Can Financial Creditors Be Discriminated Against in Resolution Plans? Supreme Court Says No

Introduction

The Supreme Court of India recently addressed a significant issue regarding the treatment of financial creditors in corporate insolvency resolution plans. In the case of Rahul Jain vs Rave Scans Pvt. Ltd. & Ors., the Court examined whether a resolution plan could discriminate against dissenting financial creditors, ultimately ruling that such discrimination is impermissible under the Insolvency and Bankruptcy Code, 2016 (IBC).

Case Background

The case arose from the Corporate Insolvency Resolution Process (CIRP) initiated against Rave Scans Pvt. Ltd. under Section 10 of the IBC. The appellant, Rahul Jain, was the resolution applicant whose revised resolution plan was approved by the National Company Law Tribunal (NCLT) on October 17, 2018. However, the approval was challenged by Hero Fincorp Ltd., a financial creditor, on the grounds that the resolution plan discriminated against it by offering a lower percentage of its admitted claim compared to other financial creditors.

The NCLAT, upon hearing the appeal, modified the NCLT's order, requiring the appellant to increase the liquidation value offered to Hero. This modification was based on the finding that the resolution plan was discriminatory, which led to the present appeal before the Supreme Court.

What The Lower Authorities Held

The NCLAT found that the resolution plan approved by the NCLT failed to comply with the amended Regulation 38 of the IBC, which prohibits discrimination against dissenting financial creditors. The NCLAT noted that the plan provided Hero with only 32.34% of its admitted claim, while other financial creditors received 45%. This differential treatment was deemed unjustifiable, leading the NCLAT to direct the appellant to amend the resolution plan to ensure equal treatment for all financial creditors.

The NCLAT's decision was influenced by previous judgments, including Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. and Binani Industries Ltd. v. Bank of Baroda, which had established that the unamended Regulation 38 was discriminatory. The NCLAT emphasized that the amended regulation strengthened the rights of operational creditors and mandated fair treatment for all creditors.

The Court's Reasoning

The Supreme Court, while reviewing the NCLAT's decision, focused on the principles of fairness and equality enshrined in the IBC. The Court highlighted that Section 30(2)(e) explicitly requires that a resolution plan must not discriminate against similarly situated creditors. The Court noted that the NCLAT's modification imposed greater financial burdens on the resolution applicant without justifiable grounds.

The Court observed that the resolution plan offered by the appellant was based on a liquidation value of ₹36 crores, with an offer of ₹54 crores to revive the Corporate Debtor. The plan had been approved by the NCLT, and the dissenting creditor's objections did not warrant a modification of the plan that would disadvantage the resolution applicant.

The Supreme Court also pointed out that the NCLAT had failed to consider the context in which the resolution plan was prepared and approved. The resolution process had commenced prior to the amendment of Regulation 38, and the appellant had complied with the regulations as they stood at that time. The Court emphasized that the NCLAT's requirement for the appellant to match the payouts to Hero with those of other financial creditors was not justified, given the circumstances.

Statutory Interpretation

The Supreme Court's ruling involved a critical interpretation of the IBC, particularly Section 30, which outlines the requirements for resolution plans. The Court reiterated that the resolution professional must ensure that the plan provides for the repayment of debts to operational creditors in a manner specified by the Insolvency and Bankruptcy Board, which must not be less than what is payable in the event of liquidation.

The Court also examined the implications of the amended Regulation 38, which now prioritizes operational creditors over financial creditors in resolution plans. This amendment reflects a legislative intent to ensure fair treatment of all stakeholders in the insolvency process, particularly operational creditors who often bear the brunt of corporate defaults.

Why This Judgment Matters

This judgment is significant for several reasons. Firstly, it reinforces the principle of equality among creditors in the insolvency resolution process, ensuring that no creditor is unfairly disadvantaged based on their dissenting status. Secondly, it clarifies the application of the amended Regulation 38, emphasizing that all creditors within the same class must be treated equally, thereby promoting fairness in the resolution process.

The ruling also highlights the importance of adhering to the statutory framework established by the IBC, ensuring that resolution applicants are not subjected to arbitrary modifications that could jeopardize the viability of their plans. This decision serves as a precedent for future cases involving disputes over resolution plans and creditor treatment, providing clarity on the legal standards that must be met.

Final Outcome

In light of the above reasoning, the Supreme Court allowed the appeal, restoring the NCLT's order approving the resolution plan. The Court held that the NCLAT's directions were unjustified and imposed undue burdens on the resolution applicant. Consequently, the order of the NCLT was reinstated, and the appeal was allowed without any order on costs.

Case Details

• Case Title: Rahul Jain vs Rave Scans Pvt. Ltd. & Ors.
• Citation: 2019 INSC 1228
• Court: IN THE SUPREME COURT OF INDIA
• Bench: Justice Arun Mishra, Justice S. Ravindra Bhat
• Date of Judgment: 2019-11-08