India: The Saga Of Unending Resolution Process Under IBC Part – II

Last Updated: 25 October 2018
Article by AMLEGALS  

CASE STUDY ON ESSAR STEEL – A NEVER ENDING LITIGATION

PART- II

The NCLT Ahmedabad Bench vide its order dated 19.04.2018, in the IAs filed by Arcelor Mittal & Numetal, remanded the matter back to the COC for their reconsideration.

This order was challenged by way of Appeals by both Numetal and AMIPL, respectively, before the Appellate Authority i.e. the NCLAT.

However, before these appeals could be decided, the COC, in compliance with the order of the NCLT, disqualified both AMIPL & Numetal on 08.05.2018

On appeals, NCLAT passed an order and held that Numetal is Eligible while declaring AMIPL to be ineligible under Section 29A. However, 2 days time was granted to AMIPL for removing the ineligibility under Section 29A of the code.

This led both AMIPL & Numetal to file an appeal before the Apex Court.

AMIPL IN SC

Mr. Harish N Salve, Senior Advocate made the following submissions:

  • The ineligibility under Section 29A is in relation to the submission of a resolution plan, which must consist of the elements set out in Section 30.
  • An expression of interest is not the subject matter of a resolution plan & therefore, the relevant time is the time of submission of a resolution plan.
  • The relevant time was the time of submission of a resolution plan, is clarificatory in nature. Once this becomes clear, everything on facts falls into place.
  • The entire shareholding of Fraseli in KSS Global was transferred back to the promoters of KSS Global on 9.2.2018, i.e. 3 days before submission of the resolution plan. Therefore, Section 29A is not attracted. Hence the question of paying off the debts of Uttam Galva and KSS Petron would not arise.

ON NUMETAL RESOLUTION PLAN

  • Numetal was incorporated on 13.10.2017 by Shri Rewant Ruia, son of Shri Ravi Ruia (who was a promoter of ESSAR STEEL).
  • 'Aurora Enterprises Limited' (AEL) held 100% shareholding of Numetal. AEL's 100% shareholding was held by one 'Aurora Holdings Limited' (AHL), 100% of whose shareholding was held by Shri Rewant Ruia.
  • On 18.10.2017 AEL transferred 26.1% of its shares in Numetal to one 'ESSAR Communications Limited' (ECL).
  • On 19.10.2017 Shri Rewant Ruia settled an irrevocable discretionary trust, which purchased the shares of AHL at par value.
  • On 20.10.2017, Numetal submitted its expression of interest at that time it had two share holders, i.e., AEL (holding 73.9%) and ECL (holding 26.1%).
  • On 22.11.2017, when the Finance Minister made a statement that the Code would be amended in order to prevent unscrupulous persons from submitting resolution plans, AEL transferred 13.9% of its shareholding in Numetal, and ECL its entire 26.1% shareholding, to one 'Crinium Bay Holdings Limited' (CBHL), a 100% subsidiary of VTB Bank.
  • CBHL thus became the owner of 40% of the shareholding of Numetal. AEL subsequently transferred 25.1% of the shareholding in Numetal to one 'Indo International Trading FZCO' (Indo) & 9.9% shareholding subsequently on 29.03.2018 all the share of AEL was transferred.
  • Therefore CBHL held 40%, TPE held 25.9% & Indo held 34.1% in Numetal
  • Further argued that VTB Bank, the parent company of Crinium Bay, stands prohibited from accessing the securities markets in the European Union pursuant to an order dated 31.7.2004 and in the United States by two orders.
  • Most important fact was that an amount of Rs. 500 crores was given by AEL to Numetal so that it could deposit the requisite earnest money that had to be made along with the resolution plan furnished by Numetal which continued to remain with the RP, and has till date not been withdrawn by AEL which shows that Shri Rewant Ruia continues to be vitally interested and linked with Numetal, even after the complete exit of AEL.
  • The core objective of Section 29A was to ensure that the promoter of the corporate debtor should not through or by circular means comeback in order to regain the company that he himself had run to the ground.

Argument was supported by learned Senior Advocate Dr. A.M. Singhvi by stating that the sale of shares is complete once they move out of the DEMAT account of the seller, which in this case took place 5 days before 12.2.2008.

