NCLAT Upholds Rejection of Guarantor’s Plan, Says Section 114(3) Relief Depends on Record-Based Grounds
Introduction
The National Company Law Appellate Tribunal, Chennai Bench, held that the power of the Adjudicating Authority under Section 114(3) of the Insolvency and Bankruptcy Code, 2016 to direct modification of a repayment plan is discretionary and not mandatory, and can be exercised only where sufficient material on record justifies such intervention. The Bench comprising Chairperson Justice Ashok Bhushan, Judicial Member Justice Sharad Kumar Sharma, and Technical Member Jatindranath Swain dismissed an appeal filed by a personal guarantor to the loans of the Nithin Group of Companies, affirming the order of the NCLT, Amaravati Bench, which had accepted the Resolution Professional’s report recording rejection of the repayment plan by the creditors. The Tribunal clarified that Section 114(3) is merely an enabling provision, and does not cast any obligation on the Adjudicating Authority to compel reconsideration in every case of rejection.
Factual Background
The appellant, promoter of the Nithin Group of Companies, had availed substantial loan facilities from Bank of India and had also furnished a personal guarantee securing those borrowings. Insolvency proceedings were thereafter initiated against him in his capacity as a personal guarantor under Part III of the IBC.
During the insolvency resolution process, the appellant submitted a repayment plan offering ₹68.84 lakh to the creditors. When the plan was placed before the meeting of creditors held on 31 March 2022, it failed to secure approval. Bank of India, which held 71.22% voting share, voted against the proposal, resulting in rejection of the plan.
The appellant’s principal reliance was that the amount offered under the repayment plan was substantially higher than the assessed value of his assets, stated to be ₹36.93 lakh, and therefore deserved reconsideration.
Procedural Background
The Resolution Professional placed a report before the NCLT, Amaravati Bench, recording rejection of the repayment plan by the creditors. The Adjudicating Authority accepted the report and did not invoke its powers under Section 114(3) to direct any modification or reconsideration.
Aggrieved, the personal guarantor preferred the present appeal before the NCLAT, Chennai, contending that the NCLT ought to have exercised its statutory discretion to direct modification of the repayment plan, particularly since the offered amount exceeded the realizable asset value.
The appellate tribunal was therefore required to examine the scope of Section 114(3) and determine whether the NCLT was under any obligation to direct reconsideration merely because the offered value was commercially higher than liquidation value.
Issues
1. Whether the power under Section 114(3) of the IBC to direct modification of a repayment plan is mandatory or discretionary?
2. Whether the Adjudicating Authority is required to direct reconsideration of a repayment plan merely because the offered amount exceeds the assessed value of the guarantor’s assets?
3. Whether the exercise of Section 114(3) power requires specific material on record indicating necessity for modification?
4. Whether the NCLT committed any error in accepting the Resolution Professional’s report recording rejection of the repayment plan?
Contentions of Parties
The appellant contended that the ₹68.84 lakh repayment proposal exceeded the assessed value of his assets of ₹36.93 lakh, and therefore the NCLT ought to have exercised its discretion under Section 114(3) to direct modification or reconsideration of the plan. It was argued that refusal to do so defeated the commercial object of maximising creditor recovery.
Bank of India opposed the appeal, submitting that the total outstanding dues exceeded ₹106 crore, and that the repayment proposal was grossly inadequate. It was argued that the plan had been duly placed before the creditors, considered in accordance with the statutory process, and rejected by a decisive majority vote. In such circumstances, no judicial interference was warranted.
Reasoning and Analysis
The Appellate Tribunal undertook a textual reading of Section 114(3) and held that the provision is enabling in nature, conferring a discretionary power upon the Adjudicating Authority to direct modification of a repayment plan where circumstances warrant. However, the Bench emphasized that the discretion is not to be exercised mechanically or merely because an alternate commercial view may be possible.
A crucial aspect of the ruling is the requirement that there must exist circumstances apparent from the record enabling the Adjudicating Authority to form an opinion that modification is necessary. In the absence of such material, the Tribunal held, the NCLT is not obliged to compel reconsideration of a plan that has already been rejected by the creditors.
The NCLAT rejected the appellant’s simplistic reliance on the offered amount being higher than asset value, holding that comparison with asset valuation alone is not sufficient material to mandate judicial intervention, particularly where the admitted dues exceeded ₹106 crore and the secured creditor holding 71.22% voting share had consciously rejected the proposal.
The Bench thus reaffirmed the limited role of the Adjudicating Authority in Part III repayment plan processes, recognising that the commercial decision of creditors cannot be lightly displaced unless the record discloses compelling circumstances warranting statutory discretion.
Decision
The NCLAT Chennai dismissed the appeal and upheld the order of the NCLT, Amaravati Bench, holding that the power under Section 114(3) to direct modification of a repayment plan is discretionary and can be exercised only when supported by material on record. Since no such material existed in the present case, the Tribunal found no ground to interfere with the acceptance of the Resolution Professional’s report recording rejection of the plan.
In this case the appellant was represented by Advocate Arjun Suresh.