The Allahabad Bench of the National Company Law Tribunal (NCLT) has clarified that while the CoC’s commercial wisdom in approving a resolution plan is generally respected, the inter se distribution among secured financial creditors cannot be structured in a manner that is contrary to the scheme of the IBC. The Tribunal held that the Code does not recognise a separate distribution class among secured financial creditors based solely on first-charge and second-charge ranking, and an allocation that effectively excludes an admitted secured financial creditor from participation in value derived from charged assets, without demonstrable legal and factual basis, is impermissible. The Tribunal also made it clear that recoveries made by a secured creditor outside CIRP from separate security cannot, by themselves, be used to deny that creditor participation in resolution proceeds.
On directions, the Tribunal held that the resolution approving the distribution mechanism in the 31st CoC meeting, insofar as it dealt with distribution among financial creditors, could not be approved. However, the approval of the successful resolution applicant’s plan itself was not disturbed. The CoC was directed to reconsider and re-determine the inter se distribution of amounts payable to secured financial creditors in accordance with the Code, keeping in view the principles underlying Section 53 of the IBC. The Tribunal further directed that, in light of the undertaking furnished by the secured financial creditors, consequential adjustments and redistribution of the resolution proceeds should be carried out thereafter, including regarding IFCI’s entitlement and that of all other claimants, to the extent of their respective voting share.
The Division Bench comprising Praveen Gupta (Judicial Member) and Ashish Verma (Technical Member) observed that the limited issue was whether allocating only Rs. 0.83 crores to IFCI, against its admitted claim of Rs. 117.69 crores, was consistent with the scheme of the Code. It noted that there was no dispute that IFCI was an admitted secured financial creditor and that it held a second pari-passu charge, while the other CoC members held first charge over substantial assets. The Bench accepted that commercial wisdom of the CoC is ordinarily non-justiciable, but clarified that such commercial wisdom must still operate within the confines of the Code and cannot be exercised contrary to its statutory scheme.
The Tribunal further held that IFCI and the other lenders formed a single class, namely secured financial creditors, and the distinction attempted by the CoC was only among secured financial creditors on the basis of inter se charge ranking. It observed that Section 53 places secured creditors who have relinquished their security interests in the same category and does not create separate tiers based on first charge, second charge, or subordinate charge. It also noted that the provisions governing resolution do not expressly recognise a separate class of first-charge secured financial creditors distinct from second-charge secured financial creditors for distribution under a resolution plan. Therefore, any such distinction would amount to creating an artificial classification within the same set of claimants.
The Bench acknowledged that Essar Steel recognises that equitable treatment does not necessarily mean equal payment, but said that differential treatment must rest on an intelligible and legally sustainable basis. On facts, it found that the impugned mechanism distributed substantial value only among four lenders and excluded IFCI from value realised from charged assets. Crucially, no material had been placed before the Tribunal to show that the value of charged assets would be entirely exhausted in satisfying first-charge lenders so as to wipe out IFCI’s second-charge security interest.
The Tribunal also found merit in IFCI’s objection regarding the GCC compensation amount, holding that once it formed part of the assets available during CIRP and the overall distributable pool, no cogent basis had been shown for excluding IFCI from participation in it. The Tribunal finally rejected the CoC’s justification based on IFCI’s independent recovery of approximately Rs. 40.51 crores from third-party security, observing that such recovery was outside CIRP and the Code does not contemplate exclusion of a secured financial creditor from resolution proceeds merely because it has separately enforced independent security.
Briefly, the dispute relates to an application filed by IFCI Ltd. under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, challenging the distribution mechanism approved in the 31st CoC meeting in the CIRP of Hind Agro Industries Ltd. The IFCI sought setting aside of the CoC resolution on distribution, challenged the approved resolution plan to that extent, and asked for distribution at par with the other secured financial creditors based on voting share. IFCI’s case was that all CoC members belonged to a single class of secured financial creditors, but the other lenders had arbitrarily created a sub-classification based on charge ranking and allotted IFCI, a second pari-passu charge holder, only Rs. 0.83 crore, while distributing the balance among first-charge lenders. IFCI also pointed out that the resolution plan originally contemplated a non-discriminatory distribution based on voting share, but the final distribution was altered at the CoC level.
IFCI had advanced Rs. 50 crores to the corporate debtor under a loan agreement dated 22.06.2015 and held a second pari-passu charge on all movable and immovable fixed assets of the corporate debtor. Its claim of Rs. 117.69 crores were admitted as that of a secured financial creditor. IFCI also stated that it had separately enforced an exclusive third-party security at Maharani Bagh, New Delhi under SARFAESI and realised about Rs. 40.51 crores, but argued that such external recovery could not justify excluding it from distribution under the resolution plan. The CoC and RP defended the distribution as a matter of commercial wisdom, arguing that IFCI’s second-charge status, the first-charge rights of consortium lenders, and IFCI’s earlier recovery justified the differential treatment.
