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National Company Law Tribunal, Hyderabad (upholding the interests of creditors) permits distribution of surplus funds generated by the corporate debtor during its ongoing corporate insolvency resolution process, to its creditors

On August 5, 2024, the National Company Law Tribunal (“NCLT”), Hyderabad Bench[1] in the corporate insolvency resolution process (“CIRP”) of KSK Mahanadi Power Company Limited (“Corporate Debtor”), has allowed an application filed by the Committee of Creditors (“CoC”) seeking distribution of surplus funds generated by the Corporate Debtor to its creditors, in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016 (“IBC”)[2].

Brief Facts

The CoC of the Corporate Debtor sought for interim distribution of surplus funds amounting to INR 8,821 crore (Indian Rupees eight thousand eight hundred and twenty-one crore) (to the extent that these funds were not required for the smooth functioning of the Corporate Debtor as a going concern), placing reliance on Section 28 of the IBC[3] and a previous order of the National Company Law Appellate Tribunal (“NCLAT”) in the IL&FS case[4], wherein NCLAT had directed the interim distribution of funds amounting to INR 16,361 crore[5] on a pro rata basis, subject to board approval.

Notable Findings

NCLT, while allowing the CoC’s application has, inter alia, noted that:

1. the CIRP of the Corporate Debtor had extended for a period of nearly 5 (five) years, consequently the moratorium under Section 14 of IBC had also continued for an extended period;
2. for the entire period of the prolonged CIRP, the Corporate Debtor was functioning as a going concern, generating revenue in excess of what was required for its day-to-day functioning;
3. retaining surplus funds in the Corporate Debtor’s bank accounts would be in contradiction with IBC’s primary objective of promoting credit availability and balancing stakeholder interest;
4. the interim distribution of surplus funds, in terms of Section 53 of IBC, will enable productive utilization of surplus funds, which are otherwise laying idle;
5. such distribution is contemplated in the Request for Resolution Plan (“RFRP”) and therefore would not come in the way of resolution plans of prospective resolution applicants (“PRAs”); and
6. resolution plans submitted by the PRAs, in compliance with the RFRP will account for cash balances accumulated in the Corporate Debtor’s accounts. If these accumulated balances are not distributed in the interim, they would nonetheless be distributed under any resolution plan submitted.

Conclusion

Insolvency jurisprudence in India does not explicitly provide for interim distribution of surplus funds of a corporate debtor during the pendency of CIRP. NCLT’s judgement serves as a step forward in upholding creditors’ interests. Necessary reliefs for creditors, especially in cases where the CIRP has been prolonged, will consequently increase credit supply in the economy, promoting growth and furthering the objectives of IBC.

This Prism has been prepared by:

Abhishek Munot Partner

Tushar Nagar Principal Associate

Purvi Shrivastava Associate

For more details, please contact [email protected]

[1] In the matter of M/s. KSK Mahanadi Power Company Limited; Power Finance Corporation Limited, on behalf of the committee of creditors, vs. Mr. Sumit Binani, Resolution Professional. IA No.1365 of 2024 in CP (IB) No.492/07/HDB/2019

[2] Section 53 of IBC –  Distribution of Assets which, inter alia, provides for mechanism for distribution of proceeds from the sale of liquidation assets in order of priority specified in Section 53 (1) (a) – (h)

[3] Section 28 of IBC –  Approval of Committee of Creditors for certain actions outlined in Section 28 (1) (a) – (m)

[4] Order dated May 31, 2022, in Union of India v Infrastructure Leasing and Financial Services Ltd. & Ors. (I.A. No. 586 of 2022 in Company Appeal (AT) No. 346 of 2018.

[5] Refer Para 19 of Order dated May 31, 2022 [Interim Distribution – INR 11,296 crore (Indian Rupees eleven thousand two hundred and ninety-six crore) in cash and INR 5,065 crore (Indian Rupees five thousand and sixty-five crore) of InvIT Units]