NCLAT Rules: Committee of Creditors Cannot Modify Approved Resolution Plans

The National Company Law Appellate Tribunal (NCLAT) has delivered a significant ruling regarding the authority of the Committee of Creditors (CoC) in insolvency proceedings. The tribunal stated that once a resolution plan is approved, the CoC cannot modify the financial distribution framework, particularly concerning dissenting financial creditors. This decision arose from an appeal by Bank of Baroda in the insolvency case of Reliance Communications Infrastructure Ltd (RCIL), emphasizing the limits of commercial wisdom in altering approved plans.

Background of the Case

The case centers on the insolvency resolution of Reliance Communications Infrastructure Ltd (RCIL), where a resolution plan proposed by Reliance Projects & Property Management Services Ltd (RPPMSL), a subsidiary of Jio, was approved on August 5, 2021. The plan received support from 67.97 percent of the CoC by vote share. However, dissenting votes came from lenders such as IDBI Bank and State Bank of India. Following the approval, Bank of Baroda sought to convene a CoC meeting to discuss the reallocation of proceeds under the approved resolution plan, particularly concerning a loan to Reliance Bhutan.

On October 17, 2023, the National Company Law Tribunal (NCLT) directed the resolution professional to hold a CoC meeting to address Bank of Baroda’s request. During the meeting on October 27, 2023, a resolution was passed to reallocate and reassign the Reliance Bhutan loan, achieving a 67.55 percent majority despite objections from IDBI Bank and SBI. This decision prompted IDBI Bank to challenge the CoC’s actions, arguing that they violated the terms of the approved resolution plan.

NCLT’s Ruling on CoC Authority

The NCLT ruled that the CoC could not alter the financial distribution framework once the resolution plan had been approved. It emphasized that the loan to Reliance Bhutan, which was designated for assenting financial creditors, could not be reassigned to dissenting creditors through a subsequent CoC decision. The tribunal underscored that the integrity of the approved resolution plan must be maintained, and any modifications that deviate from the original terms are impermissible.

On December 19, the NCLT reaffirmed its stance by approving the resolution plan as initially proposed by RPPMSL. This ruling was challenged by Bank of Baroda, leading to an appeal before the NCLAT. The NCLT’s decision highlighted the importance of adhering to the approved financial layout, ensuring that dissenting creditors are not unfairly impacted by subsequent CoC decisions.

NCLAT’s Final Decision

In its recent ruling, the NCLAT upheld the NCLT’s position, stating that the CoC’s decision on October 27, 2023, was contrary to the approved resolution plan and could not bind dissenting financial creditors. The appellate tribunal agreed with the NCLT’s assessment that the CoC’s actions were outside the permissible scope of its authority after the resolution plan had been approved.

The NCLAT emphasized that the adjudicating authority had correctly interpreted the relevant clauses of the resolution plan and had not erred in allowing IDBI Bank’s plea. The tribunal dismissed Bank of Baroda’s appeal, reinforcing the principle that once a resolution plan is approved, its financial distribution cannot be altered by the CoC, thereby protecting the rights of dissenting creditors.

Implications of the Ruling

This ruling by the NCLAT sets a crucial precedent in insolvency proceedings, clarifying the limits of the CoC’s authority post-approval of a resolution plan. It underscores the necessity for creditors to adhere to the agreed-upon terms, ensuring that the interests of all parties, particularly dissenting creditors, are safeguarded. The decision also highlights the importance of maintaining the integrity of resolution plans in the insolvency process, which is vital for fostering trust and stability in financial dealings.

As the landscape of insolvency law continues to evolve, this ruling serves as a reminder of the need for clear guidelines and adherence to approved frameworks, ultimately contributing to a more equitable resolution process for all stakeholders involved.

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