The Resolution Plan That Paid the Dissenter Less
Prakash Ispat Ltd (PIL) was admitted to CIRP on 12 February 2024 on a section 7 application by Union Bank of India, whose admitted claim of Rs 312 crore forms part of total financial debt of Rs 840 crore. The CoC has seven financial creditors: Union Bank 38.2%, State Bank 22.4%, three other banks 27.6%, an NBFC 7.4% and an unsecured financial creditor 4.4%. Operational claims are Rs 210 crore, including workmen's wages of Rs 18 crore for the preceding 24 months and statutory dues of Rs 46 crore. The registered valuer reports a liquidation value of Rs 268 crore. A consortium's plan offers Rs 355 crore upfront: Rs 300 crore to secured financial creditors, Rs 12 crore to workmen, Rs 8 crore to operational creditors and Rs 35 crore for CIRP costs. State Bank, which would recover 11% of its claim against 15% in a liquidation, dissents. The plan is approved with 77.6% of votes on day 361 and filed before the NCLT on day 375. The resolution professional argues that the CoC's commercial wisdom is beyond review and the 330-day period is only directory.
1. Can the NCLT approve the plan over State Bank's dissent? Analyse section 30(2)(b) and the true scope of the commercial wisdom doctrine.
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Section 30(2)(b) is a condition precedent, not a guideline: the plan must provide for payment of the debts of dissenting financial creditors not less than the amount they would receive under section 53(1) in a liquidation. The NCLT's satisfaction under section 31(1) is expressly tied to compliance with section 30(2).
State Bank's liquidation entitlement must therefore be computed, not asserted. Take the liquidation value of Rs 268 crore, deduct CIRP and liquidation costs, apply the section 53(1)(b) priority for 24-month workmen's dues, and then apply the secured creditors' security interest under section 52. If the resulting figure for State Bank is 15% of its claim and the plan pays 11%, the plan fails section 30(2)(b) as filed and cannot be approved.
The RP's reliance on commercial wisdom is misplaced. Essar Steel held that the CoC's decision is non-justiciable on questions of feasibility, distribution among assenting creditors and the haircut they accept, but the adjudicating authority must still check the statutory parameters in section 30(2). K. Sashidhar protects the CoC's business judgment; it does not license a breach of the liquidation-value floor. The NCLT cannot rewrite the plan to raise State Bank's recovery - its power is to approve or reject, and it may send the plan back for a fresh CoC vote. The cure is a revised plan meeting the floor, or an affidavit from the valuer reconciling 11% and 15%.
2. Does the delay beyond 330 days bar approval of the plan? What must the RP place before the Tribunal?
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Section 12(3), with its proviso, requires completion of CIRP within 330 days including extensions and time spent in legal proceedings. In Essar Steel the Supreme Court held that the period is directory, not mandatory: it was introduced to curb delay, and expiry does not automatically invalidate a plan lawfully approved by the CoC. The correct position is that the delay must be explained and justified on the record.
Here the overrun is 31 days to CoC approval and 45 days to filing, not a drift of years, and there is no suggestion of mala fides. That is likely to be condoned. But the RP must place before the NCLT:
- a chronological affidavit of the CIRP, with the CoC minutes, the valuation dates and the reasons for each extension;
- the explanation for the gap between CoC approval and filing;
- confirmation that the CD's value has not eroded in the interval and that the plan's consideration is still adequate;
- the CoC's resolution extending the period under section 12(3).
What the RP cannot do is treat the timeline as irrelevant. A pattern of unexplained delay, or delay coupled with value erosion or an unapproved plan, has led benches to order liquidation under section 33. The RP should also anticipate an application by a dissenting creditor seeking liquidation on the ground that the process has lost its purpose.
3. If the plan is rejected and PIL goes into liquidation, set out the section 53 waterfall and explain what the workmen, secured creditors and statutory dues are likely to recover.
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Section 53(1) order of priority: (a) CIRP costs and liquidation costs, including the liquidator's remuneration and the fees of the professionals; (b) workmen's dues for the 24 months preceding the liquidation commencement date, and debts of secured creditors that have relinquished security, ranking pari passu; (c) wages and unpaid dues of employees other than workmen for 12 months; (d) financial debts owed to unsecured creditors; (e) statutory dues to Central and State Governments (excluding fines) and the shortfall of secured creditors who enforced their security under section 52; (f) remaining debts and dues; (g) preference shareholders; (h) equity shareholders.
On the facts. From Rs 268 crore, subtract CIRP and liquidation costs first. The workmen's Rs 18 crore for 24 months falls in (b) and is effectively protected. Secured creditors may either realise their security under section 52 and prove the shortfall in (e), or relinquish and rank in (b); the choice is theirs and it changes everyone else's recovery. Unsecured financial creditors and operational creditors share the residue in (d) and (e), which on these numbers will be small. Statutory dues of Rs 46 crore rank below unsecured financial debt, so recovery is likely to be minimal.
One caveat: if a State statute creates a first charge on the company's property, State Tax Officer v Rainbow Papers (2022) may treat the department as a secured creditor, which cuts across the section 53 order. Later benches have doubted that reasoning and the point is unsettled; the liquidator should obtain specific advice before distributing.