Introduction

The case of Facor Alloys Limited and another v. Bhuvan Madan and others presents pivotal issues in the realm of corporate insolvency and the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC). Filed before the National Company Law Appellate Tribunal (NCLAT) on November 25, 2020, the appeals revolve around the approval of a Resolution Plan by the Adjudicating Authority/National Company Law Tribunal (NCLT), Cuttack Bench. The primary contention lies in the inclusion of assets from a third-party subsidiary and the differential treatment accorded to financial creditors based on their voting stance towards the Resolution Plan.

The parties involved include Facor Alloys Limited (FAL) and Vineet Infin Private Limited as Appellants, challenging the Resolution Plan submitted by Sterlite Power Transmission Limited (SPTL) and approved by the NCLT. Central to the dispute is whether the Resolution Plan appropriately maximizes asset value and treats all financial creditors equitably, as mandated by the IBC.

Summary of the Judgment

The NCLAT, after a thorough examination of the arguments presented by both the Appellants and Respondents, upheld the Impugned Order dated January 30, 2020, which approved the Resolution Plan submitted by SPTL. The Tribunal addressed multiple facets of the appeals, including the legitimacy of including assets from the subsidiary Facor Power Limited (FPL) in the Resolution Plan and the permissibility of treating financial creditors differently based on their consent or dissent towards the plan.

The key findings were:

• The inclusion of FPL’s assets in the Resolution Plan was justified as FPL is a subsidiary of the Corporate Debtor, Ferro Alloys Corporation Limited (FACL), and forms part of its assets under Section 18(f)(v) of the IBC.
• The differential treatment of financial creditors, distinguishing between consenting and dissenting creditors, was upheld as it complied with the provisions of Section 30(2) and Regulation 38 of the IBC, ensuring minimum liquidation value and fair treatment.
• The Appellants’ arguments regarding the undervaluation of FPL’s shares and alleged procedural lapses were dismissed due to lack of substantive evidence and merit.
• The Tribunal emphasized that the Resolution Plan was in line with the IBC’s objectives of maximizing asset value and ensuring equitable treatment of all stakeholders.

Analysis

Precedents Cited

The Judgment referenced several key cases to substantiate its reasoning:

• JSW Steel v. Ashok Kumar Gulla, CA (AT) (Insolvency) No. 467 of 2019: Emphasized that shares held by a Corporate Debtor in a subsidiary are part of its assets and can be included in the Resolution Plan.
• ESSAR Steels v. Satish Kumar Gupta, 2019 SCC OnLine SC 1479: Addressed the differentiation between secured and unsecured financial creditors and upheld the principle that similar classes can be treated differently based on their specific classifications.
• Rahul Jain v. Rave Scans Pvt. Ltd., (2019) 10 SCC 548: Discussed the legality of differential treatment under Regulation 38 and the temporal applicability of regulation amendments.
• Tata Steel Ltd. v. Liberty House Group Pvt. Ltd., Dated 4 February 2019: Established that absent creditors cannot influence the voting outcome, reinforcing the validity of the approved Resolution Plan.
• IDBI Bank Ltd. v. Anuj Jain, Order dated 10 June 2019: Reinforced that absent creditors' votes should not influence the Resolution Plan approval.

These precedents collectively reinforced the Tribunal’s stance on the inclusion of subsidiary assets and the permissible differential treatment of creditors within the framework of the IBC.

Legal Reasoning

The Tribunal delved into the statutory provisions of the IBC, particularly focusing on Section 18(f)(v) and Section 30(2), alongside Regulation 38 of the Insolvency Resolution Process regulations. The core legal reasoning encompassed:

• Inclusion of Subsidiary Assets: FPL, being a subsidiary of FACL, had its shares considered as part of FACL's assets. As per Section 18(f)(v), these assets legitimately form part of the Corporate Debtor and can be incorporated into the Resolution Plan.
• Valuation of Shares: The Resolution Professional appointed independent valuers who assessed the fair value of FPL’s shares, ensuring that the asset valuation was transparent and justifiable.
• Differential Treatment of Creditors: The Tribunal acknowledged that the IBC permits differentiated treatment of financial creditors based on their consent or dissent. Regulation 38 allows for minimum liquidation values to be paid to dissenting creditors, thereby upholding the Tribunal’s decision to approve the Resolution Plan despite differential payouts.
• Temporal Applicability of Regulations: The amendment to Regulation 38 came after the approval of the Resolution Plan. Hence, the outdated provisions were applicable, and the Resolution Plan was compliant with the laws as they stood at the time.
• Equitable Treatment: The Tribunal underscored that equitable treatment under the IBC does not necessarily equate to identical treatment. It highlighted that equity involves fairness based on the specific circumstances and classifications of creditors.

