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REPORTABLE

 IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7940 OF 2019

RAHUL JAIN ...APPELLANT

VERSUS

RAVE SCANS PVT. LTD. & ORS.             ...RESPONDENTS

      J U D G M E N T

S. RAVINDRA BHAT, J.

1. The resolution applicant (hereafter “the appellant”) is

aggrieved by the decision of the National Company Law

Appellate Board (hereafter “NCLAT”) in regard to its directions

modifying a resolution plan accepted by the adjudicating

authority (i.e. National Company Law Tribunal, hereafter

“NCLT” or “the adjudicating authority”). The Corporate

Insolvency Resolution Process (CIRP) was initiated against M/s.

Rave Scans Private Limited (hereafter the “Corporate Debtor”)

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under Section 10 of the Insolvency and Bankruptcy Code, 2016

("IBC" or “the Code” for short). The revised resolution plan

submitted by the appellant was approved by the NCLT on 17th

October, 2018. The second respondent, M/s Hero Fincorp Ltd.

(hereafter the “Financial Creditor” or “Hero”) appealed against

the NCLT’s order on grounds of discrimination between

financial creditors, which resulted in the NCLAT modifying the

NCLT’s final order. The question urged by the appellant is

whether the finding that the financial creditor was

discriminated against, leading the NCLAT to modify the

adjudicating authority’s directions, and consequently imposing

greater financial burdens on the resolution applicant, is

justified in the circumstances.

2. The facts of the case are as follows. The CIRP was initiated

on  25th  January, 2017 against the  Corporate  Debtor  under

Section 10 of the IBC. The appellant was the resolution

applicant of the Corporate Debtor, whose liquidation value was

ascertained as 36 crores. Against the said amount, the₹

appellant offered  54 crores to revive the Corporate Debtor in₹

terms of the resolution plan. The resolution  plan was then

revised and the revised resolution plan submitted by the

appellant was approved by the adjudicating authority, i.e., the

Principal Bench of the NCLT. This resolution plan was

challenged before the NCLAT by the second respondent in the

present appeal, Hero Fincorp Ltd. as being discriminatory.

Discrimination was alleged on the ground that the secured

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financial  creditors were provided with a higher percentage of

their claim amounts; however, Hero had been allowed a lesser

percentage of its admitted claim. Hero, who had dissented with

the resolution plan, had been provided with 32.34% of its

admitted claim, whereas other financial creditors had been

provided with 45% of their admitted claims. The remarks

column in the resolution plan showed that the plan was based

on  ‘Maintained  liquidation value  (LV) under Regulation 38 of

the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process  for  Corporate Persons)  Regulations,  2016.

The reference  herein  was to the  unamended  Regulation  38,

pertaining to the mandatory contents of a resolution plan.  

3. The  NCLAT in its impugned  order  which set aside the

NCLT’s  directions and required the appellant to  increase the

liquidation value of the offer to Hero, relied on Central Bank of

India v. Resolution Professional of the Sirpur Paper Mills Ltd. &

Ors.,  Company Appeal  (AT)  (Insolvency) No. 526 of  2018 and

Binani Industries Ltd. v. Bank of Baroda & Anr.,  Company

Appeal (AT) (Insolvency) No. 82 of 2018, and noticed that

Regulation 38 had been held to be discriminatory in these

cases. Accordingly, an amendment was made on 5th  October,

2018, and the provision  in Regulation 38(1)(c)  on  liquidation

value payable to financial creditors was deleted. The amended

regulation was also considered by the Supreme Court in Swiss

Ribbons Pvt. Ltd. & Anr. v. Union of India, 2019 SCC Online SC

73, which noticed that the amendment strengthens the rights of

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operational creditors by statutorily incorporating the principle

of fair and equitable  dealing of operational creditors’ rights,

together with priority in payment over financial creditors. Swiss

Ribbons  (supra)  also  observed that the NCLAT,  while looking

into the viability and feasibility of resolution plans approved by

the committee of creditors, has always gone into the question of

whether operational creditors are given roughly the same

treatment as financial  creditors,  and  if  not,  such plans have

been rejected or modified so that the rights of operational

creditors are safeguarded.

