Operational Creditor Cannot Vote on Its Own Resolution Plan; Such Approval A “Material Irregularity” Under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that a resolution applicant who is not a financial creditor cannot vote on and approve its own resolution plan, declaring such approval void ab initio as it violates Section 30(5) of the Insolvency and Bankruptcy Code, 2016.

The ruling was delivered by a bench comprising Judicial Member Justice N. Seshasayee and Technical Members Arun Baroka and Indevar Pandey.

The tribunal observed, “In the present case the Resolution Applicant is an Operational Creditor and not a Financial Creditor. In such a situation it is clearly barred, from voting on its own Resolution Plan, submitted for resolution of Corporate Debtor. Such voting and approval of its own Resolution Plan by the Operational Creditor is in the face of express bar provided in Section 30 (5) of the Code.”

It further held, “Permitting a Resolution Applicant, who is not a Financial Creditor, to effectively vote on and approve its own Resolution Plan amounts to a material irregularity in the decision-making process.” The bench added that in such a situation, “the question of commercial wisdom of Committee of Creditors is meaningless.”

The case arose from the insolvency of Rancom Healthcare Pvt. Ltd. The corporate insolvency resolution process was initiated on an application filed under Section 9 of the Code by Mahavir Medicare as an operational creditor. No other creditor filed any claim. As a result, Mahavir Medicare became the sole claimant and the only member of the Committee of Creditors, holding 100 percent voting rights.

It also submitted its own resolution plan. By orders dated November 12, 2024, the National Company Law Tribunal, Allahabad rejected the application filed by Pragiti Construction seeking consideration of its planbit however, approved the plan submitted by Mahavir Medicare.

Pragiti Construction challenged those orders before the appellate tribunal. It argued that the entire process was legally flawed because the sole operational creditor acted as the petitioning creditor, the sole member of the Committee of Creditors, the resolution applicant, and the beneficiary of the approved plan.

It contended that despite a direction of the Adjudicating Authority to freshly consider its resolution plan, the same was rejected without a proper comparative evaluation. It also pointed out that its plan offered a substantially higher value.

Mahavir Medicare opposed the appeal, submitting that the appellant had failed to submit its plan within the stipulated time and that the decision of the Committee of Creditors was an exercise of its commercial wisdom. It was also argued that the approved plan had already been implemented.

Examining Section 30(5), the tribunal noted that while a resolution applicant may attend the meeting in which its plan is considered, it "shall not have a right to vote at the meeting of the committee of creditors unless such resolution applicant is also a financial creditor"

In the present case, the resolution applicant was an operational creditor and not a financial creditor. The tribunal held that by voting in favour of its own plan as the sole member of the Committee of Creditors, the operational creditor acted in clear violation of the statutory bar. It declared that such approval of the plan by the Committee of Creditors was void ab initio.

The tribunal then examined how the sixth meeting of the Committee of Creditors was conducted. It noted that the resolution professional had placed on record that the plan submitted by Pragiti Construction was of a value of Rs. 20 lakh, out of which Rs. 10 lakh was proposed to be distributed to the operational creditor, whereas the plan submitted by Mahavir Medicare was of a value of Rs. 1 lakh apart from CIRP costs.

The resolution professional had also indicated that consideration of the appellant's plan could create a healthy competitive process. Despite this, the sole committee member rejected the appellant's plan.

The appellate tribunal found that there was no proper comparative evaluation of the two plans and no structured assessment of their feasibility and viability. It was recorded that the appellant was not invited to the meeting where its plan was discussed and rejected. In the peculiar facts of the case, where the only member of the Committee of Creditors was also the competing resolution applicant and beneficiary, the tribunal held that such a process could not be said to be fair, transparent, or impartial.

Relying on the Supreme Court's decision in Essar Steel, the tribunal reiterated that while the commercial wisdom of the Committee of Creditors is generally not subject to interference, it must be exercised in furtherance of the objectives of the Code, including maximisation of value.