Understanding the order made by nclat in the case of vedanta twin stars technologies ltd.

In 2018, Videocon, an Indian multinational, ceased operations and declared bankruptcy. The NCLT (National Company Law Tribunal) cleared Vedanta Groups, the parent company of Twin Star, to buy Videocon for Rs. 2,962 crores in June 2021. Later, Bank of Maharashtra and IFCI objected to the offer, claiming it was for an amount well below liquidation value, and challenged NCLT’s approval in the National Company Law Appellate Tribunal (NCLAT), alleging that approval of the takeover plan or resolution plan did not comply with Article 31 of the Insolvency and Bankruptcy Code.

The appellants had argued that (i) the resolution plan violated the rules of the IBC and the CIRP regarding the treatment afforded to them as dissenting financial creditors, (ii) the NCLT was supposed to determine whether the appellants had received at least the amount owed them under Sec. 53(1), i.e. an amount not less than liquidation value, and (iii) the current resolution plan under consideration will involve liability for Rs. 65,000 cr. which was admitted against the stated amount of Rs. 71,433 crores.

The NCLAT set aside the resolution plan and returned it to the CoC for the method to be implemented in accordance with the provisions of the IBC. The Appeals Tribunal stayed enforcement of the NCLT’s judgment accepting the Vedanta Groups resolution plan, while the Appeals Tribunal appears to be persuaded by two observations made by the NCLT:

  1. breach of confidentiality and
  2. Substantial haircut.
  • Breach of confidentiality: – The first observation made by the NCLT is that the amount offered by the Twin Star in the resolution plan is only slightly higher than the net asset value of the stressed asset. The question was raised whether the prepared liquidation value was for the benefit of the CoC and had been made available to bidders even before the bid was claimed. The NCLT asked the IBBI to review the issue considering whether additional safeguards are needed to ensure confidentiality. The government has also ordered the Serious Fraud Investigation Office to investigate.
  • Substantial discount: – The Court further observed that the claims admitted in this case for an amount of Rs 64,838 crores far exceeded the amount proposed in the resolution plan proposed by the Twin Star. The plan therefore provided for the payment of 4.15% of the total non-performing receivables, which resulted in a discount of 95.85%. The probable reason for the large discount is that the case deals with a relatively new law in force and a situation concerning the insolvency of a group of companies which was not originally envisaged in the IBC. There has been a global pandemic which has significantly affected the process and expected timeline and is the main reason for the depreciation in value of distressed assets.

The NCLAT, while quashing the NCLT order, finds that IBC Section 30(2)(b) was not complied with and that the resolution plan approval is not in accordance with Section 31 of the IBC. Two dissenting banks appealed the NCLT order to the NCLAT (Bank of Maharashtra and IFCI). One of their complaints is that the Twin Star resolution plan provides for payment by installments, which they claim violates the IBC’s mandate. The court relied on the precedent of the Supreme Court’s rule that dissenting financial creditors must be paid cash in advance – Twin Star’s resolution plan provided for payment in installments to all financial creditors (including including the dissenting financial creditors), part of the payment being made in cash in advance and the remainder in non-convertible debentures.

Laws involved in the case

This judgment involves Section 30(2) (b) and Section 31 of the Insolvency and Bankruptcy Code.

Article 30(2)(b) specifies that payment to operational creditors during the resolution plan phase must not be less than the amount that would be paid to them in the event of the liquidation of the debtor company. Article 53(1) specifies the order of payments during the liquidation phase: costs of insolvency proceedings, workers’ contributions, secured creditors, unsecured creditors, legal contributions and operational creditors.

