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

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

Lalit Mishra & Ors. Versus Sharon Bio Medicine Ltd. & Ors.

The Appellate Tribunal rejected the appellants' challenge to the approval of the Resolution Plan under the Insolvency and Bankruptcy Code, 2016. The ... Approval of the ‘Resolution Plan’ - Insolvency and bankruptcy - Appellants submitted that the payment terms provided in the ‘Resolution Plan’ is in contravention to the applicable provisions of law. The 3rd Respondent- ‘Successful Resolution Applicant’ has arbitrarily reduced or written off substantial liabilities of the promoters/ shareholders without any legal basis - HELD THAT:- The object of the ‘I&B Code’ is, inter alia, maximization of the value of the assets of the ‘Corporate Debtor’, then to balance all the creditors and make availability of credit and for promotion of entrepreneurship of the ‘Corporate Debtor’. While considering the ‘Resolution Plan’, the creditors focus on resolution of the borrower ‘Corporate Debtor’, in line with the spirit of the ‘I&B Code’. The present appeal has been preferred by the promoters, who are responsible for having contributed to the insolvency of the ‘Corporate Debtor’. The ‘I&B Code’ prohibits the promoters from gaining, directly or indirectly, control of the ‘Corporate Debtor’, or benefiting from the ‘Corporate Insolvency Resolution Process’ or its outcome. The ‘I&B Code’ seeks to protect creditors of the ‘Corporate Debtor’ by preventing promoters from rewarding themselves at the expense of creditors and undermining the insolvency processes. For the aforesaid reasons, it will be evident from the ‘I&B Code’ that the powers of the promoters as the members of the Board of Directors of the ‘Corporate Debtor’ are suspended. The voting right of the shareholders, including promoter shareholders, are suspended and shareholders’ approval is deemed to have been granted for implementation of the ‘Resolution Plan’ as apparent from explanation to Section 30(2)(f) of the ‘I&B Code’. The promoters, being ‘related parties’ of the ‘Corporate Debtor’, have no right of representation, participation or voting in a meeting of the ‘Committee of Creditors’. Admittedly, the shareholders and promoters are not the creditors and thereby the ‘Resolution Plan’ cannot balance the maximization of the value of the assets of the ‘Corporate Debtor’ at par with the ‘Financial Creditors’ or ‘Operational Creditors’ or ‘Secured Creditors’ or ‘Unsecured Creditors’. They are also ineligible to submit the ‘Resolution Plan’ to again control or takeover the management of the ‘Corporate Debtor’. If no amount is given to the promoters/ shareholders and the other equity shareholders who are not the promoters have been separately treated by providing certain amount in their favour, the Appellant cannot claim to have been discriminated. 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.