However, there was no clarity on whether a potential resolution applicant could propose differing methods of treatment for settlement of claims of financial and operational creditors. The only guidance provided was in section 30(2), which inter alia stipulated that a resolution plan must provide for the payment of debts of operational creditors in a manner prescribed by the Insolvency and Bankruptcy Board of India (IBBI), which should not be less than the amount to be paid to operational creditors in the event of a liquidation, in terms of the specified waterfall.

This was supplemented by regulation 38(1)(b) and (c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP regulations) framed under the code, in terms of which a resolution plan was required to provide for a minimum payment of liquidation value to operational creditors, as well as dissenting financial creditors.

The NCLAT, in Central Bank of India v Resolution Professional of The Sirpur Paper Mills Limited, struck down regulation 38(1)(b) and (c) of the CIRP regulations inter alia providing for a minimum payment of liquidation value to the dissenting financial creditors on the grounds that such provision was not in consonance with the code, being discriminatory between the same set of financial creditors.

It was further observed that any resolution plan that provided for payment of liquidation value to the dissenting financial creditors of the corporate debtor on the basis of the CIRP regulations, without any other reason to discriminate between two sets of similarly situated creditors, could not be approved as it was illegal.

The IBBI subsequently amended regulation 38 of the CIRP regulations to simply provide for operational creditors being paid in priority to the financial creditors of a corporate debtor. However, since section 30(2) of the code was not amended, the only effective impact of the amendment of the CIRP regulations by the IBBI was that the requirement of paying dissenting financial creditors a minimum of liquidation value was removed.

All dissenting unsecured financial creditors would now receive similar treatment within the class of unsecured financial creditors. All dissenting secured financial creditors would receive amounts in accordance with the priority of claims lodged with the resolution professional.

The NCLAT, in the hotly contested insolvency case of Binani Cement, taking into consideration its decision in Sirpur Paper as well as the subsequent amendment of the CIRP regulations, held that in view of the primary objectives of the code (i.e., resolution, maximization of value of assets of the corporate debtor and promoting entrepreneurship, availability of credit and balancing the interests of stakeholders), commercial reasons could not be used to differentiate inter se among the same class of financial creditors or operational creditors.

Within the class of operational creditors or financial creditors, they must get similar treatment and there can be no differentiation. The NCLAT reiterated that the code does not permit differential treatment to similarly situated operational creditors, or the same class of financial creditors, on one or the other ground, and observed that if operational creditors are ignored and provided with only liquidation value “on the basis of a misplaced notion and misreading” of section 30(2) of the code, no creditor would supply any goods or services to a corporate debtor.

The NCLAT therefore clearly ruled that discrimination inter se among similarly placed financial creditors or operational creditors is not permissible under the code. For example, a resolution applicant cannot pay “X” to one operational creditor and “2X” to another operational creditor in the same class of operational creditors. The standards to be applied for these tests have not been elaborated upon, but evolving evaluation matrices or criteria will have to be molded accordingly, and this is expected to be judicially developed in the future.

It is interesting to note that an appeal filed against this NCLAT ruling has recently been dismissed by the Supreme Court, and the far-reaching ramifications of this decision on ongoing and future insolvency resolution processes remain to be assessed.

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