NIL payment to unsecured financial creditors justifiable if the liquidation value suggests so!


Unsecured financial creditors (“Unsecured Financial Creditors”) are not mandated to receive payments exceeding the minimum liquidation value owed to them. The Committee of Creditors (“CoC”), drawing upon its commercial wisdom, has the authority to approve a resolution plan that prioritizes payments to secured creditors over Unsecured Financial Creditors and others, even where it entails providing them with no payment.

Balaji Minerals & Ors. v Essar Power M. P. Ltd. (Through Professional) & Ors. (Comp. App. (AT) (Ins) No. 1083 of 2021 & I.A. No. 2902 of 2021)

Technical Details:

1)  Some of the Operational Creditors (“OC”) preferred an Appeal before the National Company Law Appellate Tribunal (“NCLAT”) from the order of the National Company Law Tribunal (“NCLT”). The NCLT had rejected the applications by the OCs objecting to the resolution plan and seeking an amendment in the Insolvency and Bankruptcy Code, 2016 (“IBC”) and regulations.

2)  The Resolution Plan was approved by 100% voting by the CoC, and NIL payments were offered to the Unsecured Financial Creditors, OCs, and contingent creditors. This was in accordance with Section 30(2)(b) of the IBC.

The NCLAT ruled as follows:

1)  The commercial wisdom of the CoC is considered settled and not subject to judicial review.

2)  The liquidation value of amounts owed to Unsecured Financial Creditors (and therefore even for the OCs) by the CD was assessed as NIL, and the resolution applicant proposed distribution of proceeds in line with Section 53 of the IBC, the resolution plan can indeed allocate NIL value to such creditors. This aligns with Section 30(2) of the IBC alongside Regulation 38 of the CIRP Regulations.

3)  OCs are entitled to receive no more than their minimum liquidation value, and the CoC is within its rights to approve a resolution plan that offers differing payments to financial creditors and operational creditors based on its commercial judgment.

JC Key Takeaways:

1)  OCs are not mandated to be given priority over other creditors when determining the distribution of payments under a resolution plan.

2)  Providing NIL value to OCs and even Unsecured Financial Creditors is permissible if it aligns with the liquidation value stipulated in the IBC.

3)  If a resolution plan is compliant and receives full approval from the CoC, the CoC’s commercial wisdom is not subject to judicial review.

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