Case Update: Bank of Baroda. vs. MBL Infrastructure

Decided on 18 January 2022| Supreme Court of India

In Bank of Baroda & Anr. v. MBL Infrastructures Ltd. & Ors., the Supreme Court (“Court”) interpreted Section 29A of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Court clarified whether a guarantor whose guarantee is invoked by a creditor is ineligible to submit a resolution plan under Section 29A(h) of IBC. It also considered whether the words ‘such creditors’ in Section 29A(h) meant all creditors or only one creditor who had initiated the insolvency proceedings. The Court ruled that the phrase ‘such creditor’ in Section 29(A)(h) must be construed to mean similarly situated creditors once the insolvency application is accepted by the adjudicating authority.

Facts

In this case, Mr. Anjanee Kumar Lakhotiya (“Lakhotiya”) founded MBL Infrastructures Limited (“MBL”) in the early 1990s. MBL secured loans/credit facilities from a consortium of banks. Thereafter, MBL failed to repay the loan, and some of the banks in the consortium were obliged to rely on personal guarantees provided by Mr Lakhotiya in exchange for credit facilities obtained by MBL. Then, RBL Bank filed an application with the Kolkata Bench of NCLT under Section 7 of the IBC to initiate the Corporate Insolvency Resolution Process (“CIRP”) against MBL and the same was admitted.

Subsequently, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 was notified and Section 29A was added to the IBC. The Committee of Creditors (“CoC”) met to discuss the implications of the modification regarding Mr Lakhotiya’s ability to submit a resolution plan. Mr Lakhotiya’s resolution plan was authorised by the NCLT and a directive was also issued that the settlement plan would take effect immediately. The same was challenged before NCLAT, and the NCLAT upheld the NCLT’s decision and refused to intercede. The said order was assailed before the Court.

Judgment

The Court interpreted Section 29A of IBC on the basis that the object behind section 29A was to balance the interest of committee of creditors and the corporate debtor while preventing unwanted elements from advancing their own personal interests. It is also designed to keep out the categories of persons who may not lend confidence to the resolution process by virtue of their disqualification. The Court analysed the scope of section 29A(h) and stated that after a person issued a guarantee in favour of a creditor for credit facilities obtained by the corporate debtor and in the event that the application for bankruptcy was allowed and the guarantee was invoked, the bar on ineligibility would undoubtedly apply. The Court noted that requirement of the section is that a guarantee in favour of a ‘creditor’ must be executed and once an application for insolvency is accepted by a ‘creditor’ the proceedings would be in rem and creditors of the same class would have equal rights. Therefore, the disqualification under section 29A(h) would apply on invocation of personal guarantee by creditor, even when the application for insolvency resolution process is filed by another creditor. The ineligibility of persons is with respect to the participation of an applicant in resolution process and not ineligibility with respect to one creditor against the other. The Court considered that the subsequent amendment in law would make the resolution application ineligible even though at the time of filing of application for insolvency, the said resolution applicant was eligible.

However, since the Resolution Plan was already accepted by more than the required voting percentage by the CoC and much development has been made, the Court observed that the IBC’s ultimate goal was getting a corporate debtor back on its feet. It was also said that the dissenting creditors would not suffer any harm since their interests would be protected by the resolution plan, which allows them to recover the liquidation value of their respective credit limits. As a result, based on the unique facts of the case, the Court did not interfere with the guarantor’s resolution plan.

Comment

The Court reiterated that the object of the IBC was to bring the debtor back to business and not get hauled into insolvency. The Court’s stance in not disallowing the resolution plan and on the matter of who may be ineligible according to section 29A(h) was in upholding the aim and object of the Code and not to hinder the resolution process.

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