The amended Article 30(2)(b) specifies that payments to operational creditors for their debt shall be made in a manner determined by IBBI, but shall not be less than:

  1. the amount to be paid to these creditors in the event of the liquidation of the debtor company;
  2. The amount that would have been paid to those creditors if the distribution had been made in accordance with their priority under section 53(1), whichever is greater. [1]

Any judicial interpretation must not distort the priority other than that indicated in Article 53(1), and the extent and value of this payment must also be established on the basis of the hierarchy specified in this article. In addition, the amendment stipulates that payments to dissenting financial creditors will be made in accordance with IBBI standards, but will not be less than the amount due to them in accordance with the hierarchy established at the liquidation stage.

In the case of Sirpur Paper Mills [2], the NCLAT ruled that the regulations had exceeded their scope by prescribing amounts to be paid to dissenting financial creditors in a resolution plan, and the regulations were revised as a result of the ruling. A resolution plan must provide that the dissenting financial creditors obtain at least the liquidation value due to them, in accordance with Article 30(2) (b). In this case, the “dissident financial creditors” argued for the non-disclosure of their respective share of the liquidation value, which prevented them from making an appropriate and prudent decision if they had known that they could have persuaded willing financial creditors The creditors do not accept the resolution plan with such an unprecedented discount. As a result, the CoC had to reconsider its decision to accept the 95% discount.

Observance of the contracting authority

Article 31 of the IBC specifies that the resolution plan authorized by the adjudicating authority has a binding effect on all the entities concerned. There was no clear indication of the binding force of such a resolution plan on statutory bodies until the Insolvency and Bankruptcy Code (Amendment) Act 2019 was incorporated. The amendment made by the Supreme Court gave retroactive effect to the article. The main purpose of the amendment was to clarify the provision which deals with the approval of the resolution plan by the Committee of Creditors (CoC) which must additionally be approved by the adjudicating authority as an order binding on the creditors , debtor companies, employees, and stakeholders affected by the resolution plan. The appeals tribunal finds that “the CoC is not functus officio when approving the resolution plan, and therefore, legal precedents have established that the adjudicating authority and this tribunal have jurisdiction to refer the resolution plan. resolution to the CoC for reconsideration.”[3]

The Honorable Supreme Court in the case of Jaypee Kensington Boulevard Apartments Welfare Association and Ors. Versus. NBCC (India) Limited and Ors [4] ruled that in the event that a resolution plan requires modification, the Adjudicating Authority (which would include this Tribunal under the Code regime) must refer the resolution plan to the CoC to review the modifications, in order to give the resolution seeker’s opportunity to modify the plan, and the CoC may then reconsider the plan and vote on it.

In the case of Creditors Committee of Essar Steel India Ltd Vs. Satish Kumar Gupta & Ors [5] it was clarified that when the Creditors’ Committee uses its business acumen to make a business decision to resuscitate the debtor company, it must consider these essential features of the Code before making a business decision to repay financial and operational debts. creditors. There is no doubt that the final decision on what to pay and how much to pay each category or subcategory of creditors rests with the creditors’ committee, but such a decision must reflect the fact that the committee has maximized the value of the creditor. assets of the debtor while adequately balancing the interests of all stakeholders, including operational creditors.

It was also judged in the case of Kalpraj Dharmashi & Anr. Versus. Kotak Investment Advisors Ltd., & Anr. [6]that the commercial wisdom of the CoC has been given preeminent priority without any judicial interference to ensure that the stated processes are completed within the IB Code timelines. A collective enterprise decision is an opinion expressed by the CoC after careful consideration at meetings through a vote, in accordance with voting shares. The law deliberately left no grounds for challenging the “commercial wisdom” of individual financial creditors or their collective decision before adjudicative authority, and the decision of the CoC’s “commercial wisdom” is rendered unjustifiable.”

Thus, the court in this case took advantage of several Apex Court decisions holding that the business sense of CoCs is unjustifiable and therefore falls within their domain, particularly if later adjudicated in the public interest and the amount of the loss. The proposal may be referred back to the CoC, particularly in light of its own evidence to reconsider its decision, which the Treasury will bear at an unprecedented discount in such a large use of funds.

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