Supreme Court Holds Secured Creditors Entitled to Rights and Protections in Insolvency Resolution Plans
In a recent judgment, the Supreme Court of India has provided a solution to a tricky legal issue related to the rights of secured creditors in the Corporate Insolvency Resolution Process (CIRP). The case pertains to the resolution plan approved by the Committee of Creditors (CoC) for the insolvent Corporate Debtor, Amtek Auto Ltd., which led to the dilution of the pledge agreement between the corporate debtor and one of its secured creditors, Vistra ITCL (India) Ltd. The Supreme Court held that Vistra ITCL (India) Ltd. should be treated as a secured creditor and be entitled to all the rights and obligations applicable to a secured creditor under Sections 52 and 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).
The Court examined the amended Section 30(2) of the IBC, which requires the resolution plan to protect the interests of operational creditors and financial creditors who have not voted in favour of the plan. It also noted that the existing precedents did not provide a clear solution to the issue of a secured creditor who is not a financial creditor or operational creditor.
The Court provided two options to address the issue. The first was to treat the secured creditor as a financial creditor to the extent of the estimated value of the pledged share on the date of commencement of the CIRP, and give it voting rights. However, this would require a reconsideration of the existing precedents. The second option was to treat the secured creditor as a secured creditor in terms of Section 52 read with Section 53 of the IBC, and give it the option to retain the security interest in the pledged shares and receive the sale proceeds in accordance with Rule 21-A of the Liquidation Process Regulations.
The Court clarified that the resolution plan approved by the National Company Law Appellate Tribunal (NCLAT) would not be affected by its decision. It also rejected the argument of the respondents that the appellant had not objected to the earlier resolution plan and had acquiesced to its non-classification as a financial creditor in the CoC.
Date of Decision: May 4, 2023
M/S VISTRA ITCL (INDIA) LTD & ORS. vs DINKAR VENKATASUBRAMANIAN
