Supreme Court Sets Aside NCLAT’s Modification of Approved Resolution Plan

The Supreme Court of India recently ruled in favor of the resolution applicant, Rahul Jain, by setting aside the National Company Law Appellate Tribunal’s (NCLAT) decision that modified an approved resolution plan. The case, Rahul Jain v. Rave Scans Pvt. Ltd. & Ors., focused on whether the NCLAT was justified in altering a resolution plan after its approval by the National Company Law Tribunal (NCLT) on the grounds of discrimination among financial creditors.

Background of the Case

The Corporate Insolvency Resolution Process (CIRP) was initiated against Rave Scans Pvt. Ltd. (the ‘Corporate Debtor’) under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC). The resolution applicant, Rahul Jain, submitted a revised resolution plan, which was approved by the NCLT on October 17, 2018.

However, Hero Fincorp Ltd. (‘Hero’), one of the financial creditors, challenged the NCLT’s approval before the NCLAT. Hero argued that the resolution plan was discriminatory because dissenting financial creditors, including itself, were treated less favorably than other secured financial creditors. The NCLAT agreed with Hero’s claim and modified the approved resolution plan, increasing the financial burden on the resolution applicant.

Legal Issues

• Was the resolution plan discriminatory towards dissenting financial creditors?
• Did the NCLAT have the jurisdiction to modify an already approved resolution plan?
• Did the amended Regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, apply retroactively?

Arguments by the Petitioner (Rahul Jain)

The petitioner, Rahul Jain, contended that:

• The resolution plan was formulated and approved before the amendment to Regulation 38, which removed the requirement of maintaining liquidation value for dissenting financial creditors.
• The NCLAT wrongly applied the amended Regulation 38 retroactively to modify the plan.
• The financial creditors had already approved the plan, and the modifications imposed by the NCLAT created an undue financial burden.
• Secured creditors had different types of securities, and there was a justified reason for the variation in payouts.

Arguments by the Respondent (Hero Fincorp Ltd.)

Hero argued that:

• The resolution plan was discriminatory as it provided dissenting financial creditors only 32.34% of their admitted claims, while others received 45%.
• The principle of equitable treatment of creditors, as established in the Swiss Ribbons Pvt. Ltd. v. Union of India case, required that all similarly situated creditors be treated equally.
• The NCLAT correctly modified the plan to ensure fair treatment for dissenting financial creditors.

Supreme Court’s Observations

1. Application of Amended Regulation 38

The Supreme Court held that the amendment to Regulation 38, which removed the requirement of providing liquidation value to dissenting financial creditors, was introduced on October 5, 2018. Since the resolution plan was approved before this date, the amendment could not be applied retroactively.

2. NCLAT’s Overreach in Modifying the Plan

The Court ruled that the NCLAT had exceeded its jurisdiction by modifying an approved resolution plan. The adjudicating authority (NCLT) had already accepted the plan, and the NCLAT should not have intervened to impose additional financial burdens on the resolution applicant.

3. Distinction Among Secured Creditors

The Court acknowledged that different secured creditors had different levels of security, justifying the differential treatment in payouts. It stated that treating all secured creditors identically, regardless of the nature of their security, would be inappropriate.

4. Approval of the Plan by Majority of Creditors

The Court noted that the plan had been approved by the Committee of Creditors (CoC), except for Hero. Since the CoC’s decision is paramount in the resolution process, a dissenting creditor could not demand changes after approval.

Supreme Court’s Verdict

The Supreme Court allowed the appeal and restored the NCLT’s approval of the resolution plan. It concluded:

“The NCLAT’s order and directions were not justified. They are hereby set aside; the order of the NCLT is hereby restored.”

Impact of the Judgment

This ruling has significant implications for insolvency proceedings:

• It reaffirms that amendments to the IBC regulations cannot be applied retroactively.
• It limits the powers of the NCLAT in modifying approved resolution plans.
• It upholds the authority of the Committee of Creditors in the resolution process.
• It ensures that resolution applicants are not unfairly burdened with additional financial obligations after plan approval.

Conclusion

The Supreme Court’s decision in Rahul Jain v. Rave Scans Pvt. Ltd. ensures clarity in insolvency proceedings, preventing undue modifications to approved plans. The judgment emphasizes the importance of adherence to procedural fairness and protects resolution applicants from post-approval financial burdens.

Petitioner Name: Rahul Jain.
Respondent Name: Rave Scans Pvt. Ltd. & Ors..
Judgment By: Justice Arun Mishra, Justice S. Ravindra Bhat.
Place Of Incident: India.
Judgment Date: 08-11-2019.

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