NCLAT Upholds Distribution Among Financial Creditors Based on Pro Rata Basis as per Voting Shares

NCLAT Upholds Distribution Among Financial Creditors Based on Pro Rata Basis as per Voting Shares

Introduction

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that the distribution among financial creditors should be based on a pro rata basis as per voting shares. The appeal was filed against the decision of the NCLT, Jaipur, which rejected the application filed by the appellant.

Factual Background

The appellant, a secured financial creditor with a 3.22% vote share in the Committee of Creditors (CoC), challenged the distribution mechanism adopted by the CoC, which was based on voting shares. The CoC had passed a resolution for distribution on the basis of vote share, and the adjudicating authority approved the resolution plan.

Procedural Background

The appellant filed an application before the NCLT, praying for setting aside the resolution of the CoC and declaring that the distribution should be based on security interest. However, the NCLT dismissed the application, and the appellant challenged this order before the NCLAT.

Issues

• The main issue before the NCLAT was whether the distribution among financial creditors should be based on security interest or on a pro rata basis as per voting shares.
• The NCLAT had to determine whether the CoC's decision to adopt a voting share-based distribution mechanism was valid.

Contentions of the Parties

Appellant: The appellant argued that it had a valid security interest in the resources of the corporate debtor and hence, the distribution should be based on security interest. The appellant also submitted that it had filed an application raising its claim three months prior to the approval of the plan, but the application was not decided by the adjudicating authority.

Respondent: The respondent argued that the distribution mechanism was decided by the CoC, and thereafter, the plan was approved. The respondent submitted that the appellant's objection was pending before the adjudicating authority when the resolution plan was approved.

Reasoning and Analysis

The bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Member-Technical) observed that there was no dispute regarding the fact that the CoC had passed a resolution plan adopting the voting share as the distribution mechanism of the debt. The bench discussed previous rulings, including the State Bank of India v. IDBI Bank Limited & Anr. and India Resurgence ARC Pvt. Ltd. v. Amit Metalinks Ltd., and upheld the distribution based on a pro rata basis as per voting shares.

Implications

The judgment highlights the importance of the CoC's decision in determining the distribution mechanism among financial creditors. The NCLAT's decision underscores that the distribution should be based on the decision of the CoC, and in this case, the CoC had decided to adopt a voting share-based distribution mechanism.

Relief Sought

The appellant sought to set aside the resolution of the CoC and declare that the distribution should be based on security interest. However, the NCLAT dismissed the appeal.

In this case the appellant was represented by Mr. NPS Chawla, Mr. Abhinav Mishra and Mr. Ishaan Dhingra, Advocates. Meanwhile the respondent was represented by Ms. Neha Agarwal, Advocate for R-1 and Mr. Nitesh Shrivastava, Advocates for SRA.