NCLAT Rules on Creditor Fairness in Insolvency, Mandating Cash Payments Over Shares for Operational Creditors

Introduction

The National Company Law Appellate Tribunal (‘NCLAT’), in the case* of Gupta Textile v. Darshan Patel*[i], illuminates the intricate balance between the autonomy of the Committee of Creditors (‘CoC’) and the requisite judicial oversight in insolvency proceedings. In this decision, the NCLAT navigated the complexities of the Insolvency and Bankruptcy Code, 2016 (‘Code’), addressing the fundamental question of whether payments to operational creditors can be partly made in redeemable shares instead of cash. Delving into the heart of the matter, the NCLAT examined the factual matrix and legal principles to arrive at a definitive conclusion that reinforces the adherence to statutory provisions, particularly ensuring fair treatment of operational creditors (‘OC’).

Facts

• The corporate insolvency resolution process (‘CIRP’) was initiated against Television Home Shopping Network Limited, the corporate debtor (‘CD’).

• The OC had filed a claim of Rs. 1.41 crores, which was partially admitted to the extent of Rs. 1.24 crores.

• Subsequently, the resolution plan (‘Plan’) submitted by Respondent No. 2 was approved by the CoC, proposing the payment to the OC be made partly in cash and partly through redeemable preference shares.

• Aggrieved by the approval of the aforementioned Plan, the OC filed the present appeal, contending that the Plan violated s. 30(2)(b) of the Code by offering a cash upfront amount that contradicts the liquidation value of the CD.

Issue  

The issue in this case was whether payments to OCs under s. 30(2)(b) of the Code can include partly paid redeemable shares/equity or must solely be made in cash.

Held

The NCLAT while rejecting the appeal made the following observations:

• The National Company Law Tribunal (‘NCLT’) had failed to notice that the amount proposed to the OC was contrary to the provisions of s. 30(2)(b) of the Code, and thus, the order passed by the NCLT was unsustainable in law.

• The NCLAT observed that payments made to financial creditors (‘FC’) should be made on a priority basis and only in cash, not by issuing equity. Thus, the payment offered to the OC was not in accordance with the provisions of s. 30(2)(b) of the Code.

• It was also noted by the NCLAT that there is a limited scope of judicial review concerning the Plan, which is approved by the CoC, thus, emphasizing the importance of the CoC's commercial wisdom and knowledge.

Analysis

This decision underscores the delicate balance between judicial oversight and the autonomy of the CoC in insolvency proceedings. While recognizing the CoC's commercial wisdom, the NCLAT's intervention highlights the necessity of adhering to statutory requirements, particularly regarding the fair treatment of OCs. By modifying the order to ensure compliance with s. 30(2)(b)(ii) of the Code, the Tribunal reinforces the principle of equitable distribution of assets in insolvency resolutions, safeguarding the interests of all stakeholders involved. Thus, it sets a precedent for ensuring that the Plan aligns with statutory provisions, promoting transparency and fairness in the insolvency resolution process.

End Note

[i] 2024 SCC OnLine NCLAT 426 [01.04.2024]

Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.