NCLAT Dismisses SRA's Appeal, Says CIRP Surplus Not In Resolution Plan Must Be Distributed Among Creditors

The National Company Law Appellate Tribunal (NCLAT) at Delhi has dismissed an appeal challenging the distribution of surplus generated during the insolvency process, holding that such surplus, if not provided for in the resolution plan, cannot be claimed by the successful resolution applicant and must be distributed under the IBC waterfall.

A Bench of Justice Ashok Bhushan and Technical Member Indevar Pandey emphasised that the nature and timing of the surplus were determinative, observing:

“The crucial factor here is that this surplus was generated during the CIRP period, when the Corporate Debtor was under the control of the Resolution Professional and was being run under the oversight of CoC. The Appellant had no role in generating this surplus, nor had it taken any operational or financial risk during that period. Therefore, such surplus cannot be treated as a benefit arising from the Appellant's efforts or investment.”

The case arose from CIRP proceedings against Deegee Cotsyn Pvt. Ltd., which continued as a going concern under the supervision of the resolution professional and generated surplus cash flows during the process.

A resolution plan submitted by Manjeet Cotton Pvt. Ltd. was approved by the committee of creditors and the adjudicating authority. Thereafter, Phoenix ARC Pvt. Ltd. approached the NCLT seeking distribution of the CIRP-generated surplus, contending that it formed part of the insolvency estate.

The NCLT allowed the application and directed distribution under Section 53 of the Insolvency and Bankruptcy Code, prompting Manjeet Cotton to file the present appeal.

Before the NCLAT, Manjeet Cotton argued that the resolution plan provided for transfer of the corporate debtor as a going concern along with all assets, rights, and accretions and that the surplus constituted an accretion that vested in it. It further contended that once approved under Section 31, the plan was binding and any redistribution would amount to impermissible modification.

Opposing this, Phoenix ARC submitted that the surplus was generated entirely during CIRP under the control of the resolution professional and therefore formed part of the insolvency estate. It argued that Manjeet Cotton had no role in generating the surplus and that allowing it to appropriate such value would result in unjust enrichment, particularly when creditors had taken significant haircuts.

Agreeing with Phoenix ARC, the tribunal held that a resolution plan is a commercial arrangement based on assets and liabilities as known at the time of approval, and observed:

“Only those assets and values which are identified and accounted for in the Plan can be said to vest in the Resolution Applicant. Any value or asset which is not contemplated, quantified, or provided for in the Plan cannot be later claimed by way of implication”

The bench noted that the resolution plan was completely silent on the treatment of surplus generated during CIRP and rejected the resolution applicant's attempt to treat it as an accretion through interpretation.

It also clarified that the only clause referring to surplus merely permitted its utilisation for foreclosure of dues and did not create any proprietary right in its favour.

Holding that the surplus remained part of the insolvency estate, the tribunal ruled that, in the absence of any provision in the resolution plan, the statutory distribution mechanism under Section 53 would apply.

Accordingly, the NCLAT dismissed the appeal and upheld the NCLT's direction to distribute the CIRP-generated surplus under the IBC waterfall.