI (2024.01.03) in DBS Bank Ltd. Singapore Vs. Ruchi Soya Industries Ltd. and Anr. [Civil Appeal No. 9133 of 2019 with Civil Appeal No. 787 of 2020 ] held that;
Section 30(2) refers only to the sum of money and nothing else, that is, it does not permit the dissenting financial creditor to enforce the security and sell the same. This would be counterproductive and may nullify the resolution plan.
What the dissenting financial creditor is entitled to is the payment, which should not be less than the amount/value of the security interest held by them.
The security interest gets converted from the asset to the value of the asset, which is to be paid in the form of money.
A dissenting financial creditor is entitled to not partake the proceeds in the resolution plan, unless a higher amount in congruence with its security interest is approved in the resolution plan. The “amount” to be paid to the dissenting financial creditor should be in accordance with Section 53(1) in the event of liquidation of the corporate debtor.
In other words, in our opinion, the dissenting financial creditor is entitled to a minimum value in monetary terms equivalent to the value of the security interest.
The dissenting financial creditor has to statutorily forgo and relinquish his security interest on the resolution plan being accepted, and his position is same and no different from that of a secured creditor who has voluntarily relinquished security and is to be paid under Section 53(1)(b)(ii) of the Code.
We wish to clarify that Section 53(1) is referred to in Section 30(2)(b)(ii) with the purpose and objective that the dissenting financial creditor is not denied the amount which is payable to it being equal to the amount of value of the security interest. The entire Section 53 is not made applicable.
The dissenting financial creditor cannot object to the resolution plan, but can object to the distribution of the proceeds under the resolution plan, when the proceeds are less than what the dissenting financial creditor would be entitled to in terms of Section 53(1) if the corporate debtor had gone into liquidation. This is the statutory option or choice given by law to the dissenting financial creditor. The option/choice should be respected.
In view of the aforesaid discussion, and as we are taking a different view and ratio from India Resurgence ARC Private Limited (supra) on interpretation of Section 30(2)(b)(ii) of the IBC, we feel that it would be appropriate and proper if the question framed at the beginning of this judgment is referred to a larger Bench.
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Case laws on distribution of funds under section 53(1)).
6. In the matter of distribution of funds under section 53(1) Appellate Authority (NCLAT). Negating and non applicability of the concept of “Value of security interest”, ruled as under;
6.1. NCLAT (2021.04.05) in Technology Development Board Vs.Anil Goel, Liquidator of Gujarat Oleo Chem Limited (GOCL) & Ors. [Company Appeal (AT) (Insolvency) No.731 of 2020] held that;-
Appellate Tribunal in “J M Financial asset Reconstruction Co. Ltd. vs. Finquest Financial Solutions Pvt. Ltd. & Ors.”, held that only the first charge holder i.e. the Secured Creditor being highest in the inter creditor ranking is entitled to enforce his right for the realization of its debt out the secured asset.
While it is true that the relinquishment of security interest affects the order of distribution, it is equally true that the Secured Creditor does not lose its status of being a Secured Creditor though he has elected to forego his right of enforcing security interest. Whether the Secured Creditor holds first charge or second charge is material only if the Secured Creditor elects to realise its security interest.
The two sets of Secured Creditors, one relinquishing the security interest and the other realising its security interest are treated differently. A creative interpretation has to be given to the provisions to make them workable and stand in harmony. It is significant to note that Section 53 has been given overriding effect and the non-obstante clause contained in the very opening words of the Section leaves no room for doubt that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force.
Of course first charge holder will have priority in realising its security interest if it elects to realize its security interest and does not relinquish the same. However, once a Secured Creditor opts to relinquish its security interest, the distribution of assets would be governed by the provision engrafted in Section 53(1)(b)(ii) where under all Secured Creditors having relinquished security interest rank equally and in the waterfall mechanism are second only to the insolvency resolution process costs and the liquidation costs.
We accordingly allow the appeal and set aside the impugned order. I.A. 514 of 2019 in CP(IB) No. 04/2017, is held to be maintainable and we allow the same with direction to the Liquidator to treat the Secured Creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of I&B Code and distribute the proceeds in accordance therewith.
6.2. However, Hon'ble Supreme Court (29.06.2021) in Kotak Mahindra Bank Limited Vs. Technology Development Board & Ors. (Civil Appeal Diary No(s). 11060/2021)(Arising out of impugned final judgment and order dated 05-04-2021 in CAAT(I) No. 731/2020 passed by the National Company Law Appellate Tribunal) stayed the order of the Appellate Authority;
O R D E R
Permission to file Appeal is granted.
Issue notice.
In the meantime, there shall be stay of the operation of the impugned judgment and Order passed by the National Company Law Appellate Tribunal.
7. Conclusion; Developments so far indicate that the concept of “Value of Security Interest” is inherent under section 30(2) & section 53(1). However this question will be settled with the decisions in the following cases;
Kotak Mahindra Bank Limited Vs. Technology Development Board & Ors. (Civil Appeal Diary No(s). 11060/2021)
Decision of the bigger bench in DBS Bank Ltd. Singapore Vs. Ruchi Soya Industries Ltd. and Anr. [Civil Appeal No. 9133 of 2019 with Civil Appeal No. 787 of 2020 ]
Pending reference is answered by the Hon’ble Supreme Court, Hon’ble NCLAT (2024.10.21) in SMFG India Credit Co. Ltd. Vs (CA) Kshitiz Gupta (RP) and Anr.. [Company Appeal (AT) (Insolvency) No. 1886 & 1887 of 2024 & I.A. No. 6966, 6967 of 2024] held that;
This Tribunal has held that till the reference is answered by the Hon’ble Supreme Court the law laid down in the matter of `India Resurgence ARC Pvt. Ltd.’ Vs. `Amit Metaliks Ltd. & Anr.’ reported in 2021 SCC OnLine SC 409, has to be followed.
However, liberty is reserved to the Appellant to make an Application after the reference is answered accepting the contentions with regard to submission raised by the Appellant.
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However there is an interesting provision under the insolvency process for personal guarantors.
# Section 110. Rights of secured creditors in relation to repayment plan. -
(1) Secured creditors shall be entitled to participate and vote in the meetings of the creditors.
(2) A secured creditor participating in the meetings of the creditors and voting in relation to the repayment plan shall forfeit his right to enforce the security during the period of the repayment plan in accordance with the terms of the repayment plan.
(3) Where a secured creditor does not forfeit his right to enforce security, he shall submit an affidavit to the resolution professional at the meeting of the creditors stating -
- (a) that the right to vote exercised by the secured creditor is only in respect of the unsecured part of the debt; and
- (b) the estimated value of the unsecured part of the debt.
(4) In case a secured creditor participates in the voting on the repayment plan by submitting an affidavit under sub-section (3), the secured and unsecured parts of the debt shall be treated as separate debts.
(5) The concurrence of the secured creditor shall be obtained if he does not participate in the voting on repayment plan but provision of the repayment plan affects his right to enforce security.
Explanation. – For the purposes of this section, "period of the repayment plan" means the period from the date of the order passed under section 114 till the date on which the notice is given by the resolution professional under section 117 or report submitted by the resolution professional under section 118, as the case may be.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
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