Validity of NIL Payment Clause to Operational Creditors Under a Resolution Plan – Ayush Raj

Validity of NIL Payment Clause to Operational Creditors Under a Resolution Plan

Authored by: Ayush Raj
5th year B.B.A. LL. B (Hons.), Chanakya National Law University, Patna

The Operational Creditors as per Section 5(21) are those creditors against whom some operational debt is owned by the corporate debtor. The Operational debt defined under Section 5(20) can primarily be classified into three categories, payments with respect to the supply of goods and services, those regarding the payment to be made to the employees in return to the services rendered and the statutory dues payable to the local authorities. The operational creditors despite being vested with the power to move an application before the Adjudicating authority are not a part of the Committee of Creditors of the corporate debtor. However, they might form a part of the Committee of Creditors in the absence of any financial creditors of the corporate debtor.       

The Insolvency and Bankruptcy code 2016 under Section 30(2)(b) of the IBC mandated that a resolution plan “provides for the payment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53.

The Operational creditors though have not been put on equal footing with the financial creditors to the extent that the Hon’ble apex court Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and others [2019] ibclaw.in 07 SC (hereinafter “Essar Steel“) has held that equal treatment need not be meted out to the operational creditors and financial creditors under a resolution plan. It would be correct to state that the resolution plans might also prove to be inequitable as far as the discharge of liabilities pertaining to the operational creditors is concerned.

The NCLAT in its recent judgement has moved a step further as far as the liabilities of corporate debtor towards its operational creditors are concerned. The NCLAT’s judgment in the case of M/s. Genius Security and Allied Services vs. Mr. Shivadutt Bannanje, (2022) ibclaw.in 279 NCLAT passed by the Chennai Bench observed that a corporate debtor may be absolved from its liabilities towards the operational creditor if the liquidation value is not sufficient enough to make payment to the financial creditors.    

Facts of the case

Genius Security and Allied Services (hereinafter reffered to as the Appellant) provided security and housekeeping services to the projects of the corporate debtor. They submitted their claim of Rs. 8,77,317/- after the initiation of CIRP which was approved by the Resolution Professional after making certain deductions at Rs. 8,47,147/-.  The appellant again submitted the revised proof of claims amounting to Rs. 1,08,55,500/-  which was further approved by the Resolution Professional (Respondent No.1). The Resolution Applicant, however, preffered to exclude the claim out of the resolution plan claiming it to be ineligible.

The Respondents Mr. Shivadutt Bannanje, (Resolution Professional) and M/s. Koncept Shelters (Resolution Applicant) argued that not every claim raised against the corporate debtor is required to be paid. The Respondents further argued that the manner of payment enshrined under Section 30 is inapplicable in the present case, because there is no sum which is payable to the operational creditors. Their further contention on the ground of the liquidation value, which amounted to Rs. 18,06,64,274/- was inadequate, when compared with the claims of approximately Rs. 138 crore. Their whole argument surmounted on insufficient liquidation value in comparison to the admitted claims and primacy of financial creditors over the operational creditors. Further, M/s. Koncept Shelters Resolution Applicant (Respondent No. 2) further stated that vide revised Resolution Plan dated 03.08.2020 the value which they agreed upon to invest amounted to Rs. 8,80,000/- inclusive of CIRP cost. Therefore, following the mechanism set in under Section 53 no payments could be made to the operational creditors.

Analysis and observation by the NCLAT

The Hon’ble NCLAT’s observation was squarely based on the procedure laid down under Section 30 (4) and Section 31 of the IBC clubbed with the commercial wisdom of the CoC. The Hon’ble Appellate Tribunal in its concluding remarks observed that the CoC under Section 30(4) has been vested with the power to decide on the feasibility and other issues concerning the proposed resolution plan with not less than 66% votes and once a plan is approved under Section 31 the same shall be binding on all the corporate debtor, creditors, members, guarantors and other stakeholders as per SBI vs. V Ramakrishna [2018] ibclaw.in 29 SC, it is quite apparent that this shall apply on the appellant M/s Genius Security and Allied Services (i.e., operational creditors) as well.  

The NCLAT’s observation on the issue of discrimination is interesting in as much as it is based on the fact that NIL payment has been approved by the CoC towards the operational creditors as a class and not to some specific operational creditor.  The Tribunal thus refused to interfere with the approved resolution plan, which was passed with 95% vote and the appeal was thus rejected.  

Conclusion

The judgment in the case of Genius Security has shown that even though Section 30(2)(b) provides for a separate treatment to the operational creditors, such classification is not absolute. It would be relevant to recall the observation of the Hon’ble NCLAT in the Binani Industries vs. Bank of Baroda & Anr. [2018] ibclaw.in 06 NCLAT  and consider it as obsolete wherein the Hon’ble Tribunal observed that

If the ‘Operational Creditors’ are ignored and provided with ‘liquidation value’ on the basis of misplaced notion and misreading of Section 30(2)(b) of the ‘I&B Code’, then in such case no creditor will supply the goods or render services on credit to any ‘Corporate Debtor’. All those who will supply goods and provide services, will ask for advance payment for such supply of goods or to render services which will be against the basic principle of the ‘I&B Code’ and will also affect the Indian economy. Therefore, it is necessary to balance the ‘Financial Creditors’ and the ‘Operational Creditors’ while emphasizing on maximization of the assets of the ‘Corporate Debtor’. Any ‘Resolution Plan’ if shown to be discriminatory against one or other ‘Financial Creditor’ or the ‘Operational Creditor’, such plan can be held to be against the provisions of the ‘I&B Code’

The Essar Steel’s judgement though has made a paradigm shift from the observation made in the Binani industry case by observing that the financial creditors and operational creditors may not be treated on the equal footing. However, even the Essar steel reasoned its order on the ground that the equality should persist among the equals, made an observation that NIL payment to operational creditor cannot be said to be in consonance with the interests of the stakeholders of the corporate debtor. Further, the NCLAT in the case of Hammond Power Solutions Pvt. Ltd vs. Sanjit Kumar and ors. [2020] ibclaw.in 207 NCLAT held that that there is necessity to maximize the value of the assets and that the interest of all stakeholders including Operational Creditors has been taken care of.     

The observation there as well rests upon the commercial wisdom of the CoC and the mechanism vested in the code and regulations made thereunder. The apex court stressed on the contention that financial and operational creditors cannot be treated on an equal footing owing to the fact that both represent different classes of creditors. The apex court in Essar Steel’s judgment has devised a point of difference between the financial creditors and operational creditors by stating that “financial creditors” are in the business of lending and it is by way of the interest that they make money. Further, they finance the capital requirements of businesses to enable them to set up and sustain their establishments. The Operational creditors on the other hand are beneficiaries of such lending inasmuch as they receive payments for providing the services to the corporate debtor which forms the working capital of the latter. Therefore, upon drawing such reasoning in cases of conflict, the payment to lenders would always be prioritized.

 

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