Only creditors distribute assets discovered after CIRP

In Allahabad Bank v SPS Steels Rolling Mills Limited, the National Company Law Tribunal (NCLT) considered how the assets of a corporate debtor discovered after the approval of a resolution plan should be distributed.

SPS, the corporate debtor, had certain fixed deposit receipts (FDR) with the Indian Overseas Bank as a margin against bank guarantees issued in favour of statutory authorities. Although the FDRs were deposited before the corporate insolvency resolution process (CIRP) started, they were not disclosed in the information memorandum issued by the resolution professional (RP) and were thus not part of the approved resolution plan. Following the approval of the resolution plan, the successful resolution applicant (SRA) discovered the FDRs. As the bank guarantees had expired, SPS, now owned by the SRA applied to the NCLT for the release of the FDRs to it. SPS similarly applied in respect of another set of FDRs held by the Central Bank of India, which had been unilaterally adjusted after the approval of the resolution plan.

The NCLT held that neither the SRA nor the corporate debtor were entitled to the FDRs since they had not been factored into the resolution plan. Had the FDRs been dealt with in the resolution plan, the creditors of the corporate debtor would likely have received larger distributions. In addition, the resolution plan did not entitle the SRA to realise any extra amounts or assets discovered after the completion of the CIRP. As to the unilateral adjustment of the FDRs by the Central Bank of India, the NCLT held that the bank was not entitled to the FDRs since it had filed its original claim with the RP without adjusting the FDRs. The NCLT directed that the former members of the committee of creditors (CoC) should determine how the amounts from the FDRs should be distributed.

Under the Insolvency and Bankruptcy Code, 2016 (IBC), resolution plans are submitted after the issue of, and are based on an information memorandum setting out, among other matters, the assets and liabilities of the corporate debtor. It would be inconsistent with the purpose of the IBC to hold that an asset discovered after the completion of the CIRP should be handed over to an SRA, leading to their unjust enrichment. Giving the benefit of such assets to the creditors is consonant with the scheme of the IBC since resolution plans usually require the creditors to take substantial haircuts. That said, the identity of which body should determine the manner of distribution of assets discovered after the approval of the resolution plan is problematic.

The NCLT’s decision is the first of its kind. It raises the question of whether the CoC, which becomes functus officio or without authority after the resolution plan is approved, can function and take decisions after the approval of the resolution plan. The IBC, which is supposedly a self-contained mechanism does not expressly permit this.

While the IBC recognises, and the courts have repeatedly upheld the supremacy of the commercial wisdom of the CoC to determine the viability of a resolution plan, the defunct CoC should not be free to determine how assets recovered following the approval of a resolution plan should be distributed. With no guidelines in place, the CoC, consisting mainly of financial creditors will likely apply the same principles applying to recovery from avoidance applications, which were not factored into the resolution plan and prioritise financial creditors over other creditors. Experience shows that a CoC often approves resolution plans where contingent recoveries from avoidance applications pending in courts, are made available only to the financial creditors on the CoC, while excluding all other categories of creditors.

The NCLT’s decision has not been tested before the courts. A better view, given that the CoC becomes functus officio after the resolution plan is approved, is that decisions regarding the distribution of assets recovered after the approval of the resolution plan should be taken by the NCLT. The tribunal is the adjudicating authority under the IBC unless the approved resolution plan expressly provides for the distribution of such assets. It is incumbent on the government to frame guidelines addressing the distribution of assets discovered after the completion of the CIRP if such distribution is not dealt with in the resolution plan.

Sonam Gupta is a counsel and Divyam Sharma is an associate at Bharucha & Partners.