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Can Resolution Plan Be Considered By The Committee Of Creditors Even Below The Liquidation Value Of The Corporate Debtor?

The Bench of the Hon’ble Supreme Court of India (Supreme Court) comprising of Mr. Justice R.F. Nariman, Mr. Justice Aniruddha Bose, and Mr. Justice V. Ramasubramanian, in a recent judgment of Maharashtra Seamless Steel Limited versus Padmanabhan Venkatesh & Ors. held that the approved Resolution Plan can provide for payment of amounts lower than the liquidation value of the Corporate Debtor if it complies with the provisions of Section 30(2)(b) of the IBC while addressing the following issues.
  1. Whether the scheme of the Code contemplates that the sum forming part of the Resolution Plan should match the liquidation value or not? And
    • The Supreme Court held that there is no provision in the Code or Regulations thereunder, that has been brought to their notice, under which the bid of any Resolution Applicant has to match liquidation value arrived in the manner provided in Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
       
    • The Supreme Court further held that the object behind prescribing such valuation process is to assist the Committee of Creditors ("CoC") to take decision on a resolution plan properly. Once a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 thereof.
       
    • Therefore, the Order of the Adjudicating Authority while approving the Resolution Plan does not breach the provisions of the Insolvency and Bankruptcy Code, 2016
       
  2. Whether Section 12-A is the applicable route through which a successful Resolution Applicant can retreat?
    • The Supreme Court upon the second issue held that the exit route prescribed in Section 12A is not applicable to a Resolution Applicant. The procedure envisaged in the said provision only applies to applicants invoking Sections 7, 9 and 10 of the Code.
       
    • Therefore, the provision of Section 12A is the applicable route for the Resolution Applicant.

Fact:
  • The matter arose out of the Corporate Insolvency Resolution Process (CIRP) of United Seamless Tubulaar Private Limited (Corporate Debtor). One, Application under Section 7 of IBC was filed by Indian Bank before the Hon’ble National Company Law Tribunal, Hyderabad (Adjudicating Authority) which was subsequently admitted by the Adjudicating Authority.
     
  • That the total debt of the Corporate Debtor was of INR. 1897 Crores out of which INR. 1652 Crores comprised of term loans of two entities of Deutsche Bank. Also, there was debt on account of working capital borrowing of INR. 245 Crores from another Bank, being India Bank who initiated the CIRP of the Corporate Debtor
     
  • In terms of the IBC, the Resolution Professional (RP) appointed Two (02) registered valuer for the valuation of the Corporate Debtor which turned out valued at INR. 681 Crores and INR. 513 Crores, respectively. Considering the substantial difference in the valuation, a third valuer was appointed for liquidation value of the Corporate Debtor which valued at INR. 352 Crores. Accordingly, the average of the two closest estimates of valuation of liquidation value assessed to be INR. 432.92 Crores.
     
  • After getting the Assessed Valuation Value, the RP approached before the Adjudicating Authority for approval of Resolution Plan of Maharashtra Seamless Limited (MSL). However, the Adjudicating Authority while disposing of the Application of RP, directed the RP to re-determine the liquidation value of the Corporate Debtor by taking into consideration the first and second valuation. Accordingly, the revised valuation value amounted to INR. 597.54 Crores.
     
  • The aforementioned order of the Adjudicating Authority was challenged before the National Company Law Appellate Tribunal (NCLAT) wherein directions given to Adjudicating Authority to pass orders on the Resolution Plan in terms of Section 31 of the IBC.
     
  • Accordingly, the Adjudicating Authority approved the Resolution Plan of MSL of INR. 578 Crores, which stipulated an upfront payment of INR. 477 Crores and additional fund infusion on takeover of the Corporate Debtor. The said Order was challenged before NCLAT by one of the promoters of the Corporate Debtor and Indian Bank on the ground that the approval of Resolution Plan was giving windfall to the MSL as they would get assets of INR. 597.54 Crores for a considerable lower price when another Resolution Applicant offering INR. 490 Crores.
     
  • Further, the NCLAT in promoter’s Appeal held that MSL should increase upfront amount from INR. 477 Crores to INR. 597.54 Crores to bring it at par with final Liquidation value i.e. INR. 597.54. Further, it has been directed by the NCLAT to MSL that the increase upfront amount to be distributed among the Financial Creditors and Operational Creditors in the ratio of 25% of their claim amount. Furthermore, NCLAT directed to deposit differential amount within 30 days, failing which the order of Adjudicating Authority approving MSL Resolution Plan will be treated to have been set aside.

Conclusion:
There is no provision under the IBC that justifies a vision that Resolution plan should carry a value higher than liquidation value, if approved by the COC. Its statutory mandate on the part of Adjudicating Authority under Section 31(1) of the IBC is to ascertain that a Resolution Plan meets the requirement of Sub-section (2) and (4) of Section 30 of the IBC.

The Liquidation Value, works as a guidance for Committee of Creditors for considering the Resolution plan for approval; it cannot be considered as a Standard and Plans offering lower value than liquidation value ought not to be rejected on this ground, if Adjudicating Authority has examined the fulfillment of required perquisites under IBC.

The preamble of the Code does speak of maximization of the value of assets of Corporate Debtors and the balancing of the interests of all stakeholders. Hence, in absence of any provisions under the Code and/or Regulations stipulating that the amount offered under Resolution Plan should be equivalent to the Liquidation Value, set aside the impugned NCLAT order.

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