Resolution plan approved under Section 30(2) IBC found compliant with Regulation 38; commercial wisdom of CoC preserved

NCLAT upheld approval of the resolution plan under Section 30(2) IBC, finding the plan adequately addressed treatment of financial and operational creditors per Regulation 38 of CIRP Regulations. The Tribunal held the adjudicating authority and NCLAT lack jurisdiction to upset the commercial wisdom of the CoC absent breach of statutory provisions; no breach of Section 30(2) or CIRP Regulations was shown. Given the liquidation value would yield nothing to operational creditors, the plan's payouts were permissible. Appeal dismissed.

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1. ISSUES PRESENTED and CONSIDERED

1. Whether the resolution plan approved by the adjudicating authority complies with the statutory requirements under Section 30(2) of the Insolvency and Bankruptcy Code (IBC), specifically regarding the treatment and payment to operational creditors.

2. Whether the resolution plan adequately addresses the interests of all stakeholders, including operational creditors, as mandated by Regulation 38(1A) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).

3. Whether the adjudicating authority and the appellate tribunal can interfere with the commercial wisdom of the Committee of Creditors (CoC) in approving a resolution plan that proposes NIL payment to operational creditors, when the CoC has approved the plan with 100% voting shares.

4. Whether the principle of "fair and equitable" treatment under Section 30(2)(b) of the IBC requires operational creditors to be paid more than the liquidation value of their claims in the resolution plan.

5. The applicability and scope of judicial review by the adjudicating authority and appellate tribunal in relation to the approval of resolution plans under the IBC.

6. The relevance and distinction of precedents, including the Supreme Court judgment in 'CoC of Essar Steel India Limited' and the Tribunal's judgment in 'Hammond Power Solutions Private Limited', to the facts of the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Compliance of the Resolution Plan with Section 30(2) of the IBC Regarding Payment to Operational Creditors

Legal Framework and Precedents: Section 30(2)(b) of the IBC mandates that a resolution plan must provide for the payment of debts of operational creditors not less than the amount payable in liquidation under Section 53. The provision was amended effective 16.08.2019 to clarify the minimum payment standards for operational creditors. The Supreme Court in 'CoC of Essar Steel India Limited' emphasized that operational creditors must receive at least their liquidation value.

Court's Interpretation and Reasoning: The admitted claims of operational creditors in the CIRP were substantial, but the resolution plan proposed NIL payment to operational creditors other than workmen, employees, and government dues. The adjudicating authority noted that the liquidation value of the corporate debtor was insufficient to cover secured financial creditors, and hence the operational creditors' liquidation value was effectively NIL. The resolution plan's proposal of NIL payment to operational creditors was thus consistent with Section 30(2)(b).

Key Evidence and Findings: The admitted operational creditor claims totaled approximately Rs.77.65 crores. The resolution plan provided for payment to secured financial creditors but no payment to operational creditors due to insufficient liquidation value. The adjudicating authority's order explicitly detailed the treatment of operational creditors under various categories, including the NIL payment to operational creditors other than government dues, employees, and workmen.

Application of Law to Facts: Since the liquidation value payable to operational creditors was NIL, the resolution plan's proposal for NIL payment complied with the statutory minimum under Section 30(2)(b). There was no statutory breach in the payment structure.

Treatment of Competing Arguments: The appellants argued that the resolution plan failed to consider operational creditors' claims adequately and violated Regulation 38(1A) and the principles laid down in 'CoC of Essar Steel India Limited' and 'Hammond Power Solutions Private Limited'. The respondents contended that the plan complied with Section 30(2)(b) and that the CoC's commercial wisdom could not be interfered with. The Court found that the plan did contain a statement dealing with operational creditors' interests and that the NIL payment was justified by the liquidation value assessment.

Conclusions: The resolution plan complied with Section 30(2)(b) of the IBC in proposing NIL payment to operational creditors where liquidation value was NIL. There was no breach of statutory provisions in this regard.

Issue 2: Adequacy of Consideration of Operational Creditors' Interests Under Regulation 38(1A) of the CIRP Regulations

Legal Framework and Precedents: Regulation 38(1A) requires that a resolution plan include a statement explaining how it has dealt with the interests of all stakeholders, including operational creditors. The Supreme Court in 'CoC of Essar Steel India Limited' underscored the need for the resolution plan and CoC decision to reflect consideration of all stakeholders' interests.

Court's Interpretation and Reasoning: The adjudicating authority's order demonstrated that the resolution plan explicitly addressed the treatment of operational creditors in different categories, including a dedicated section for operational creditors other than government dues, employees, and workmen. The plan acknowledged the admitted claims and the rationale for NIL payment based on liquidation value.

Key Evidence and Findings: Paragraph 20 of the adjudicating authority's order detailed the treatment of operational creditors under various heads, showing that the plan did not ignore operational creditors but provided a rationale for the payment structure. The plan included a statement on how the interests of operational creditors were addressed.

Application of Law to Facts: The resolution plan met the mandatory content requirements under Regulation 38(1A) by including a statement on the treatment of operational creditors. The NIL payment was explained in the context of liquidation value and the priority of secured financial creditors.

