Case Brief Committee of Creditors Essar Steel India Limited v Satish Kumar Gupta

Mishi Aggarwal, Intern

Committee of Creditors Essar Steel India Limited v Satish Kumar Gupta

Citation: 2019 SCC OnLine SC 1478

Court: Hon’ble Supreme Court of India

Bench: Rohinton Fali Nariman, Surya Kant , V. Ramasubramanian

Date: 15 November, 2019

FACTS

The Reserve Bank of India in 2017 had set up an Independent Advisory Committee that had listed a total of 12 Companies, each of whose Non-performing Assets exceeded INR 50 Billion, which also covered Essar Steel India Limited. Following this, The Reserve bank of India directed the lenders of these companies to initiate Corporate Insolvency proceedings against the listed Companies. Insolvency Proceedings were initiated by Standard Chartered Bank and State Bank of India against Essar Limited under the Insolvency and Bankruptcy Code before the National Company Law Tribunal, Ahmedabad.

The National Company Law Tribunal, while admitting this application, partly approved Arcelor Mittal India Private Limited’s Resolution plan. The Tribunal directed the Committee of Creditors to consider dividing 15% of the earnings during the CIRP of the operational creditors of the company, which was later challenged in the National Company Law Appellate Tribunal.

The National Company Law Appellate Tribunal disqualified Arcelor Mittal India Private Limited and Numetal Limited, who had submitted the resolution plan, on the grounds of them being ineligible under Section 29A of the Insolvency and Bankruptcy Code. As a result, Arcelor Mittal India Private Limited challenged the decision of the National Company Law Appellate Tribunal in the apex court who also upheld that the said parties, namely Arcelor Mittal India and Numetal Limited to be ineligible resolution applicants under section 29A. . The NCLAT held that in the interest of impartiality, treatment of financial and operational creditors should be as equals in matters of payment of dues and directed redistribution of the earnings amongst creditors. The NCLAT had also directed redistribution of earnings under the resolution plan in a manner that all the financial creditors were paid an amount of 60.7% of their claims and operational creditors were paid 60.26 of their claims, and those operational centers within amount under one crore were paid in full.

Thus, the financial creditors appealed against the decision of the National Company Law Appellate Tribunal, challenging the authority of NCLT and NCLAT, alleging that the order so passed is outside the scope of the Insolvency and Bankruptcy Code along with the role of the Committee of Creditors in the matter. These appeals were followed by writ petitions filed before the Supreme Court challenging the constitutional validity of the Insolvency and Bankruptcy Code (Amendment Act, 2019) which was passed during the pendency of this matter.

ISSUES

1. Whether the Resolution Applicants were disqualified from submitting a resolution plan being inconsistent with section 29A of the Code?

2. Whether the secured and unsecured creditors could be treated at par for the purpose of disbursement of funds?

3. Whether Section 4 of the Insolvency and Bankruptcy Code (Amendment) Act are constitutionally valid?

4. Whether the NCLT and NCLAT had jurisdiction to pass an order under the resolution plan?

LAWS

1. Section 29A of Insolvency and Bankruptcy Code, 2016

2. Section 30 of the Insolvency and Bankruptcy Code, 2016

3. Section 4 of Insolvency and Bankruptcy Code, 2016 (Amendment Act, 2019)

4. Section 6 of Insolvency and Bankruptcy Code, 2016 (Amendment Act, 2019)

5. Section 53 of Insolvency and Bankruptcy Code, 2016

6. Regulation 38 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

JUDGEMENT

The order of the Supreme Court had provided conclusive interpretation on the stance of the Insolvency and Bankruptcy Code on various aspects, which are as follows:

1. Section 4 of the insolvency and bankruptcy code amendment act, 2019 provided that a corporate insolvency resolution process had to mandatorily be completed within a period of 330 days, failing which the company has to undergo litigation. However, the Supreme Court in the present case was of the view that a litigant shall not suffer Due to the time that goes in conducting legal proceedings. The court made way for exceptional cases where The resolution process is on its word or is deemed fit by the NCLT or NCLAT. Thus the court granted the flexibility to the appropriate authorities in determining whether a case needs an extension beyond the period of 330 days which is the general limit for completion of the Corporate Insolvency Resolution Process.

