In I.A. No. 2165 of 2021-NCLT- CoC by majority votes cannot enforce its decision for extinguishment of right of dissenting creditor to proceed against personal guarantor, holds NCLT Mumbai while rejecting Resolution Plan
Members- Anuradha Sanjay Bhatia(Technical) & Kuldip Kumar Kareer (Judicial) [01-05-2023]

Read Order: ASREC (India) Limited Vs. Shivaji Cane Processors Limited 

Tulip Kanth

Mumbai, May 2, 2023: While reaffirming that the COC cannot extinguish right of the particular Secured Creditor to proceed against the personal guarantor of the Corporate debtor under the grab of its commercial wisdom, the Mumbai Bench of the National Company Law Tribunal has rejected a resolution plan which was approved by 78.03% voting share.

The Bench comprising Members- Anuradha Sanjay Bhatia(Technical) & Kuldip Kumar Kareer (Judicial) was considering an Application filed by the Resolution Professional under Section 30(6) and Section 31 of the Insolvency and Bankruptcy Code, 2016, seeking approval of the Resolution Plan, submitted by the Resolution Applicant M/s Puro Natural Sugars JV, which was approved by 78.03% voting share of the members of the Committee of Creditors (COC).

The Financial Creditor- ASREC (India) Limited had furnished Form No. 1 under Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by invoking Section 7 of the Insolvency and Bankruptcy Code against Shivaji Cane Processors Limited (Corporate Debtor). 

The Corporate Debtor was admitted in the Corporate Insolvency Resolution Process (CIRP) by an Admission Order and an Interim Resolution Professional was appointed. The COC in its first meeting  appointed the present Applicant as the Resolution Professional (RP). The IRP published a public announcement, inviting claims from the creditors of the Corporate Debtor.

The Resolution Professional received a Resolution Plan from M/s. PURO Naturals Sugars JV (Resolution Applicant) along with the demand draft of Rs 25,00,000 as bid amount. The Plans were discussed in several meetings of the CoC and was approved with 78.03% votes in favour of the M/s. Puro Natural Sugars JV. 

The two members of the Committee of Creditors (CoC)- Shree Warana Sahakari Bank Limited and Kolhapur Urban Cooperative Bank Limited, having 11.13% and 10.84% voting share respectively, had voted against the Resolution Plan of Puro Natural Sugars JV (SRA). The same plan had been submitted before the Adjudicating Authority for approval under Section 30(6).

The dissenting financial creditors were objecting to the approval of the Resolution Plan, submitted by the Resolution Applicant SRA. The counsel for the dissenting financial creditor contended that the Resolution Plan did not provide for upfront payment to the dissenting financial creditors as is mandatory under the Provisions of the Code and further the Resolution Plan assigned and extinguished the third party security interest of the dissenting Financial Creditors and Personal Guarantees executed in favour of the dissenting Financial Creditors, without the approval of the dissenting Financial Creditors which is not permissible under the Code.

As regards to the issue pertaining to the extinguishment of the Personal Guarantees,the Bench said, “...we are of the view that it is the settled position of law that personal guarantees executed to secure the debt of Corporate Debtor are not covered by Section 14 moratorium and do not get extinguished on approval of Resolution Plan.”

Referring to the judgment in NCLT Indore Bench in Naveen Kumar Sood RP of Ujaas Energy Ltd & Anr v/s. Ujaas Energy Ltd & Ors,  the Bench held that it was clear that the COC can take any commercial decision relating to insolvency of the Corporate Debtor but it cannot extinguish right of the particular Secured Creditor to proceed against the personal guarantor of the Corporate debtor under the grab of its commercial wisdom. Therefore, the Bench held that the plan couldnot be approved as it contravened the provision of section 30(2)(e).

Noting that the Dissenting Financial Creditors had voted against the Resolution Plan, and were also apposing on the ground that they were not being paid upfront and the guarantees were also being extinguished, the Bench said, “...such Resolution Plan can not be approved and deserves to be rejected as the CoC by majority votes cannot enforce its decision for extinguishment of the right of the dissenting creditor to proceed against the personal guarantor.”

Thus, holding that the Resolution Plan deserved to be rejected, the Bench allowed the applications filed by Kolhapur Urban Co-Op Bank Limited & Shree Warna Sahakari Bank Limited.