Interpretation of Judgment of Vendanta pronounced by NCLAT

By

Sakshi Shairwal

Pooja Jha

In the year 2018, Videocon, an Indian multinational business, ceased operations and declared corporate bankruptcy. The NCLT (National Company Law Tribunal) authorized Vedanta Groups, the parent company of Twin Star, to buy Videocon for Rs. 2,962 Crores in June 2021. Later, the Bank of Maharashtra and the IFCI opposed the bid, claiming that it was for a much lower amount than the liquidation value, and challenged the approval of NCLT before the National Company Law Appellate Tribunal (NCLAT), claiming that the permission given to the takeover plan or the resolution plan was not in accordance with Section 31 of the Insolvency and Bankruptcy Code.

The Appellants had argued that (i) the Resolution Plan violated the IBC and CIRP Regulations in terms of the treatment given to them as Dissenting Financial Creditors, (ii) the NCLT was supposed to determine whether the Appellants were paid not less than the amount due them under Sec. 53(1), i.e. an amount not less than the liquidation value, and (iii) the current resolution plan under consideration will put for liability of Rs. 65,000 Cr. that has been admitted against the stated amount of Rs. 71,433 crore.

The NCLAT set aside the resolution plan and returned it to the CoC for the method to be carried out in compliance with the IBC's provisions. The appellate tribunal stayed the operation of the NCLT's judgment accepting the Vedanta Groups' resolution plan, while the Appellate Tribunal appears to be persuaded by two observations made by the NCLT:

1. Breach of confidentiality and

2. Substantial haircut

1. Breach of Confidentiality: - The first observation made by the NCLT was that the amount offered by the Twin Star in the resolution plan is only marginally above the liquidation value of the stressed asset. A question was raised whether the liquidation value prepared was for the benefit of the CoC and was made available to the bidders even before the bid was claimed. The NCLT has asked the IBBI to examine the issue considering whether further safeguards are needed to ensure confidentiality. The Government has also directed the Serious Fraud Investigation Office to conduct a probe.

2. Substantial Haircut: - The Tribunal has further observed that the claims admitted in the matter for the amount of Rs 64,838 crores far exceeded the amount offered in the proposed resolution plan by the Twin Star. The plan has therefore provided for payment of 4.15% of the total outstanding claim resulting in a haircut of 95.85%. The probable reason for the large haircut is that the matter deals with a relatively new law in operation and a situation regarding the insolvency of a group of companies not originally contemplated in the IBC. There has been an intervening global pandemic that has materially affected the process and the anticipated timeline and is the major reason for the depreciation in the value of stressed assets.

The NCLAT while setting aside the order of NCLT holds that Section 30(2) (b) of IBC has not been complied with and the approval of the resolution plan is not in accordance with Section 31 of the IBC. Two dissenting banks appealed the NCLT order to the NCLAT (Bank of Maharashtra and IFCI). One of their complaints is that the Twin Star resolution plan calls for payment to be made in installments, which they believe violates the IBC's mandate. The tribunal relied upon the precedent from the Supreme Court rule that dissenting financial creditors must be paid in cash upfront – Twin Star's resolution plan called for a staggered payment to all financial creditors (including dissenting financial creditors), with a portion of the payment made in cash up front and the rest in non-convertible debentures.

Laws Involved in the Case

This judgment involves Section 30(2) (b) and Section 31 of the Insolvency and Bankruptcy Code.

Section 30(2) (b) specifies that Payment to operational creditors during the resolution plan stage must not be less than the amount that would be paid to them in the case of the corporate debtor's liquidation. Section 53(1) specifies the order of payments during the liquidation stage: insolvency process charges, workmen's dues, secured creditors, unsecured creditors, statutory dues, and operational creditors.

