Appellate Tribunal rules Resolution Plan valid, emphasizes Creditors' role

The Appellate Tribunal overturned the Adjudicating Authority's decision to reject a Resolution Plan due to the extinguishment of personal guarantees, holding that the plan did not contravene the Insolvency and Bankruptcy Code. The Tribunal emphasized the importance of the Committee of Creditors' commercial wisdom and directed a fresh decision within three months.

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Issues Involved:

1. Rejection of the Resolution Plan by the Adjudicating Authority.
2. Extinguishment of rights under personal guarantees.
3. Commercial wisdom of the Committee of Creditors (CoC).
4. Applicability of Section 30(2)(e) of the Insolvency and Bankruptcy Code (IBC).

Summary:

1. Rejection of the Resolution Plan by the Adjudicating Authority:
The Appellant, a Successful Resolution Applicant, filed an appeal against the order dated 06.01.2023 by the Adjudicating Authority (National Company Law Tribunal), Indore Bench, which rejected the Resolution Plan submitted by the Appellant. The Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor, and the Resolution Plan was approved by the CoC with a 78.04% vote share. However, the Adjudicating Authority rejected the plan, citing that the CoC cannot extinguish the right of a secured creditor to proceed against the personal guarantor of the Corporate Debtor.

2. Extinguishment of rights under personal guarantees:
The Bank of Baroda, holding a 5.83% voting share, objected to the Resolution Plan on the grounds that it provided for the extinguishment of rights under personal guarantees. The Adjudicating Authority accepted this objection, stating that such a provision contravenes Section 30(2)(e) of the IBC. The Appellant argued that the personal guarantees are a security interest under the Code and can be dealt with in a Resolution Plan, and that the CoC's commercial wisdom should be given paramount importance.

3. Commercial wisdom of the Committee of Creditors (CoC):
The CoC approved the Resolution Plan with a majority vote of 78.04%, which included a provision for the extinguishment of personal guarantees after paying due compensation to the Financial Creditors. The Appellant and the CoC argued that the Adjudicating Authority should not interfere with the commercial wisdom of the CoC, especially at the instance of a dissenting Financial Creditor with a minor voting share.

4. Applicability of Section 30(2)(e) of the Insolvency and Bankruptcy Code (IBC):
The Adjudicating Authority held that the CoC cannot extinguish the right of a secured creditor to proceed against the personal guarantor, as it contravenes Section 30(2)(e) of the IBC. However, the Appellant argued that the Supreme Court judgments indicate that personal guarantees are not per se and ipso facto discharged by the approval of a Resolution Plan, and that there may be circumstances where personal guarantees can be discharged if relevant clauses are included in the Resolution Plan.

Conclusion:
The Appellate Tribunal concluded that the Adjudicating Authority committed an error in rejecting the Resolution Plan on the grounds of extinguishing personal guarantees. The Tribunal held that the Resolution Plan did not contravene Section 30(2)(e) of the Code and that the commercial wisdom of the CoC should be given due weightage. The Tribunal allowed the appeal, set aside the order dated 06.01.2023, and directed the Adjudicating Authority to pass a fresh order on the approval of the Resolution Plan within three months.

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