2. The Supreme Court, while interpreting the scope of Regulation 38 of the Corporate insolvency resolution process regulations, differentiated between the term equal and equitable. It laid down that opposed to the decision of the National Company Law Appellate Tribunal; equal treatment implies that equals have to be treated equally. It further laid down that the principle could not be applied for treating unequals in an equal manner. The court was of the opinion that in a scenario where all the creditors were kept at par irrespective of their security interest, it would encourage a unanimous vote for liquidation by all creditors and Hence would be against the essence of the Code. Thus, The Supreme Court allowed the treatment of different classes of creditors differently on the basis of reasonable grounds.

3. On the subject of the scope of judicial review to be exercised by the NCLT/NCLAT, The Supreme Court held that the Tribunal has a restricted power to conduct judicial review. The review by the NCLT has to come under Section 30(2) of the Code and for NCLAT has to be within the scope of Section 32 read along with 61(3) of the Code. The court held that such review under no circumstance should intervene in a business decision taken by the Majority of the Committee of creditors. The Supreme Court further clarified that the tribunals do not have the diction to act as a court of equity and estimate adjudicate upon commercial decisions Since the ultimate power rests with the Committee of Creditors. However, The Tribunal can examine whether or not the Committee of creditors has Considered the three main factors, including Making sure that the corporate debtor is kept as a going concern during the resolution proceedings, the value of the assets are maximized, and balance is maintained amongst the interests of all the stakeholders.

4. The Supreme Court recognized the clarification laid down in the case of Arcelor Mittal India Private Limited v Satish Kumar Gupta which held that the rule of a resolution professional is not adjudicatory but administrative in nature. A resolution professional is the one who, Along with managing the affairs of the debtor to keep it as a going concern, Is it responsible for Managing meetings, collection, and admission of claims made by the creditors with having to be examined. Furthermore, the court laid down that the Committee of creditors most pivotal decision-maker to determine the rehabilitation of corporate debtors by deciding upon a feasible resolution plan. The resolution plan is approved when the commercial wisdom of the majority of the Committee of creditors Is achieved. It is the duty of the Committee of creditors to evaluate all relevant factors before approval of the resolution plan.

5. The Supreme Court overruled the holding of the National Company Law Appellate Tribunal, which held that once a guaranteed debt is cleared upon the approval of resolution plan lenders, the guarantee no longer applies. The court interpreted section 31(1) of the Code, which lays down that once a resolution plan is approved by the Committee of creditors, it becomes binding on all stakeholders, which also includes enters. This implies that a successful resolution applicant undertakes business activities from square one. Hence, there are well within their rights against the guarantor after a resolution plan has been approved.

6. The Supreme Court also set aside the decision of the NCLAT laid down that the profits earned by the corporate debtor when the resolution proceedings are going on shall be used for paying off the creditors. The Supreme Court overruled this to hold that Request for a proposal by Arcelor Mittal and the Committee of creditors incorporated the condition that the earnings shall not be disbursed for the payment of debts.

7. The Supreme Court laid down that even though the Committee of creditors is solely responsible for taking all decisions by themselves, a sub-committee can be appointed to carry on administrative activities like negotiating with applicants, etc. The Supreme Court held that one condition for the appointment of a subcommittee is that all the activities undertaken by the subcommittee are to be approved and governed by the Committee of creditors itself.

The Supreme Court thus quashed the decision of the NCLAT, which brought both operational and financial creditors at par with each other in the distribution of the proceeds. The Supreme Court laid down the application of the waterfall mechanism according to which secured financial creditors are to be given utmost priority for disbursement of funds and are to be followed by unsecured financial creditors as well as operational creditors. In addition to this, the Supreme Court exercised its extraordinary powers granted to it under article 142 of the Indian Constitution and gave two weeks’ time to both parties to pay off the non-performing assets, which would make them eligible resolution applicants.

Arcelor Mittal India Private Limited again submitted its proposed resolution plan after having paid off the said non-performing Assets as provided in the aforementioned Supreme Court order and was held to be the successful resolution applicant for Essar Steel.