2018 (7) TMI 2251 - Tri - Insolvency and Bankruptcy

Tribunal orders equal treatment for creditors in resolution plan, prohibits misuse by related parties

J.R. Agro Industries P. Ltd. Versus Swadisht Oils P. Ltd.

The tribunal directed the resolution professional to modify the resolution plan to ensure equal treatment of operational creditors and classify the debt ... Approval of the resolution plan - section 30(6) of the Insolvency and Bankruptcy Code 2016 - HELD THAT:- On perusal of the resolution plan, it appears that the Resolution Professional had given the details of the Resolution applicants and its connected persons as per regulation 38(3) of the IBBI (Insolvency Resolution Process) Regulation 2017. In this list, the name of the resolution applicant Rajasthan Liquor Ltd. is on the top of the list and the names of Corporate Debtor Swadisth Oils Pvt. Ltd. as related party of Resolution Applicant, i.e. RLL. It is also important to point out that the name of unsecured Financial Creditor M/s. Jya Finance & Investment Co. Ltd. is also shown as a related party of Resolution Applicant, i.e. RLL. The approved Resolution Plan secure financial creditor State Bank of India which has 86.18% vote share in the COC is not getting anything from the distribution of liquidation estate. Approved plan provides that SBI shall enhance the working capital limits from present limit of ₹ 20 crores to ₹ 30 crores. It is also clear that in 2016 the corporate debtor paid ₹ 50 crores to SBI and after that State bank of India issued no dues certificate DT. 18 October 2016 in favour of corporate debtor. Thus it is clear that SBI, which has 86.18% vote share in the COC was not aggrieved at all. Therefore they have proposed to enhance working capital limits from ₹ 20 crores to ₹ 30 crores - Since approval of resolution plan was mainly dependent on its approval by SBI. Since you SBI was not aggrieved therefore they have not taken care of the dues of other unsecured operational creditors. Since debt of Jya Finance and investment Ltd. is an intragroup debt. The Jya finance and investment Ltd. has always acted as a financial arm of the corporate debtor. In UNCITRAL legislative guide on insolvency law, such type of debt has been treated as an equity contribution rather than as an intragroup loan, with the consequence that intragroup obligations will rank lower priority than the same obligation between unrelated parties - Therefore they can be treated in the waterfall as provided in section 53(1)(h) of the code in the category of 'the equity shareholders and partners, as the case may be' which is below the rank of both the unsecured financial creditors and as well as other debts and dues. Keeping in view the global practices, especially UNCITRAL legislative guide to insolvency law, we are of the view that claim of a related party, i.e. Jya Finance And Investment Company Limited should rank subordinate to the claim of operational creditors and treated at par with equity shareholders are partners under waterfall principle under section 53(1)(h) of the Code - the debt of ₹ 36.6643 crore of Jay Finance & Investment Co. Ltd. Crores, which is admittedly a related party of corporate debtor should fall in the category of 'equity shareholders are partners' as provided in section 53(1)(h) of the Code. Their claim will be treated at par with equity shareholders are partners, who are other unsecured creditors they rank below the operational creditors of the corporate debtor. List the matter on 31st July, 2018 for further consideration. Issues Involved:1. Approval of the resolution plan under Section 30(6) of the Insolvency and Bankruptcy Code (IBC) 2016.2. Eligibility of the resolution applicant under Section 29A of the IBC.3. Treatment of operational creditors versus financial creditors.4. Preferential, undervalued, and fraudulent transactions under Sections 43, 45, and 66 of the IBC.5. Compliance with statutory provisions and regulations under the IBC and CIRP Regulations.Detailed Analysis:1. Approval of the Resolution Plan under Section 30(6) of the IBC 2016:The resolution professional filed an application under Section 30(6) of the IBC for approval of the resolution plan submitted by Rajasthan Liquors Ltd. (RLL), which was approved by the Committee of Creditors (CoC) with a 100% vote share. The CoC comprised four financial creditors, excluding Jya Finance and Investment Company Limited, a related party of the corporate debtor (CD). The resolution professional certified that the resolution plan met the requirements of Sections 30(2) and 31(1) of the IBC and Regulations 38 and 39 of the CIRP.2. Eligibility of the Resolution Applicant under Section 29A of the IBC:The eligibility of JR Agro Industries Ltd. (JRAL) was questioned under Section 29A of the IBC, and it was ultimately disqualified. The objections raised against RLL's eligibility under Section 29A were examined. The tribunal clarified that there is no bar on common promoters/directors to present a resolution plan for a company undergoing CIRP. RLL was not an undischarged insolvent, and the clause (j) of Section 29A did not apply to RLL as the corporate debtor SOPL, which is undergoing insolvency resolution, is not eligible to submit a resolution plan for itself.3. Treatment of Operational Creditors versus Financial Creditors:The resolution plan provided for a significant haircut for operational creditors, who were to receive only 5% of their principal dues, while unsecured financial creditors were offered a 38% haircut. The tribunal emphasized that there should be no discrimination among the same class of creditors, and all operational creditors should be treated equally. The tribunal directed that the part of the resolution plan discriminating against operational creditors based on the age of dues was unsustainable in law and needed modification.4. Preferential, Undervalued, and Fraudulent Transactions under Sections 43, 45, and 66 of the IBC:The tribunal noted that the corporate debtor had made preferential payments to the State Bank of India to release bank guarantees of its promoters, which are prohibited transactions under Sections 43, 45, and 66 of the IBC. The tribunal emphasized that such transactions are subject to appropriate orders by the Adjudicating Authority.5. Compliance with Statutory Provisions and Regulations under the IBC and CIRP Regulations:The tribunal examined the resolution plan's compliance with statutory provisions and regulations. It was noted that the resolution plan did not provide for the payment of income tax liabilities, which could not be exempted without hearing the income tax department. The tribunal directed the resolution professional to modify the resolution plan in light of the observations made and to treat the unsecured debt of related parties as equity contributions, ranking lower in priority than other unsecured creditors.Conclusion:The tribunal directed the resolution professional to modify the resolution plan to ensure equal treatment of operational creditors and to classify the debt of related parties as equity contributions. The modified resolution plan was to be submitted for approval by 31st July 2018, failing which liquidation proceedings would be initiated. The order was communicated to relevant authorities to prevent misuse of the provisions of Section 53 of the IBC by related parties of the corporate debtor.