While the substance over process approach taken by the NCLAT in relation to UltraTech's bid may be beneficial from a straight-jacketed procedural approach in a CIRP, the conclusion in relation to no discrimination between sets of financial creditors and operational creditors may be problematic...
The saga begins
"[W]hen equality is given to unequal things, the resultant will be unequal" – Plato, Laws
Being one of the key non-performing assets in the banking system, on July 25, 2017, the National Company Law Tribunal, Kolkata Bench ("NCLT"), had admitted an application filed by a financial creditor to Binani Cements Limited ("Binani") for the initiation of a corporate insolvency resolution process ("CIRP") under the Insolvency and Bankruptcy Code, 2016 ("IBC").
Subsequently, resolution plans were received by the resolution professional ("RP") from several resolution applicants, including Dalmia Bharat-led Rajputana Properties Private Limited ("Rajputana") and Aditya Birla group company, UltraTech Cement Limited ("UltraTech").
Based on the evaluation matrix, the resolution plan submitted by Rajputana was approved by the COC and the RP approached the NCLT for approval in accordance with the IBC. In the meantime, UltraTech had submitted a revised bid to the RP after expiry of the prescribed deadline, which was not considered by the COC. UltraTech also entered into negotiations with Binani Industries Limited ("Binani Industries") to acquire Binani Industries' stake in Binani for the same value as its revised bid amount, subject to the parties to the CIRP entering into a settlement.
Impugned NCLT order
While rejecting Rajputana's plan, the NCLT vide its order dated May 2, 2018 held that the plan was discriminatory and was contrary to the scheme of the IBC and that the revised plan submitted by UltraTech should be considered by the COC. Subsequently, the COC on May 28, 2018 approved the revised plan submitted by UltraTech unanimously.
Aggrieved by the orders passed by the NCLT, multiple appeals (including by Rajputana) were filed before the National Company Law Appellate Tribunal ("NCLAT"), which were deliberated and disposed of together.
NCLAT: Backdrop of IBC objectives
The NCLAT in its judgment dated November 14, 2018 dealt with two primary issues: (a) the rejection of Rajputana's resolution plan, and (b) the consideration of UltraTech's resolution plan.
It held that the objective of the IBC is for insolvency resolution in a time-bound manner for maximization of value of assets of the corporate debtor, to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders. The NCLAT stressed that the objective of the IBC was to maximize the value of the assets of the corporate debtor and thereby for all creditors and not for a stakeholder or a set of stakeholders. In light of the above objectives, the NCLAT held that the operational creditors must get at least similar treatment as compared to the financial creditors.
Rajputana plan and creditor discrimination
"Relying on the NCLAT judgment in Central Bank of India v. Sirpur Paper Mills Limited, it reiterated that any such discrimination would be illegal and against the spirit of the IBC. The NCLAT held that the IBC does not prescribe differential treatment between two sets of creditors who are similarly situated such as financial creditors or operational creditors"
The NCLAT noted that while certain financial creditors were being provided with 100% of their verified claim, other financial creditors were taking significant haircuts. The rationale provided for this discrimination was that certain financial creditors had direct exposure to Binani, whereas some others were beneficiaries of corporate guarantees by Binani. The plan also discriminated between all such beneficiaries of corporate guarantees for various reasons.
Similarly, the NCLAT also noted that insofar as the operational creditors of Binani are concerned, while unrelated parties were taking a massive haircut, related parties were not provided with any amount of their verified claim.
Relying on the NCLAT judgment in Central Bank of India v. Sirpur Paper Mills Limited, it reiterated that any such discrimination would be illegal and against the spirit of the IBC. The NCLAT held that the IBC does not prescribe differential treatment between two sets of creditors who are similarly situated, such as financial creditors or operational creditors.
In the larger scheme of things, it observed that if the operational creditors are ignored and provided merely with the liquidation value, no operational creditor would supply goods and services to a company on credit, which would severely impact the IBC's object of promoting availability of credit. The NCLAT concluded that a discriminatory plan is against the basic object of maximization of the corporate debtor's assets and balancing the interests of stakeholders.
UltraTech bid: Substance over process
The resolution plan submitted by Rajputana on March 7, 2018 was approved by the COC on March 14, 2018. Despite the fact that UltraTech had submitted its revised (and higher) bid on March 8, 2018 (before the approval of the Rajputana plan), the same was not considered by the COC. As per the NCLT order, since UltraTech had submitted its first bid within the time stipulated by the RP in the invitation, the submission of a revised bid after such date is considered to be in continuance of the resolution plan already submitted by UltraTech and accepted by the RP. Further, it is pertinent to note that UltraTech's plan had provided for payment of 100% of the verified claims of the financial and operational creditors, except related parties.
