Abstract
In a recent case between Kalyan Janata Sahakari Bank Ltd. and Cicil Biochem Private Limited, the Mumbai Bench of the National Company Law Tribunal (NCLT) made an important observation. The financial creditors of Cicil Biochem (the company going through insolvency) had filed an application asking for clarity on what happens to the profits made during the Corporate Insolvency Resolution Process (CIRP). CIRP is the period when a struggling company tries to find a way to pay off its debts and get back on its feet.
The NCLT noted that if the request for resolution plans (RFRP) and the resolution plan itself do not specifically address how the profits made during the CIRP period should be handled, those profits can be distributed among the financial creditors. This means that if the plans don’t say anything about it, the profits earned during this time could be shared with the banks or other creditors who are owed money.
This observation is significant because it provides clarity on how profits should be dealt with when a company is in insolvency, helping creditors understand their rights. The article goes on to explain the CIRP process, the relevant laws that guide it, and how the tribunal’s decision fits into existing legal principles. The judgment offers important insights into how the insolvency process can be handled, especially when there are no clear terms in the resolution plan regarding profit allocation.
What is the Corporate Insolvency Resolution Process?
The Corporate Insolvency Resolution Process (CIRP) is a legal process designed for companies facing financial trouble. It involves several steps to help resolve the company’s debts. First, an insolvency professional is appointed to manage the process. This appointment can be made by the court or by agreement between creditors. The insolvency professional then creates a resolution plan to help the company recover or settle its debts, and this plan must be approved by the creditors in a meeting. The stakeholders involved in this process include various types of creditors those owed money by the company. Creditors can be financial, like banks, or operational, like suppliers.
In a significant case Essar Steel Ltd vs Satish Kumar Gupta & Ors 2019, the Supreme Court clarified that only financial creditors are allowed to vote on the committee that oversees the insolvency process called the Committee of Creditors, or COC. Operational creditors, who supply goods or services, are only included in the COC if the company has no financial creditors.
A 2018 amendment to the Insolvency and Bankruptcy Code (IBC) made homebuyers eligible to be considered financial creditors, allowing them to be part of the COC. They can even appoint a representative to participate in the meetings, as confirmed in the case of Pioneer Urban Land & Infra Ltd. 2019. A 2020 change further simplified the process for homebuyers by allowing a group of at least 100 homebuyers, or 10% of the total homebuyers in a project (whichever is smaller), to start the CIRP if they are facing issues with the builder.
Background
The Insolvency Law Committee’s Report of February 20, 2020, raised a key question about who should benefit from the profits made by a company undergoing the Corporate Insolvency Resolution Process (CIRP). There are two main views on this. One view suggests that the creditors should benefit from any profits earned during CIRP. The reasoning behind this is that creditors often don’t receive their interest payments during insolvency, and if the company loses value, the creditors bear the loss by accepting lower repayments.
On the other hand, the second viewpoint argues that the profits made during CIRP should be considered part of the company’s assets and should stay within the company. This means that when a new buyer takes over the company, the profits earned during the process would increase the company’s value and be transferred to the new owner.
After considering both perspectives, the Committee suggested that the law should be flexible, and it should be up to the Resolution Plan to decide how these profits or losses should be handled. This plan must include a specific provision on how the profits or losses during the CIRP are to be managed.
In the Essar case, the Supreme Court ruled that profits made during CIRP should be distributed according to the Resolution Plan approved by the Committee of Creditors (COC). These profits will not directly go toward paying off creditors’ debts. Similarly, in the JSW Steel Ltd. case, the National Company Law Appellate Tribunal (NCLAT) agreed that profits made during the CIRP should be managed according to the Resolution Plan, in line with the Essar case decision.
However, both of these cases did not directly address what should happen if the Resolution Plan or the Request for Resolution Plan (RFRP) doesn’t say anything about how to handle profits made during the CIRP. Interestingly, no case has yet specifically addressed this situation, leaving a gap in the law.
Analysis by the NCLT
In this case, the tribunal had to decide who should get the profits generated during the Corporate Insolvency Resolution Process (CIRP), as the Resolution Plan and the RFRP (Request for Resolution Plan) didn’t clearly address this issue. The tribunal carefully looked at the commercial interests of the parties involved when approving the plan. The Resolution Plan included provisions that dealt with how profits would be distributed. For example, one clause stated that if the unpaid CIRP costs increase beyond a certain limit, the distribution to the stakeholders would be reduced. Another clause defined “Receivables” as any money received after the NCLT approval date.
The tribunal noted that the plan was designed to limit financial outflows and ensure that secured financial creditors receive their share of the benefits within these limits. However, the tribunal emphasized that approving the plan didn’t mean that the creditors’ debts were fully satisfied in a commercial sense. This is clear because claims against guarantors and recoveries from fraudulent transactions were still open. The tribunal also pointed out that voting in favor of the resolution plan was not a free choice for stakeholders, but more like a decision between a resolution or liquidation, with stakeholders having to make significant sacrifices.
Additionally, the tribunal observed that the assets generating income during the CIRP were financed by the Financial Creditors, who didn’t receive any interest or returns during this period. Because of this, the tribunal ruled that any extra profits made during the CIRP should go to the Financial Creditors. This decision was made to ensure fairness, align with the commercial terms in the Resolution Plan, and protect the interests of all parties involved.
Comment on the Judgement
This order highlights the importance of having clear and precise guidelines in resolution plans, especially regarding profit distribution during insolvency proceedings. It emphasizes that the law must be flexible enough to adapt to changing situations and ensure fairness for all parties involved. The tribunal’s decision sets a precedent for future cases, particularly when resolution plans do not specifically address how profits should be shared. It prioritizes the interests of financial creditors by ensuring they receive excess profits, but only after carefully considering the commercial factors and the details of the resolution plan. This approach reflects the tribunal’s commitment to fairness and impartiality.
Additionally, the order stresses the need for resolution plans to be comprehensive and cover all aspects of insolvency proceedings, including profit distribution. In this case, the absence of clear provisions led to confusion, highlighting the need for more detailed documentation in future plans to prevent similar issues. The ruling also reinforces the critical role of the judiciary in interpreting and applying insolvency laws. The tribunal’s responsibility is to carefully evaluate the facts, legal precedents, and commercial considerations to deliver a just and equitable decision, ensuring that insolvency laws are upheld properly.
Conclusion
The order given by the Mumbai Bench of the National Company Law Tribunal (NCLT) in the case between Kalyan Janata Sahakari Bank Ltd. and Cicil Biochem Private Limited highlights the need for clear and specific rules when it comes to how profits are shared during the Corporate Insolvency Resolution Process (CIRP). It shows that laws must be flexible enough to keep up with changing situations, ensuring fairness for everyone involved. The ruling also sets an example for future cases by recognizing the efforts and sacrifices made by financial creditors during the insolvency process. The court emphasized the importance of fairness, ensuring that all parties’ interests are balanced. One key takeaway is that resolution plans, which lay out how the insolvency will be handled, need to clearly explain things like profit distribution to avoid confusion. In this case, the lack of clear details in the resolution plan caused uncertainty. To avoid such issues in the future, the author suggests updating the Insolvency and Bankruptcy Code (IBC) to include more specific guidelines for profit distribution, which would help make future decisions more consistent and fairer.