In C.A. No. 3606 of 2020-SC- Amended Sec.30(2) of IBC ensures that operational creditors under resolution plan should be paid amount equivalent to amount which they would have been entitled to, in event of liquidation of Corporate Debtor u/s 53: SC
Justices M.R. Shah & Sanjiv Khanna [04-05-2023]

Read Judgment: M/S VISTRA ITCL (INDIA) LTD & ORS Vs. MR. DINKAR VENKATASUBRAMANIAN & ANR

Tulip Kanth

New Delhi, May 5, 2023: While modifying the judgment of NCLAT by directing that the appellant-M/s. Vistra ITCL (India) Limited would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 & 53 of the Insolvency & Bankruptcy Code, the Supreme Court has opined that it is the mandate of Section 31 that the adjudicating authority should be satisfied that the resolution plan, as approved by the CoC meets with the requirement u/s 30(2).

Referring to the amended Section 30(2) of the Code post the substitution by Act No. 26 of 2019, the Division Bench of Justice M.R. Shah & Justice Sanjiv Khanna said, “The amendment introduced by Act No. 26 of 2019 ensures that the operational creditors under the resolution plan should be paid the amount equivalent to the amount which they would have been entitled to, in the event of liquidation of the Corporate Debtor under Section 53 of the Code.”

The facts of this case were such that one Amtek Auto Limited (Corporate Debtor) approached the appellants to extend a short­ term loan facility of INR 500 crores to its group companies i.e. Brassco Engineers Ltd. and WLD Investments Pvt. Ltd. for the ultimate end use of the Corporate Debtor. 

Two Security Trustee Agreements were executed between the first appellant and WLD as well as  between the first appellant and Brassco.  Thereafter an application under Section 7 of the Insolvency & Bankruptcy Code, 2016 was admitted against the Corporate Debtor/AAL. The respondent herein was appointed as the resolution professional. The first appellant filed its claim as a secured creditor of the Corporate Debtor and submitted Form C claiming a principal amount of INR 500 crores but the same was rejected by the Resolution Professional.

The Resolution Professional received two resolution plans from only 2 resolution applicants being Liberty House Group Pvt. Ltd. (LHG) and Deccan Value Investors (DVI). As DVI withdrew its Resolution Plan so the revised plan by M/s LHG was considered by the Committee of Creditors (CoC) and was approved. The Resolution plan was approved by the Adjudicating Authority but as the LHG did not fulfil its commitment, the Adjudicating Authority passed an order directing reconsideration of the CoC for consideration of DVI’s plan. 

The appellants filed another application under Section 60(5) claiming the right on the basis of the pledged shares. The Adjudicating Authority dismissed the application filed by the appellants. The NCLAT dismissed the appeal by observing that the appellants not having advanced any money to the Corporate Debtor as a financial debt would not be coming within the purview of financial creditor of the Corporate Debtor.  The original applicants – M/s Vistra and others approached the Top Court challenging this judgment.

Referring to the judgments in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited and Phoenix ARC Private Limited vs. Ketulbhai Ramubhai Patel, the Bench opined that the Corporate Debtor – Amtek was not liable to repay the loans advanced by the predecessor interest of the appellant ­Vistra, in respect of which there were detailed and separate agreements executed by the lenders with Brassco and WLD.

Noting that the first Appellant- Vistra was a secured creditor to the extent of the shares pledged to it by the Corporate Debtor ­Amtek and held the first right in pledge on 66.77% shareholding in JMT Auto Limited, the Bench observed that security interest can be created for credit facilities/loan advanced to another person and the first Appellant – Vistra had security interest in the pledged shares.

On the issue of pledge, the Bench referred to the judgment in PTC India Financial Services Limited v. Venkateswarlu Kari and Another and opined that the right to property vests in the pawnee only as far as it is necessary to secure the debt.

The Bench was posed with a situation wherein, the first Appellant, a secured creditor, was being denied the rights under Sections 52 & 53 in respect of the pledged shares, whereas, the intent of the amended Section 30(2) r/w Section 31 is contrary, as it recognises and protects the interests of other creditors who are outside the purview of the CoC.

The Bench could treat it as a secured creditor as a financial creditor of the Corporate Debtor to the extent of the estimated value of the pledged share on the date of commencement of the CIRP or the secured creditor could be given an option to realise the security interest.

Treating the first Appellant – Vistra as a secured creditor in terms of Section 52 r/w Section 53,the Bench said, “ In other words, we give the option to the successful resolution applicant – DVI (Deccan Value Investors) to treat the first Appellant-Vistra as a secured creditor, who will be entitled to retain the security interest in the pledged shares, and in terms thereof, would be entitled to retain the security proceeds on the sale of the said pledged shares under Section 52 r/w Rule 21­A of the Liquidation Process Regulations.”

Thus, the Bench partly modified the impugned judgment of the NCLAT affirming the view taken by the NCLT by holding that appellant-M/s. Vistra ITCL (India) Limited would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of the Code, and in accordance with the pledge agreement.