Treatment of Competing Arguments: The appellants contended that the plan failed to demonstrate adequate consideration of operational creditors' interests, relying on 'Hammond Power Solutions Private Limited' where the Tribunal set aside a plan for lack of such consideration. The Court distinguished the present facts, noting that in this case, the plan did address operational creditors' claims and reasons for NIL payment were documented.

Conclusions: The resolution plan complied with Regulation 38(1A) by adequately stating how the interests of operational creditors were dealt with, distinguishing this case from precedents where such consideration was absent.

Issue 3: Scope of Judicial Review Over Commercial Wisdom of the Committee of Creditors

Legal Framework and Precedents: The Supreme Court in 'K. Sashidhar' clarified that the adjudicating authority and appellate tribunal have limited jurisdiction to interfere with the commercial wisdom of the CoC, which is entitled to approve a resolution plan unless it breaches statutory provisions such as Section 30(2). The CoC's decision, if supported by requisite majority, is generally binding.

Court's Interpretation and Reasoning: The CoC approved the resolution plan with 100% voting shares. The Court emphasized that interference with the CoC's commercial wisdom is warranted only if the plan violates statutory requirements. Since the plan complied with Section 30(2)(b) and other provisions, there was no ground for interference.

Key Evidence and Findings: The CoC's unanimous approval and the absence of any statutory breach in the plan's provisions were noted. The adjudicating authority's approval was consistent with the limited scope of judicial review.

Application of Law to Facts: The Court applied the principle of deference to the CoC's commercial wisdom, given the statutory compliance and unanimous approval.

Treatment of Competing Arguments: The appellants sought interference based on alleged inadequate treatment of operational creditors. The Court rejected this, holding that the plan met statutory requirements and the CoC's decision was within its commercial discretion.

Conclusions: The adjudicating authority and appellate tribunal correctly refrained from interfering with the CoC's commercial wisdom in approving the resolution plan.

Issue 4: Interpretation of "Fair and Equitable" Treatment and Priority of Operational Creditors

Legal Framework and Precedents: The IBC and CIRP Regulations require "fair and equitable" treatment of operational creditors, with priority in payment over financial creditors as per Regulation 38(1). The Supreme Court in 'CoC of Essar Steel India Limited' clarified that equality of treatment does not mean identical payment to different classes of creditors.

Court's Interpretation and Reasoning: The Court recognized the distinction between financial and operational creditors and that operational creditors are entitled to minimum payment not less than liquidation value. The plan's proposal of NIL payment was justified as the liquidation value was NIL. The Court rejected the argument that operational creditors must receive payment equal to financial creditors.

Key Evidence and Findings: The liquidation value assessment and the plan's payment structure were critical. The plan prioritized secured financial creditors due to their claims and the limited liquidation value.

Application of Law to Facts: The plan's treatment of operational creditors as per liquidation value was consistent with the statutory framework and judicial precedents.

Treatment of Competing Arguments: The appellants argued for priority payment to operational creditors, but the Court held that priority does not equate to equal or guaranteed payment beyond liquidation value.

Conclusions: The resolution plan's treatment of operational creditors as per liquidation value satisfies the "fair and equitable" standard under the IBC.

Issue 5: Distinguishing Precedents and Applicability to Present Case

Legal Framework and Precedents: The Tribunal's judgment in 'Hammond Power Solutions Private Limited' set aside a resolution plan for failing to show consideration of operational creditors' interests. The Supreme Court's 'CoC of Essar Steel India Limited' judgment laid down principles for treatment of creditors and judicial review.

Court's Interpretation and Reasoning: The Court distinguished the present case from 'Hammond Power Solutions' because the resolution plan here explicitly addressed operational creditors' claims and reasons for NIL payment were documented. The 'CoC of Essar Steel' principles were applied, confirming the limited scope of interference and the requirement of statutory compliance.

Key Evidence and Findings: Unlike 'Hammond Power Solutions', the present plan contained a statement on treatment of operational creditors and was approved unanimously by the CoC.

Application of Law to Facts: The Court applied the precedents contextually, finding no violation of principles in the present case.

Treatment of Competing Arguments: The appellants relied heavily on 'Hammond Power Solutions', but the Court found that the factual matrix and plan content were materially different.

Conclusions: Precedents cited by the appellants were distinguished and did not warrant setting aside the impugned order.

Issue 6: Legislative Scheme and Policy Considerations Regarding Payment to Operational Creditors

Legal Framework and Precedents: The Tribunal has noted in prior judgments that the legislative scheme under the IBC can result in harsh outcomes for operational creditors, including NIL payments. The Tribunal has suggested that the Government and regulatory authorities consider whether amendments are necessary to address this issue.

Court's Interpretation and Reasoning: The Court acknowledged the harshness of the legislative scheme but affirmed that the present case must be decided in accordance with existing law. The Tribunal's observations about potential legislative reform do not affect the validity of the resolution plan under current law.

Key Evidence and Findings: Prior judgments such as 'Damodar Valley Corporation' were noted where the Tribunal forwarded concerns to the Government regarding operational creditors' treatment.

Application of Law to Facts: The Court applied the current statutory framework without extending relief beyond what the law permits.

Treatment of Competing Arguments: While recognizing the appellants' hardship, the Court held that the resolution plan's compliance with statutory provisions precludes interference on policy grounds.

Conclusions: The resolution plan's approval is consistent with the legislative scheme as it stands, notwithstanding the recognized harshness towards operational creditors.

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