Profits during CIRP can be allocated to Financial Creditors when RFRP and Resolution Plan are Silent: NCLT [Read Order]

The Mumbai Bench of the National Company Law Tribunal ( NCLT ) observed that the profits during corporate insolvency resolution process ( CIRP ) can be allocated to financial creditors when request for resolution plans ( RFRP ) and resolution plan are silent.

The instant Application has been filed by the Financial Creditors of Cicil Biochem Private Limited ( 'the Corporate Debtor’ ) seeking a direction with respect to the profits accrued during Corporate Insolvency Resolution Process period and a direction to withdraw the letter dated 01.02.2023 issued by the Respondent regarding utilization/distribution of the profit accrued during the CIRP period.

The resolution process culminated in passing of a Resolution Plan in the 9 th CoC meeting held on 06.3.2021 with 98.34% voting. In the 11th CoC meeting held on 24.05.2022 ie, much after approval of Resolution Plan, it came be noted that the compensation for job work paid by M/s. Shri Ganesh Enterprises significantly exceeded the total CIRP Costs and thus the question arose with regard to the utilization of this money once the Resolution Plan is approved.

Since the Resolution Plan as well as the request for Resolution Plan is completely silent on this aspect, the Respondent, on the basis of a legal opinion, advised the Applicants vide a letter dated 19.01.2023 that the said amount would go to the Resolution Applicant.

The respondent submitted that the RP of the Corporate Debtor, the Respondent filed his reply and submitted that the letter dated 01.02.2023 was issued as per the legal advice as it is not within the power of the RP of the Corporate Debtor to decide on whom to distribute the surplus amount in the account of the Corporate Debtor. The Applicants have wrongly interpreted the contents of the said letter dated 01.02.2023 to mean that the surplus amounts would go to the Respondent.

A Two-Member Bench comprising Anil Raj Chellan, Technical Member and Kuldip Kumar Kareer, Judicial Member observed that “In our considered view, under the peculiar facts and circumstances of this case, it would be just, fair and equitable if the surplus profits earned during the CIRP period are ordered to be ensured to the Financial Creditors of the Corporate Debtor which appears to be more in sync with the stipulation in the Resolution Plan which provides that all receivable shall go to the Resolution Applicant after the plan approval date and not prior to that.”

“While the commercial considerations of the Applicant are reflected in the Resolution Plan as stated above, the approval of the Resolution Plan by the CoC, cannot be treated as a commercial satisfaction of the debts by stakeholders which is evident from keeping open the remedies against the guarantors and other recoveries from avoidable transactions. Furthermore, voting in favour of a resolution plan or acceptance of a resolution plan is more like an exercise of compulsory choice between resolution or liquidation of the Corporate Debtor and the haircut/sacrifice undertaken by the stakeholders is substantial” the Bench noted.

To Read the full text of the Order CLICK HERE

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