No Artificial Sub-Classification Among Secured Creditors Under IBC Waterfall Mechanism: NCLT Allahabad

The Allahabad Bench of the National Company Law Tribunal (NCLT) on 11 June held that the waterfall mechanism under the Insolvency and Bankruptcy Code, 2016 does not permit artificial sub-classification among secured creditors while distributing proceeds after approval of a resolution plan.

Judicial Member Praveen Gupta and Technical Member Ashish Verma partly allowed an application filed by IFCI Ltd. in the Corporate Insolvency Resolution Process (CIRP) of Hind Agro Industries Ltd. The Bench observed:

“Section 53 of the Code, which lays down the provisions regarding distribution of value amongst stakeholders, places secured creditors who have relinquished their security interests in the same category. The provision does not create separate tiers amongst secured creditors based upon first charge, second charge or subordinate charge. Likewise, the provisions governing resolution under the Code do not expressly recognise a separate class of first-charge secured financial creditors distinct from second-charge secured financial creditors for the purpose of distribution under a resolution plan. Any such distinction sought to be drawn will therefore, create an artificial classification within the same set of claimants.”

The case arose from the CIRP of Hind Agro Industries Ltd., where IFCI Ltd., an admitted secured financial creditor with a claim of Rs 117.69 crore, challenged the distribution mechanism approved by the Committee of Creditors (CoC) in its 31st meeting.

IFCI held a second pari-passu charge over the corporate debtor's assets, while consortium lenders including Punjab National Bank, Bank of Baroda, Indian Bank, and Central Bank of India held a first charge.

The resolution plan submitted by G.S.W. Enterprises Pvt. Ltd. was approved by the CoC with 87.54% voting share. IFCI abstained from voting, objecting that it was excluded from value realised from charged assets and was allotted only Rs 0.83 crore, representing liquidation value of uncharged land, despite its admitted secured status.

IFCI argued that the CoC had created an arbitrary subclassification within secured creditors by distinguishing between first-charge and second-charge lenders. It further contended that the distribution decision recorded in the minutes of the 31st CoC meeting was taken unilaterally by other lenders without its participation.

The Resolution Professional (RP) submitted that distribution was a commercial decision of the CoC under Section 30(4) of the Code and that he merely facilitated the process. The CoC argued that IFCI had voluntarily abstained from voting despite full participation and could not subsequently challenge the majority decision. It further submitted that IFCI, as a second-charge holder, was not similarly situated to first-charge lenders and could therefore be treated differently.

The Bench noted that while the commercial wisdom of the CoC is ordinarily non-justiciable, it must operate within the statutory framework. It held that secured financial creditors constitute a single class and that the distinction drawn by the CoC was not between secured and unsecured creditors, but among secured creditors themselves. It observed:

“However, differential treatment must be founded upon an intelligible and legally sustainable basis.

The impugned distribution, therefore, appears to proceed on the assumption that the Applicant is not entitled to participate at all in the distribution of value derived from the charged assets, notwithstanding its admitted status as a secured financial creditor.”

Further, it held that the distribution mechanism approved in the 31st CoC meeting was inconsistent with the Code. While the approval of the resolution plan itself remained unaffected, it directed the CoC to reconsider and re-determine distribution among secured creditors in line with Section 53 principles.

Accordingly, the NCLT disposed of the application.