Resolution plan violated Section 30(2)(b)(ii) as operational creditors must receive cash payment priority over financial creditors

NCLAT held that the resolution plan approved by the Adjudicating Authority violated Section 30(2)(b)(ii) of IBC regarding payment to operational creditors. The tribunal emphasized that while commercial wisdom of Committee of Creditors has paramount importance with limited judicial review, statutory non-compliance cannot be overlooked. Citing SC precedent, NCLAT ruled that operational creditors must be paid in cash priority over financial creditors, not through equity distribution. The Adjudicating Authority's order dated 09.11.2023 was modified to ensure compliance with Section 30(2)(b)(ii) regarding operational creditor distribution, while rest of the resolution plan remained affirmed.

---

---

Issues Involved:
1. Compliance with Section 30(2)(b) of the Insolvency and Bankruptcy Code (IBC).
2. Distribution of Resolution Plan amount to Operational Creditors.
3. Priority of payments under the Resolution Plan.

Summary:

Issue 1: Compliance with Section 30(2)(b) of the IBC
The Appellant, an Operational Creditor, challenged the approval of the Resolution Plan submitted by Respondent No.2, arguing that it did not comply with Section 30(2)(b) of the IBC. The Appellant contended that the cash upfront amount offered was contrary to Section 30(2)(b)(ii), as the liquidation value of the Corporate Debtor was Rs.5.74 lakhs, and the total Plan amount was Rs.9.05 crores. The Appellant argued that the Operational Creditors were being paid only 2.16% of their admitted claims, which was not in accordance with the law laid down by the Hon'ble Supreme Court in Jaypee Kensington Boulevard Apartments Welfare Association & Ors. v NBCC & Ors.

Issue 2: Distribution of Resolution Plan amount to Operational Creditors
The Resolution Plan proposed by Respondent No.2 included a total Plan amount of Rs.9.05 crores, with key features summarized in the judgment. The Plan proposed various payments, including:
- Payment of CIRP cost: Rs.35,00,000 within 25 days of NCLT Approval Date.
- Payment to Secured Financial Creditors: Rs.19,65,908 within 25 days.
- Payment towards Operational Creditors (Non-Government): Rs.35,34,092 plus partly paid redeemable Preference Shares worth Rs.8,00,00,000 within 25 days.
- Payment towards Operational Creditors (Government Departments): Rs.15,00,000 within 25 days.
- The Appellant argued that the distribution to Operational Creditors was not in compliance with Section 30(2)(b)(ii), as it included partly paid redeemable preference shares instead of cash payments.

Issue 3: Priority of payments under the Resolution Plan
The Hon'ble Supreme Court in Jaypee Kensington had laid down that Operational Creditors are to be paid in priority over the Financial Creditors only by cash and not by issuing equity. The Tribunal noted that the payment offered to the Operational Creditors was not in accordance with Section 30(2)(b)(ii) and was contrary to the law laid down by the Supreme Court. The Tribunal concluded that the distribution of the amount to the Operational Creditors was clearly contrary to the provisions of Section 30(2)(b)(ii) and modified the order of the Adjudicating Authority to make it compliant with the provisions of Section 30(2)(b)(ii).

Conclusion:
The Tribunal modified the order of the Adjudicating Authority dated 09.11.2023 to the extent of approving the distribution to the Operational Creditors, including the Appellant. The Resolution Applicant was directed to distribute the Resolution Plan amount to the Operational Creditor on a pro-rata basis as per Section 30(2)(b)(ii) and as per priority under Section 53(1). In case of non-compliance, the Resolution Plan submitted by Respondent No.2 would be treated as disapproved. The rest of the order was affirmed, and the Appeal was disposed of with parties bearing their own costs.

---