NCLAT Upholds Distribution Based on Security Interest Over Voting Share; CoC’s Commercial Wisdom Prevails

NCLAT upheld the distribution mechanism based on security interest over voting share, emphasizing that the CoC’s commercial wisdom prevails in such matters.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and held that the Committee of Creditors (CoC), exercising its commercial wisdom under Section 30(4) of the IBC, has the discretion to approve a distribution mechanism based on security interest rather than voting share, provided that dissenting financial creditors receive at least their liquidation value. The Tribunal further emphasized that such decisions are not subject to judicial interference unless they contravene Section 30(2) of the IBC.

A dissenting Financial Creditor challenged the order dated 19.10.2023, passed by the Adjudicating Authority (NCLT), Kolkata Bench, in IA No. 1648 of 2023. The Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, Birla Tyres Limited, commenced on 05.05.2022, and the Appellant, a Financial Creditor with a voting share of 1.90%, submitted a claim of ₹21,55,00,138. Following the issuance of Form G, two Resolution Applicants submitted their plans, and the revised financial offers were deliberated upon in the 13th and 14th CoC meetings. The Resolution Professional presented a distribution mechanism based on security interest and voting percentage, which was subsequently approved in the 16th CoC meeting on 31.07.2023 with a 75.67% vote share, leading to the approval of the Resolution Plan.

The Appellant objected to the distribution methodology via email on 02.08.2023, but the Resolution Professional responded, urging the Appellant to vote on the mechanism. Dissatisfied, the Appellant filed IA No. 1648 of 2023, seeking directions to determine creditor distribution based on voting share rather than security interest and to set aside the approved Resolution Plan. The Adjudicating Authority upheld the CoC’s decision, ruling that the distribution mechanism aligned with Section 30(4) of the IBC and was an exercise of the CoC's commercial wisdom. Consequently, IA No. 1648 of 2023 was dismissed on 19.10.2023, with the Resolution Plan being approved in a separate order on the same date.

The Appellant contended that, under Section 53(1)(b)(ii), distribution should be based on voting share rather than security interest and relied on judgments, including India Resurgence ARC Private Limited v. Amit Metaliks Limited and Another, REEDLAW 2021 SC 05523. The Respondents asserted that the CoC, under Section 30(4), had the authority to approve distribution based on security interest and that dissenting creditors were only entitled to liquidation value. The Tribunal examined the arguments and considered the amended provisions of Sections 30(4) and 30(2), which permitted the CoC to factor in security interest while determining distribution. The Resolution Plan’s provisions on payout to dissenting creditors confirmed that they were entitled only to liquidation value. The CoC had separately voted on two scenarios—one based on security interest, which received 75.67% approval, and the other based on voting percentage, which failed to pass.

The NCLAT analyzed whether the CoC was bound to approve the distribution mechanism based on voting share or whether it had discretion to distribute proceeds as per security interest. The Tribunal relied on the Supreme Court’s judgment in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REEDLAW 2019 SC 11505, which clarified that the amendment to Section 30(2) of the IBC granted flexibility to the CoC in approving resolution plans, including the distribution of proceeds. The Supreme Court had emphasized that the CoC, exercising its commercial wisdom, was free to allocate amounts among creditors, subject to compliance with the Code and its regulations.

Further, in India Resurgence ARC Private Limited v. Amit Metaliks Limited and Another, REEDLAW 2021 SC 05523, the Supreme Court upheld the CoC’s authority to determine the distribution mechanism. It rejected the appellant's contention that allocation should be based on security interest, affirming that dissenting financial creditors were entitled only to the minimum amount as per Section 30(2)(b) and not necessarily to the value of their security. The Court reiterated that judicial review of CoC decisions remained limited to verifying compliance with Section 30(2) of the IBC and that the commercial wisdom of the CoC was paramount in approving a resolution plan.

The NCLAT, applying these precedents, held that the Appellant was entitled to an amount not less than the liquidation value but could not insist on distribution based on security interest. Since the approved plan offered the Appellant more than the liquidation value, the Tribunal found no merit in the appeal and upheld the CoC’s decision to distribute proceeds based on security interest rather than voting share.

Mr. Ramesh Singh, Sr. Advocate with Mr. Bheem Sain Jain and Mr. D. Ray, Advocates, represented the Appellant.

Ms. Shweta Dubey and Ms. Kanishka Prasad, Advocates, appeared for R-4, R-5, R-7 to R-9, R-12 & R-13.

Ms. Astha Sharma, Ms. Anju Thomas, Mr. Piyush Agarwal, Ms. Srivali Kajaria and Ms. Panistha Bhatt, Advocates, appeared for R-2 & R-3.

Mr. Abhijeet Sinha, Sr. Advocate with Mr. Shuanak Mitra, Mr. Avishek Guha, Ms. Soumya Dutta, Mr. Saikat Sarkar and Mr. Siddhant Upmanyu, Advocates, appeared for R-1.

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