4. The order approving the resolution plan, which was

impugned before the NCLAT was passed by  the  adjudicating

authority on  17th  October, 2018.  The  NCLAT  held that this

order failed to notice that no resolution plan could be approved

discriminating against the dissenting financial creditor, in

terms of the amended Regulation 38. The NCLAT further held

that the adjudicating authority failed to notice that the NCLAT

had declared the unamended Regulation 38(1)(c), which

stipulated the liquidation value for dissenting financial

creditors as illegal. It was held that the resolution plan in this

instance, which had been approved by the impugned order of

the NCLT, did not conform to the test in Section 30(2)(e) of the

IBC, and was discriminatory against similarly situated ‘Secured

Creditors’.

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5. The NCLAT further observed that under Section 30(2)(b)

(ii), such differential treatment must only be made in such a

manner as may be specified by the Board, which shall not be

less than the amount to be paid to these creditors in

accordance with Section 53(1) in the event of liquidation of the

corporate debtor. The NCLAT held that the amended Regulation

38 would still  be applicable, and the Corporate Debtor could

not take advantage of the repealed provision. In  light of  this

reasoning, the NCLAT held the resolution plan to be

discriminatory and violative of Section 30(2)(e) of the IBC, and

directed that the successful resolution  applicant remove the

discrimination by providing similar treatment to the appellant

before the NCLAT, as other similarly situated financial

creditors.  

6. It  was observed that the successful resolution applicant

had noticed that Regulation 38 was amended on 5th  October,

2018; the applicant,  however, failed to bring  this  fact  to  the

notice of the adjudicating authority when the matter was taken

up for approval, and also did not amend the resolution plan to

make it in accordance with the amended Regulation 38. The

grounds for discrimination alleged by the Corporate Debtor

were that firstly, Regulation 37(1) requires a resolution plan to

offer ‘maximization of value of its assets’, which is fulfilled by

offering  54 crores against the liquidation value of  36 crores₹ ₹

only; secondly, Regulation 38(1)(c) mandatorily provided for the

maintenance  of the   liquidation value  of  dissenting financial

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creditors before the amendment dated 5th  October 2018;

thirdly,  the committee of creditors, in its meeting, directed the

resolution professional to  seek a  legal  opinion on differential

value of financial creditors. The committee of creditors accepted

the opinion obtained by the resolution professional stating that

liquidation value has to be maintained for dissenting creditors.

Accordingly, in the  next revised resolution  plans  dated  12th

January, 2018, 16th February, 2018, and 5th October, 2018, the

resolution applicant offered minimum liquidation value (not a

percentage of the claim).   

7. It was urged by Mr. Ramji Srinivasan, learned senior

counsel, that PSU banks had a higher stake in the total claim

value and liquidated value of assets, having security of fixed

assets, plant and machinery, debtors, inventory and personal

guarantee,  etc.  On the other hand, NBFCs only had security

against specific plant & machinery and the personal guarantee

of the promoters. It was also argued that the resolution plan

has been fully implemented and financial creditors (except

Hero) have released security to the Corporate Debtor. Further,

the senior counsel appearing on behalf of the Corporate Debtor

argued that under Section 30(2)(b)(ii), the resolution plan allows

separate treatment  of financial creditors  who do  not  vote in

favour of the resolution plan.  

8. Mr. Amit Sibal, learned senior counsel for the second

respondent­Hero, urged that this court should not interfere

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with the impugned order. He relied on the observations in

Swiss Ribbons and Section 30 of the IBC, to say that creditors

falling within one description or class cannot be discriminated

against. It was pointed out that the PSU banks’ dues were given

primacy, inasmuch as all of them were given a settlement of

45% of their admitted claims; however, the dissenting Financial

Creditor (Hero) was provided with 32.34% of its admitted claim

which is plainly discriminatory and contrary to the letter and

spirit of the IBC.  

