Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), has held that the distribution among financial creditors should be based on either security interest or on a pro rata basis in accordance with their voting share in the Committee of Creditors (CoC).

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Background

The appeal was filed by the Small Industries Development Bank of India (SIDBI) against an order of the National Company Law Tribunal (NCLT), Jaipur Bench, dated 30.06.2025, which had dismissed I.A. No. 637/JPR/2023 filed by the appellant. The appellant, a secured financial creditor with a 3.22% voting share in the CoC, challenged the CoC’s decision to adopt the voting share ratio as the basis for the distribution of proceeds under the approved resolution plan. Another creditor, Punjab National Bank (PNB), held a 96.68% voting share in the CoC.

The NCLT had earlier approved the resolution plan of the corporate debtor on 12.03.2024. Thereafter, the CoC resolved that the distribution of proceeds would follow the voting share proportion. SIDBI filed an application before the NCLT challenging this resolution, arguing that the distribution should be determined on the basis of security interest, not voting share. The NCLT, however, dismissed the application, leading to the present appeal before the NCLAT.

Appellant’s Contentions

The appellant submitted that it held a valid and perfected security interest over the plant and machinery of the corporate debtor and was, therefore, entitled to a higher distribution. It was contended that the appellant had filed its application three months before the approval of the resolution plan, but the same was not considered by the adjudicating authority. It was further argued that distribution purely on the basis of voting share was arbitrary and contrary to the principles of equitable treatment of secured creditors under the IBC framework.

Respondent’s Submissions

The Resolution Professional (RP) opposed the appeal, contending that the distribution mechanism had already been discussed and approved by the CoC before the resolution plan was passed by the NCLT. The RP argued that once the CoC had decided to adopt a pro rata basis linked to voting share, the adjudicating authority rightly declined to interfere. It was also pointed out that the resolution plan had already been implemented, and reopening the distribution issue would disturb settled proceedings.

NCLAT’s Observations

The Bench noted that the CoC had consciously adopted the voting share ratio as the basis for the distribution of proceeds among the financial creditors. The appellant’s objections, though raised before the NCLT, remained pending when the resolution plan was approved on 12.03.2024.

Referring to its own decision in State Bank of India v. IDBI Bank Ltd. & Anr., Company Appeal (AT) (Insolvency) No. 321 of 2024 (decided on 28.01.2025), the Tribunal reiterated that the distribution of sale proceeds or resolution plan consideration should ordinarily be on a pro rata basis as per the admitted claims of financial creditors, unless otherwise agreed by the CoC. The Bench quoted from the SBI v. IDBI Bank ruling, observing that: “The Adjudicating Authority has not committed any error in directing distribution of sale proceeds as per the admitted claim of the Financial Creditors on a pro rata basis, and the same is in accordance with law as declared by the Hon’ble Supreme Court in Amit Metaliks Ltd.”

The NCLAT also referred to the Supreme Court’s decision in India Resurgence ARC Pvt. Ltd. v. Amit Metaliks Ltd. & Anr., (2021) 19 SCC 672, wherein it was held that the distribution of proceeds must be in accordance with the commercial wisdom of the CoC, and the Adjudicating Authority should not interfere with such decisions unless they are discriminatory or violative of statutory provisions. The Bench further observed that the appellant held only 3.22% of the total voting share, while PNB held 96.68%, and the CoC’s resolution on distribution remained unchallenged at the time of plan approval. Thus, the distribution mechanism adopted could not be said to be illegal or improper.

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Holding that the CoC’s decision was in conformity with established legal principles and Supreme Court precedent, the NCLAT concluded that there was no error in the NCLT’s order rejecting the appellant’s application. Accordingly, the appeal was dismissed, with liberty to the appellant to seek appropriate remedies in case any subsequent Supreme Court ruling (such as in DBS Bank Ltd. Singapore v. Ruchi Soya Industries Ltd., pending before the Apex Court) modifies the applicable distribution principles.

Appearance

For Appellant: Mr. NPS Chawla, Mr. Abhinav Mishra and Mr. Ishaan Dhingra, Advocates.  

For Respondents: Ms. Neha Agarwal, Advocate for R-1. Mr. Nitesh Shrivastava, Advocates for SRA.

Cause Title: Small Industries Development Bank of India v. Sumit Sharma, Erstwhile RP & Anr

Case No: Company Appeal (AT) (Insolvency) No. 1359 of 2025 & I.A. No. 5309 of 2025

Coram: Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member)