Recently, a three-judge bench of Supreme Court in
Greater Noida Industrial
Development vs. Prabhjit Singh Soni has classified Greater Noida Industrial
Development Authority (GNIDA) as a secured creditor, as a security interest
was created by operation of law i.e., under section 13, 13-A and 14 of UP
Industrial Area Development Act, 1976. Even though this judgment has dealt with
other issues, this finding of the SC would have far reaching implication on the
Corporate Insolvency Resolution Process (CIRP) in the long run.
The SC's judgment
A Corporate Insolvency Resolution Process (CIRP) was initiated against JNC
Constructions Pvt. Ltd. (CD) and claims were invited through public
announcement under Section 13 of Insolvency and Bankruptcy Code (IBC). The
claim that was submitted by Greater Noida Industrial Development Authority (GNIDA)
was of Rs. 43,40,31,951/- as a Financial Creditor (FC). But the Resolution
Professional rejected their claims and asked them to submit as Operational
Creditor (OC). And GNIDA failed to submit its claims as OC.
After the Resolution Plan was passed, GNIDA has filed an application before
Adjudicating Authority (AA) stating that the Resolution Professional (RP)
had no power under Regulation 13 of Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016 for
treating GNIDA as Operational Creditor.
The main issues of this case were:
- Whether the Adjudicating Authority has power to recall an order of
approval under Section 60(5) of Insolvency and Bankruptcy Code?
- Whether the resolution plan fail to comply with the requirements
specified in Section 30(2) of the Insolvency and Bankruptcy Code, along with
Regulations 37 and 38 of the Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016?
This judgment has enlarged the powers of the Adjudicating Authority to recall an
order if the court/ tribunal is of the view that such action is required to
achieve justice and to prevent the misuse of Court's procedure.
The court also held that the resolution plan submitted by the applicant failed
to fulfill the conditions of Section 30(2) read with Regulation 37 and 38 of the
IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
The court reasoned it by stating that the Resolution plan failed to acknowledge
the claim of GNIDA and erred in stating the correct amount due and payable. The
claim that was put forth by GNIDA was for Rs. 43,40,31,951/- whereas as per the
resolution plan the amount that was due was for Rs. 13,47,819/-.
The resolution plan also did not treat GNIDA as secured creditor even though, as
per UP Industrial Area Development Act, a charge was created on the assets of
the CD. Therefore, the court held that since the whole proceedings was conducted
ex-parte to the applicant i.e., GNIDA and the resolution plan did not conform
with the requirements of Section 30(2), the court allowed the resolution to be
sent back to COC after the resolution plan meets with the requirements of
Section 30(2) of IBC.
Problems/implications of treating Greater Noida Industrial Development Authority
as Secured Creditor
The Supreme Court in this judgment while deciding on the decision of RP, has
declared GNIDA as a secured creditor without even considering the 'extent of
security' or the applicability of section 13-A of UP Industrial Area Development
Act, 1976. The court even declared New Okhla Industrial Development Authority (NOIDA)
and Yamuna Expressway Industrial Development Authority (YEIDA) as secured
creditors and any other authority derived their powers from UP Industrial Area
Development Act, 1976.
Usually, statutory authorities like Greater Noida Industrial Development
Authority have a large amount of claim including interest and penal charges.
This might have adverse impact on passing of the resolution plans in real estate
matters. The following are the problems that may arise:
-
Discrimination of secured financial creditors and secured operational creditors
Under section 30(2) of the IBC, the code mandates that minimum interest of the OCs need to be protected. This minimum value is different for operational creditors and financial creditors as it was held in COC of Essar Steel India Limited through Authorized Signatory vs. Satish Kumar Gupta & Ors (2019). Only differential treatment that is permissible is based on the security interest that was provided by the creditor. This leads to discrimination between secured creditors, even when there is no intelligible differentia.
Section 30(2)(b) mandates that the minimum amount that is payable to the OC, would be higher of the following scenarios:
- Amount paid to OC in case of liquidation, or
- The sum that OC would have received if the amount provided under the plan had been allocated according to the priority order outlined in Section 53 of the Insolvency and Bankruptcy Code.
But in case of dissenting financial creditor, the minimum amount that he is eligible is in the event of liquidation distributed as per section 53 of Insolvency and Bankruptcy Code.
Therefore, comparing operational and financial creditors, the dissenting financial creditors would always be at a disadvantageous position as to operational creditors. This is because, it is very rare, that the liquidation value is higher than the resolution plan. It values may be the same, but it will never be more than resolution plan.
-
Approval of plan by the Committee of Creditors
Since, statutory authorities like GNIDA has very high amount of claim the COC might be reluctant in approving the resolution plan as the amount left for other creditors would be less very. A plan usually provides for a haircut between 50% - 90% to the creditors. If the amount is distributed as per Section 53 of IBC to these statutory authorities as operational creditors, very less amount would be available to be distributed amongst the financial creditors. This in turn leads to financial creditors dissenting to the plan. Therefore, there are high chances of the company going in liquidation which will be against the legislative intent of IBC.
Conclusion
This judgment would have some negative effect on CIRP process. Since the claims
of these statutory authorities like GNIDA, NOIDA, etc., who have security
interest, are very high because the amount includes principal amount along with
penalty and interest amount. Hence, after distributing the amount to statutory
authorities there will be very less, or no amount left for other operational,
financial, and unsecured creditors.
Another problem with this judgment is the court empowering Adjudicating
Authority to recall the orders. This will have a negative effect on already
passed resolution plans in real estate projects. It will also increase the
burden on courts and tribunals. Many review petitions are pending in the Supreme
Court w.r.t this judgment and it is hoped that court would further provide
clarity on its operation and scope.
Award Winning Article Is Written By: Ms.Maitrayani Bhosale
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