9. Mr. Sibal relied on the observations of this court in Swiss

Ribbons (supra) that:

“72. The aforesaid Regulation further strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors' rights, together with priority in payment over financial creditors."

10. Section 30, which is relied upon by the respondents, and

which was interpreted by the NCLAT, reads as follows:

“30. (1) A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum.  

(2) The resolution  professional shall examine  each resolution plan received by him to confirm that each resolution plan—  

(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor;

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(b) provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53; (c) provides for the management of the affairs of the Corporate debtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan;  

(e) does not contravene any of the provisions of the law for the time being in force;  

(f)  conforms to such other requirements as may be specified by the Board.  

(3)  The resolution professional  shall  present to the committee of creditors for its approval such resolution plans which confirm the conditions referred to in sub­ section (2).  

(4) The committee of creditors may approve a resolution plan by a vote of not less than seventy­five per cent. of voting share of the financial creditors.  

(5) The resolution applicant may attend the meeting of the committee of creditors in which the resolution plan of the applicant is considered:  

Provided that the resolution applicant shall not have a  right to  vote  at the  meeting  of the  committee  of creditors unless such resolution applicant  is also a financial creditor.  

(6) The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.”

11. Section 30 lays out the duties of the resolution

professional and the various steps that she or he has to take,

as well as the considerations that are to weigh, in examining a

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resolution plan. The principle of fairness engrafted in the

provision is that the plan should make a provision for

repayment of debts of operational creditors having regard to the

value, which shall not be less than what is prescribed by the

Board (i.e. the Insolvency  Board), repayable in the event of

liquidation, spelt out in Section 53. Section 30(3) requires the

resolution  professional to  present the resolution  plan to the

committee of creditors and Section 30(4) stipulates that

approval  shall  be by a vote  not less  than 75% of the  voting

share of the financial creditors. Regulation 38, as it stood before

the amendment and its substitution, read as follows:

"38. Mandatory contents of the resolution plan.—

(1) A resolution plan shall identify specific sources of funds that will be used to pay the­

 (a) insolvency resolution process costs and provide that the [insolvency resolution process costs, to the extent unpaid, will be paid] in priority to any other creditor;

 (b) liquidation value  due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority; and

(c) liquidation value due to dissenting financial creditors and provide that such payment  is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan."

12. After its amendment, Regulation 38 now reads as follows:

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"38. Mandatory contents of the resolution plan.—

(1) The amount due to the operational creditors under  a resolution  plan shall be given  priority in payment over financial creditors.

(1­A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.”

13.  In the present case, it is noticeable that no doubt, Hero

was provided with 32.34% of its admitted claim as it has

dissented with the plan. On the other hand, Tata Capital

Financial Services Ltd. was provided with 75.63% of its

admitted claim; other financial creditors (Indian Overseas

Bank, Bank of Baroda and Punjab National Bank) were

provided  with  45% of their admitted claims.  Given that the

resolution process began well  before the  amended regulation

came into force (in fact, January, 2017) and the resolution plan

was prepared and approved before that event, the wide

observations of the NCLAT, requiring the appellant to match the

pay­out (offered to other financial creditors) to Hero, was not

justified.  The  court  notices that the  liquidation  value  of the

corporate debtor was ascertained at   36 crores. Against the₹

said amount, the appellant offered  54 crores. The plan was₹

approved and, except the objections of the dissenting creditor

(i.e Hero), the plan has attained finality. Having regard to these

factors and circumstances,  it is  held that the NCLAT’s order

and directions were not justified. They are hereby set aside; the

order of the NCLT is hereby restored.

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14. In view of the foregoing discussion, the appeal succeeds

and is allowed. In the circumstances, there shall be no order on

costs.

........................................J.                                           [ARUN MISHRA]  

........................................J.                                           [S. RAVINDRA BHAT]  

New Delhi, November 8, 2019.