The NCLAT held that the objective of maximization of value of the corporate debtor's assets would necessitate finding a resolution applicant who can offer the maximum amount so as to safeguard the interest of all stakeholders of the corporate debtor, which was ignored by the COC.
The NCLAT held that all resolution plans which meet the requirements of Section 30(2) of the IBC are required to be tabled by the RP before the COC for its consideration, and the COC is entitled to negotiate and modify any resolution plan with the consent of such resolution applicant anytime within the 180/270-day period. Therefore, given that the RP did not present UltraTech's plan before the COC for its approval even though the plan was in compliance with Section 30(2) of the IBC, the NCLAT held that the non-consideration of UltraTech's bid was in flagrant violation of the object of maximization of the value of the assets of the corporate debtor and failing to safeguard the interests of all stakeholders.
Perhaps the most significant of the chain of events is that Binani Industries moved the Supreme Court with the intent to deposit certain amounts by transferring its stake in Binani to UltraTech. However, the NCLAT did not permit the parties to enter into a settlement since Binani Industries had not filed an application for settlement even after receipt of the requisite 90% approval of the COC. Since this deal between Binani Industries and UltraTech was struck after the resolution plan of Rajputana was approved by the COC, and after submission of the plan by UltraTech, the NCLAT held that UltraTech cannot be considered to be ineligible as a resolution applicant. Therefore, with a view to ensure greater maximization of the value of the corporate debtor's assets, the plan submitted by UltraTech was approved by the COC unanimously.
Analysis: Impact of the judgment
The key takeaways from the Binani Cements / Rajputana Properties NCLAT order are as follows:
(a) Based on the principle of non-discrimination between a set of creditors, operational creditors and financial creditors would have to be treated in the same manner. It appears that the haircut which is being offered to the financial creditors would also need to be offered to the operational creditors. Additionally, as a corollary of the judgment, even secured creditors and unsecured creditors may have to be treated in the same manner. However, commercially treating financial and operational creditors or even secured and unsecured creditors on the same footing may not be advisable as each creditor would add a different value to the corporate debtor. This would render the security provided to a lender and the value of such security irrelevant in a CIRP. Additionally, while Sirpur Paper Mills criticizes plans offering liquidation value to operational creditors only, the NCLAT order ignores Section 30(2)(b) of the IBC which provides for at least the liquidation value to be paid to operational creditors.
(b) The substance of the resolution plan and whether it maximizes the value of the corporate debtor and balances the interests of all stakeholders would be given primacy to any procedure which may be prescribed by the RP. In fact, UltraTech's revised bid was an email and was not strictly as per the process document prescribed by the RP. Even though the COC was negotiating with the highest bidder and had approved Rajputana's plan, a subsequent eligible resolution plan was approved by the NCLT on the basis of the process document, providing the COC the power to accept or reject any plans prior to approval of the same by the NCLT. While this affirms the fundamental principle of COC-autonomy which underlies the scheme of the IBC, the impact may be that the sanctity of the prescribed process may be defeated at any time prior to NCLT's approval of the resolution plan, by a higher bidder.
Accordingly, while the substance over process approach taken by the NCLAT in relation to UltraTech's bid may be beneficial from a straight-jacketed procedural approach in a CIRP, the conclusion in relation to no discrimination between sets of financial creditors and operational creditors may be problematic. This may tilt the balance of the CIRP from being a financial creditor-driven process towards operational creditors.
Disclaimer – All views expressed by the authors are personal.
Partner at J. Sagar Associates
Tirthankar specialises in Banking & Finance, Mergers & Acquisitions (M&A) (including Distressed M&A), Private Equity, Debt Restructuring & Insolvency, Project Finance, Real Estate Finance. He has been nominated as a “Rising Star” in Banking & Finance in India by IFLR 1000 (2018, 2019). He has more than 11 years of experience in debt, quasi-debt, mezzanine finance and equity transactions including Senior Secured, Limited Recourse, Bilateral or Syndicated Lending, Acquisition Finance, Leveraged Finance, Project Finance, Real Estate Finance, Structured Debt, Listed and Unlisted Corporate Bonds / Non-Convertible Debentures (Private Placement).
Associate | Banking & Finance | J. Sagar Associates
Neelasha primarily specializes in Banking & Finance. She has advised domestic and offshore clients on a variety of debt transactions including bilateral and syndicated lending (secured and unsecured), domestic and cross-border lending and project financing. Neelasha is also involved in various trade finance transactions, particularly in relation to advising banks and financial institutions on funding offshore entities to enable them to finance their payment obligations under advance payment supply agreements entered into with Indian exporters.