The National Company Law Appellate Tribunal (NCLAT) has issued a pivotal ruling on the authority of the Committee of Creditors (CoC) in insolvency proceedings. The tribunal clarified that once a resolution plan is approved, the CoC is prohibited from modifying the financial distribution framework, especially in relation to dissenting financial creditors. This decision stemmed from an appeal by Bank of Baroda in the insolvency case of Reliance Communications Infrastructure Ltd (RCIL), underscoring the limitations of commercial wisdom in modifying approved plans.
Background of the Case
The insolvency resolution of Reliance Communications Infrastructure Ltd (RCIL) involves a resolution plan proposed by Reliance Projects & Property Management Services Ltd (RPPMSL), a Jio subsidiary, which was sanctioned on August 5, 2021. The plan garnered support from 67.97 percent of the CoC by vote share, although dissenting votes came from lenders including IDBI Bank and State Bank of India. Following this approval, Bank of Baroda sought to reconvene a CoC meeting to discuss reallocating proceeds under the approved resolution plan, particularly concerning a loan to Reliance Bhutan.
On October 17, 2023, the National Company Law Tribunal (NCLT) instructed the resolution professional to conduct a CoC meeting to consider Bank of Baroda’s request. During the meeting on October 27, 2023, a resolution was passed to reallocate and reassign the Reliance Bhutan loan, achieving a 67.55 percent majority despite objections from IDBI Bank and SBI. This prompted IDBI Bank to contest the CoC’s actions, asserting that they violated the terms of the approved resolution plan.
NCLT’s Ruling on CoC Authority
The NCLT ruled that the CoC could not modify the financial distribution framework after the resolution plan had been sanctioned. It stressed that the loan to Reliance Bhutan, which was earmarked for consenting financial creditors, could not be reassigned to dissenting creditors via a subsequent CoC decision. The tribunal highlighted the necessity of maintaining the integrity of the approved resolution plan, stating that any deviation from the original terms is impermissible.
On December 19, the NCLT reaffirmed its position by approving the resolution plan as initially proposed by RPPMSL. This ruling was subsequently challenged by Bank of Baroda, leading to an appeal before the NCLAT. The NCLT’s decision underscored the importance of adhering to the approved financial structure, ensuring that dissenting creditors are not adversely affected by later CoC actions.
NCLAT’s Final Decision
In its recent ruling, the NCLAT upheld the stance of the NCLT, stating that the CoC’s decision on October 27, 2023, contradicted the approved resolution plan and could not obligate dissenting financial creditors. The appellate tribunal agreed with the NCLT’s assessment that the CoC’s actions exceeded the permissible scope of its authority following the approval of the resolution plan.
The NCLAT emphasized that the adjudicating authority rightly interpreted the relevant clauses of the resolution plan and did not err in allowing IDBI Bank’s plea. The tribunal dismissed Bank of Baroda’s appeal, reinforcing the principle that once a resolution plan is ratified, its financial distribution must remain unchanged by the CoC, thereby protecting the rights of dissenting creditors.
Implications of the Ruling
This ruling by the NCLAT establishes a critical precedent in insolvency proceedings, clarifying the boundaries of the CoC’s authority after the approval of a resolution plan. It highlights the necessity for creditors to abide by agreed terms, ensuring that the interests of all parties, particularly dissenting creditors, are protected. The decision further underscores the importance of preserving the integrity of resolution plans in the insolvency process, which is essential for building trust and stability in financial transactions.
As insolvency law continues to evolve, this ruling serves as a reminder of the need for clear guidelines and adherence to approved frameworks, ultimately fostering a more equitable resolution process for all stakeholders involved.
Digihunt is not a financial advisor and this is not investment advice.