Through this reasoning, the Tribunal meticulously validated that the Resolution Plan adhered to the IBC’s objectives, ensuring asset maximization and fair creditor treatment.

Impact

The decision in Facor Alloys Ltd. v. Bhuvan Madan has significant implications for future insolvency proceedings in India:

• Inclusion of Subsidiary Assets: This judgment sets a precedent that subsidiaries’ assets can be legitimately included in Resolution Plans, provided they are part of the Corporate Debtor's asset base.
• Creditor Classification and Treatment: The ruling reinforces the feasibility of differential treatment among financial creditors, affirming that the IBC allows for such distinctions based on consent and the nature of creditors unless it contravenes statutory mandates.
• Valuation Transparency: Emphasizes the necessity for accurate and independent valuations of assets, particularly when subsidiaries are involved, ensuring that all creditors are treated based on fair valuations.
• Regulatory Compliance: Highlights the importance of adhering to the temporal applicability of regulatory changes, ensuring that Resolution Plans comply with the laws as they are at the time of their formulation and approval.
• Judicial Consistency: By aligning with previous judgments, the Tribunal fosters consistency in judicial reasoning, providing a clearer framework for insolvency resolutions.

Overall, the judgment fortifies the IBC’s framework, ensuring that insolvency resolutions are both comprehensive and equitable, thereby boosting confidence among creditors and stakeholders in the insolvency process.

Complex Concepts Simplified

1. Resolution Plan

A Resolution Plan is a comprehensive proposal submitted by one or more potential investors/financial entities to take over the management and ownership of a financially distressed company. The plan outlines how the company will be revived by addressing its debts and operational challenges.

2. Corporate Debtor and Subsidiary

The Corporate Debtor refers to the primary company facing insolvency. A subsidiary is a company controlled by the Corporate Debtor. In this case, Facor Power Limited (FPL) is a subsidiary of Ferro Alloys Corporation Limited (FACL), the Corporate Debtor.

3. Financial Creditors

Financial Creditors are entities or individuals to whom the Corporate Debtor owes money. They can be secured (with collateral) or unsecured. The IBC categorizes creditors to ensure their claims are addressed appropriately during insolvency proceedings.

4. Dissenting vs. Consenting Creditors

Consenting Creditors are those who agree with the terms of the Resolution Plan and support its approval. Dissenting Creditors oppose the plan, either through abstention or outright rejection. The IBC provides mechanisms to protect the interests of dissenting creditors, such as ensuring they receive a minimum liquidation value.

5. Section 30(2) and Regulation 38 of the IBC

Section 30(2) mandates that the Resolution Plan must provide a minimum upfront payment to dissenting financial creditors, ensuring they receive a fair share even if they do not agree with the plan.

Regulation 38 elaborates on the procedural aspects, detailing how dissenting creditors should be treated and protected during the Resolution Process.

6. SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act allows banks and financial institutions to auction residential or commercial properties to recover loans. In this case, REC initiated a SARFAESI notice against FPL.

Conclusion

The NCLAT’s decision in Facor Alloys Limited and another v. Bhuvan Madan and others underscores the robustness of the Insolvency and Bankruptcy Code, 2016 in facilitating fair and effective resolution of insolvency cases. By endorsing the inclusion of subsidiary assets within the Resolution Plan and upholding the differential treatment of financial creditors, the Tribunal reinforced key principles aimed at maximizing asset value and ensuring equitable treatment.

This judgment not only validates the procedural and substantive aspects of the IBC but also provides clarity on managing complex insolvency scenarios involving subsidiaries and varied creditor classes. It sends a clear message that as long as Resolution Plans adhere to statutory mandates and uphold the principles of fairness and asset maximization, they will be upheld by the judiciary.

Stakeholders, including creditors and insolvency professionals, can draw confidence from this decision, knowing that the legal framework accommodates intricate corporate structures and diverse creditor interests, paving the way for more streamlined and just insolvency resolutions in the future.