India – ‘CASH ONLY’ To Dissenting Financial Creditors – Supreme Court In Jaypee.

20 April 2021

 

The Supreme Court’s judgment in Jaypee Kensington Boulevard Apartments Welfare Association & Ors vs. NBCC (India) Ltd. & Ors.[1] (“Jaypee Decision”) has laid down some new requirements whilst reinforcing several old ones in relation to the insolvency resolution regime of the country. In this article, we examine and discuss the implications of the rights of dissenting financial creditors as held in the Jaypee Decision on the corporate insolvency resolution process.
 

Background Facts       
           

In August 2017, the insolvency resolution process (“CIRP”) of Jaypee Infratech Limited (“JIL”) commenced under the provisions of Insolvency and Bankruptcy Code, 2016 (“IBC”). The resolution plan submitted by NBCC (India) Limited (“NBCC”), approved by 97.36% of the committee of creditors (“CoC”), was approved by the National Company Law Tribunal (“NCLT”), with certain modifications.
 

The order approving the resolution plan was challenged in appeal before the National Company Law Appellate Tribunal (“NCLAT”). In the appeal proceedings, an interim order was passed by the NCLAT (“Interim Order”) permitting the implementation of the resolution plan subject to final outcome of the appeal and constituting an interim monitoring committee (“IMC”) for its implementation. The appeal against this Interim Order, along with various other related appeals were disposed of in Jaypee Decision.
 

‘Payment’ to Dissenting Financial Creditors          
 

As per the resolution plan, the dissenting financial creditors (“DFCs”) were to receive liquidation value “in the form of proportionate share in the equity of the Expressway SPV and transfer of certain land parcels belonging to the Corporate Debtor.” This payment mechanism was challenged by DFCs who contended that payments to them should be in cash.
 

While the resolution professional and NBCC argued that in absence of express requirement under IBC, obligation can be discharged by delivery of “cash payment, money or other valuable thing,” the Supreme Court interpreted “payment” specifically in the context of rights and entitlements of dissenting financial creditors under IBC both in CIRP and to mean direct payment in cash. In arriving at this interpretation, the Supreme Court reasoned that a person who does not vote in favour of resolution plan, “cannot be forced to yet remain attached to the corporate debtor by way of provisions in the nature of equities or securities.” Hence, the Court was of the view that there should be a complete ‘disembarkment’ of the DFCs from the fate and fortune of the corporate debtor once a resolution plan is approved. To achieve this, “payment” must mean payment in direct cash and not by payment in kind or securities, the Court noted.
 

Accordingly, the Court held that “payment” under Section 30(2) (b) of the IBC could, in this context, refer “only to payment of money and not anything of its equivalent in the nature of barter.” The Court further went on to hold that a resolution plan must provide for either payment of ‘direct money’ or, in case the DFCs are secured creditors then, ‘enforcement of security interest’ to the extent of the value receivable may also be offered instead of direct money payment. Thus, the liquidation value due to the DFCs in terms of Section 53 of the IBC must be paid to them in priority and only in terms of cash or enforcement of security interest.
 

The Court also left it open for DFCs to opt for any other method of discharge of obligation owed to them.
 

Conclusion
 

Payment to DFCs in the manner as prescribed by the Supreme Court strengthens their rights and secure immediate payment to them. However, this right may also have the undesirable effect of incentivising dissent by financial creditors. It may also be a challenge to acquire a corporate debtor as ‘going concern,’ if the enforcement of security interest for payment to DFCs is required over assets that are critical for the continued operations of such corporate debtor. The requirement to bring in upfront cash may be a barrier to entry for interested resolution applicants.

 

Also, as the ‘payment’ required to be made to DFCs can only be known once a resolution plan is voted upon, there is a risk of the entire CIRP process unravelling. The requirement to set aside certain assets for payment to DFCs at this stage may change the fundamentals of the resolution plan.

 

Keeping in mind the foremost objective of the IBC, i.e. timely resolution of a corporate debtor with liquidation as a last resort, certain amendments to the legal framework for the conduct of CIRP may be required to provide the necessary clarifications and mechanism to align the rights of DFCs with the primary objective of the IBC.