2018 (12) TMI 1730 - AT - Insolvency and Bankruptcy

Appellate Tribunal Upholds Resolution Plan under Insolvency Law, Emphasizes Stakeholder Equality

The Appellate Tribunal rejected the appellants' challenge to the approval of the Resolution Plan under the Insolvency and Bankruptcy Code, 2016. The ... Resolution Plan approval under I&B Code - Treatment of personal guarantees under Resolution Plan - Promoters' entitlement and exclusion during corporate insolvency resolution process - Suspension of shareholders' voting rights during CIRP and deemed approval of Resolution Plan - Maximisation of value of assets under I&B Code - Promoters' ineligibility to regain control or benefit from CIRP - Allegation of discrimination against promotersTreatment of personal guarantees under Resolution Plan - Resolution Plan approval under I&B Code - Allegation of discrimination against promoters - Whether the approved Resolution Plan unlawfully discharged or discriminated against promoters by treating personal guarantees and securities as resulting in no liability and thereby contravened applicable law. - HELD THAT: - The Tribunal examined Clause 12 of Section 5 of the Resolution Plan which provides that all securities, collaterals and margin monies shall be released on the Effective Date and that personal guarantees provided by existing promoters shall result in no liability towards the Company or the Resolution Applicant. The Court held that on approval of a Resolution Plan the claims of stakeholders stand discharged as per the scheme approved under the I&B Code, and consequently personal guarantors cannot thereafter claim discrimination since stakeholders' claims have been cleared by the successful Resolution Applicant. The Tribunal further noted that the insolvency process under the I&B Code aims at maximisation of asset value and balancing creditor interests, and is not a recovery suit for guarantors; liabilities of guarantors being independent contracts does not preclude their treatment within an approved Resolution Plan. Having regard to these principles and the terms of the approved plan, the appellants' contention that the treatment of securities and guarantees amounted to unlawful reduction of liabilities or discrimination was rejected. [Paras 8, 9]The contention that the Resolution Plan unlawfully discharged or discriminated against promoters by releasing securities and extinguishing personal guarantees is rejected.Promoters' entitlement and exclusion during corporate insolvency resolution process - Suspension of shareholders' voting rights during CIRP and deemed approval of Resolution Plan - Promoters' ineligibility to regain control or benefit from CIRP - Whether promoters/shareholders could claim a right to equal treatment or contest the Resolution Plan on the ground that they were given no amount or were excluded from benefits of the proposed restructuring. - HELD THAT: - The Tribunal observed that the I&B Code prohibits promoters from benefiting from the corporate insolvency resolution process, regaining control, or participating in creditor decision-making; voting rights of shareholders, including promoters, remain suspended and shareholders' approval is deemed granted under the statutory scheme. Promoters are related parties and are ineligible to submit or obtain a Resolution Plan that restores their control. In that context, promoters who contributed to the insolvency cannot claim discrimination merely because no amount is allocated to them while other equity shareholders may receive treatment under the plan. The Court therefore found no illegality in a Resolution Plan that provides no consideration to promoters but treats other stakeholders in accordance with the plan's terms and the objectives of the I&B Code. [Paras 10, 11, 12, 13]Promoters cannot claim entitlement or discrimination where the Resolution Plan, approved under the I&B Code, allocates no amount to them and excludes them from participation or control; such exclusion is consistent with the Code's scheme and objectives.Final Conclusion: The appeal is dismissed; the Tribunal upheld the Adjudicating Authority's approval of the Resolution Plan, finding no illegality in the treatment of securities or personal guarantees and no discriminatory denial of entitlements to the promoters in light of the I&B Code's objectives and statutory scheme. Issues:Challenge to approval of Resolution Plan under Insolvency and Bankruptcy Code, 2016 based on lack of provision for shareholders and discrimination against personal guarantors.Analysis:The appellants, as promoters of the Corporate Debtor, challenged the approval of the Resolution Plan by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016. They contended that the Resolution Plan did not provide any amount for the shareholders, who were also personal guarantors, thus alleging discrimination. The appellants argued that the payment terms in the Resolution Plan violated applicable laws by reducing or writing off their liabilities without legal basis. They further claimed that the treatment of security interests, including personal guarantees, was against the Indian Contract Act.The Resolution Professional and the Successful Resolution Applicant disputed the appellants' submissions, asserting that the Resolution Plan was in compliance with the law. The Resolution Plan proposed a reduction of share capital and restructuring of financial debt, ensuring the release of securities and collateral upon implementation. The Resolution Plan aimed to clear all stakeholders' claims, including those of personal guarantors, upon approval.The Appellate Tribunal rejected the appellants' arguments, emphasizing that the Resolution Plan's approval cleared all stakeholders' claims, preventing personal guarantors from claiming discrimination post-approval. The Tribunal highlighted that the Insolvency and Bankruptcy Code's objective is to maximize the Corporate Debtor's asset value, balance creditors' interests, and promote entrepreneurship, rather than benefit personal guarantors.The Tribunal noted that the Insolvency and Bankruptcy Code prohibits promoters from gaining control or benefiting from the Corporate Insolvency Resolution Process. Promoters' powers are suspended during the process, and their voting rights are deemed granted for Resolution Plan implementation. Shareholders, including promoters, have no representation, participation, or voting rights in the Committee of Creditors' meetings.Given the ineligibility of shareholders and promoters to submit Resolution Plans or control the Corporate Debtor's management, the Tribunal concluded that the appellants, as shareholders, were not discriminated against by the Resolution Plan. Therefore, the appeal was dismissed, with no costs awarded.