The amended section 30(2) (b) specifies that payments to operational creditors for their debt will be made in a manner determined by the IBBI, but will not be less than:

I.) The amount to be paid to such creditors in the event of the corporate debtor's liquidation;

II.) The amount that would have been paid to such creditors if the distribution had been made according to their priority under Section 53 (1) whichever is higher. [1]

Any judicial interpretation should not distort the priority other than what is indicated in section 53(1), and the extent and value of such payment should also be established based on the hierarchy specified in this section. Furthermore, the amendment states that payments to dissenting financial creditors will be made in accordance with IBBI standards, but will not be less than the amount owing to them in accordance with the hierarchy established at the liquidation stage.

In the case of Sirpur Paper Mills [2], the NCLAT ruled that the regulations had gone beyond their scope by prescribing amounts to be paid to dissenting financial creditors in a resolution plan, and the regulation was revised as a result of the ruling. A resolution plan must provide for the dissident financial creditors to obtain at least the liquidation value owed to them, according to Section 30(2) (b). In this case, the 'Dissenting Financial Creditors' have made claims about the non-disclosure of their respective share of the liquidation value, resulting in their inability to make a proper and prudent decision if they had known so they could have persuaded the Assenting Financial Creditors not to accept the Resolution Plan with such an unprecedented large haircut. As a result, the CoC has had to review its decision to accept the 95 percent haircut.

Observation of the adjudication authority

Section 31 of the IBC specifies that the resolution plan authorized by the Adjudicating Authority has a binding effect on all relevant entities. There was no clear indication of the binding force of such a resolution plan over statutory bodies until the Insolvency and Bankruptcy Code (Amendment) Act, 2019 was incorporated. The amendment made by the Supreme Court brought a retrospective effect to the section. The main purpose behind the amendment was to clarify the provision that deals with the approval of the resolution plan by the committee of creditors (CoC) which further needs to be approved by the adjudicating authority as an order binding upon the creditors, corporate debtors, employees, and stakeholders relevant to the resolution plan. The appellate tribunal holds that "The CoC is not functus-officio on the approval of the Resolution Plan, and thus, the judicial precedents established that the Adjudicating Authority and this Tribunal are competent to send the Resolution plan back to the CoC for reconsideration."[3]

The Hon’ble Supreme Court in the case of Jaypee Kensingon Boulevard Apartments Welfare Association and Ors. Vs. NBCC (India) Limited and Ors [4] have held that in case a resolution plan requires modification, the Adjudicating Authority (which would include this Tribunal by virtue of the scheme of the Code) must send back the resolution plan to the CoC to consider the modifications, so as to afford an opportunity to resolution applicant to modify the plan, and CoC may then re-consider the plan and vote upon the same.

In the case of Committee of Creditors of Essar Steel India Ltd Vs. Satish Kumar Gupta & Ors [5] it was made clear that when the Committee of Creditors uses its commercial acumen to make a business decision to resuscitate the corporate debtor, it must take these key features of the Code into account before making a commercial decision to pay off the debts of financial and operational creditors. There is no doubt that the ultimate decision on what to pay and how much to pay each class or sub-class of creditors rests with the Committee of Creditors, but such a decision must reflect the fact that the Committee has maximized the value of the corporate debtor's assets while also adequately balancing the interests of all stakeholders, including operational creditors.

It was further held in the case of Kalpraj Dharmashi & Anr. Vs. Kotak Investment Advisors Ltd., & Anr. [6] that the business wisdom of CoC was granted preeminent priority without any judicial interference in order to ensure that the indicated processes were completed within the IB Code's timetables. A collective corporate decision is an opinion voiced by the CoC after due consideration in meetings through voting, as per voting shares. The law has purposefully left no grounds for challenging individual financial creditors' "commercial wisdom" or their collective decision before the Adjudicating Authority, and the decision of the CoC's 'commercial wisdom' is rendered non-justifiable."

Thus, the tribunal in the present case has drawn weight from several of the Apex Court decisions holding that the CoCs' commercial acumen is unjustifiable and, as a result, it is in their domain, particularly if it is later found in the public interest and the amount of loss. The proposal can be remitted to the CoC, particularly in light of their own evidence to review their decision, which the public exchequer will bear with such an unprecedented haircut in such significant fund employment.

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