Introduction
The NCLAT’s judgment dated 01.04.2024 in the case of *Gupta Textiles Vs. Darshan Patel and Ors.* presents a pivotal moment in the interpretation of the Insolvency and Bankruptcy Code (IBC), specifically concerning the treatment of operational creditors under Section 30(2)(b) of the IBC. This judgment underscores the necessity of cash payments to operational creditors in a resolution plan, marking a significant stance on ensuring fairness and equity in the resolution process.
The Judgment at a Glance
The case revolves around the approval of a resolution plan by the NCLT Mumbai Bench, which was subsequently challenged by Gupta Textiles, an operational creditor, before the NCLAT. The heart of the contention lay in the method of payment proposed to operational creditors, contrasting cash payments with the issuance of partly paid redeemable preference shares.
Contextualizing the Dispute
Gupta Textiles, representing operational creditors, contested the NCLT’s approval of a resolution plan that inadequately compensated operational creditors through non-cash means, contrary to the mandates of Section 30(2)(b) of the IBC. The resolution plan in question proposed a meager cash payment of 2.16% to operational creditors, with the remainder being compensated via redeemable preference shares.
NCLAT’s Interpretation and Directive on Cash Payments to Operational Creditors
The NCLAT scrutinized the resolution plan’s adherence to the IBC, particularly Section 30(2)(b) which outlines the payment to operational creditors. The tribunal highlighted:
“The Hon’ble Supreme Court in Jaypee Kensington Boulevard Apartments Welfare Association & Ors. v NBCC & Ors. laid down that Operational Creditors are to be paid in priority over the Financial Creditors only by way of cash payment and not by way of issuing equity.”
This reference underscores the principle that operational creditors, pivotal to the corporate debtor’s business operations, should receive their dues in cash to ensure immediate liquidity and financial stability.
Analysis of Section 30(2)(b) of the IBC
To understand the NCLAT’s judgment, a closer examination of Section 30(2)(b) of the IBC is essential. This section mandates the resolution plan to ensure that the operational creditors receive an amount not less than:
- The liquidation value due to them.
- The amount that would have been paid to them, had the distribution been made according to Section 53(1) priorities, whichever is higher.
This legislative intent is to safeguard the interests of operational creditors, ensuring they are not sidelined in the resolution process.
The Importance of Cash Payments to Operational Creditors
The judgment emphasizes the significance of cash payments to operational creditors, aligning with the broader objective of the IBC to balance stakeholders’ interests and maintain business continuity. Cash payments ensure that operational creditors, often smaller businesses or suppliers, receive immediate relief, thus enabling them to sustain their operations and contribute to the economy’s overall health.
Implications of Cash Payments to Operational Creditors and Conclusion
The NCLAT’s decision in *Gupta Textiles Vs. Darshan Patel and Ors.* is a landmark ruling that reinforces the statutory mandate for equitable treatment of operational creditors. By insisting on cash payments, the judgment ensures that the resolution process under the IBC remains fair, transparent, and conducive to achieving the Code’s objectives of insolvency resolution, maximization of value, and promotion of entrepreneurship.
This judgment sets a precedent for future resolution plans, mandating that they adhere strictly to the provisions of the IBC, particularly in ensuring that operational creditors are paid their dues in cash. It is a step forward in strengthening the insolvency resolution framework in India, ensuring that all stakeholders, especially operational creditors, are treated equitably in the corporate insolvency resolution process.