NUMETAL IN SC

Mr. Mukul Rohtagi appeared on behalf of Numetal and made the following submissions:

ON REGULATION

  • On the date of submission of the resolution plan, AEL held only 25% shares, which would be below the figure of 26% mentioned in the request for proposal dated 24.12.2017, wherein "control" has been defined as a person holding more than 26% of the voting share capital in the company.
  • On 02.04.2018, when it submitted a fresh resolution plan, AEL had walked out completely.
  • Numetal cannot possibly be described as a joint venture of its shareholders. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control, which is missing in the present case.
  • Shri Rewant Ruia is neither a promoter nor in the management or control of Numetal, he would fall outside sub-clause (iii) of Explanation 1.
  • He strongly attacked Shri Salve's argument that VTB Bank, the holding company of CBHL, was barred from accessing the securities market by either the European Union or the United States by arguing that the restrictive measures taken in view of Russia's actions destabilizing the situation in Ukraine because Russia had illegally annexed Crimea, political sanctions were imposed by this document, which cannot possibly be said to be sanctions imposed by an authority equivalent to SEBI in India. The sanctions also did not relate in any manner to the securities market.
  • In EU the corresponding "authority" to SEBI is the 'European Securities and Market Authority', whereas in the US it would be the 'Securities Exchange Commission' and neither of whom has issued any sanctions which would interdict VTB Bank from accessing or trading in thesecurities market.
  • For Rs. 500 crores that was advanced by AEL was not withdrawn because the validity of the first bid by Numetal continues to be sub judice.

FOR ARCELOR MITTAL RESOLUTION PLAN

  • AMNLBV, which is admittedly a L.N. Mittal Group Company, was shown as a "promoter" in the annual reports of Uttam Galva, and would therefore fit in the definition of "promoter".
  • Non-Disposal Undertaking was issued to the State Bank of India by AMNLBV on 12.7.2011 agreeing that it would not sell, transfer or dispose of any shares held by it without the consent of the lenders of Uttam Galva. Therefore, the transfer of shares without obtaining the consent of the SBI is invalid in law and a fraud played by AMNLBV.
  • In so far as KSS Petron is concerned, it is clear that Fraseli's holding of 32.22% in KSS Global would certainly amount to de facto control, if not de jure control.
  • Shri Pramod Mittal, brother of Shri L.N. Mittal, is a connected person and he is a promoter and director of one 'Gontermann Piepers (India) Limited', which has also been declared a NPA, rendering Shri L.N. Mittal ineligible under Section 29A(j).
  • Equally, Shri L.N. Mittal, Shri Pramod Mittal and other members of the Mittal family are promoters of one 'Ispat Profiles India Limited'. This company was ordered to be wound up by the BIFR, appeals from which have been dismissed by the AAIFR. Consequently, Shri L.N. Mittal, as a related party of Shri Pramod Mittal, would render AMIPL ineligible under sub-clause (c) read with sub-clause (j) of Section 29A of the Code.

COC IN SC

Mr. Gopal Subramanium, Senior Advocate appearing on behalf of COC made the following submissions:

  • Amendment Act of 2017 brings in "persons acting in concert" which has been dealt by the Justice P.N. Bhagwati Committee Report on Takeovers, 1997. He also referred to some of our judgments on tearing the corporate veil, and on persons acting in concert.
  • There should be no interference by the appropriate authority at the behest of a resolution applicant at the stage of a Resolution Professional processing resolution applications, and the subsequent stage of a COC disapproving a resolution plan.
  • The period of 270 days is a water-tight compartment, within which either a resolution plan will be approved, or the corporate debtor be wound up. Therefore, the practice of IA being filed at anterior stages of the proceedings before the NCLT and orders of remand to the COC should be stopped.
  • The time taken by the Adjudicating Authority and the Appellate Authority in deciding disputes that may arise before them should be excluded from the computation of 270 days.
  • The expressions "persons acting in concert" and "control" are broad enough to bring all associated persons within the meaning of Section 29A.
  • Section 29A should be construed in accordance with the object sought to be achieved by the said provision, which should never be defeated, so as to get to the real state of affairs of the facts of every given case.
  • Therefore, it is very important to remember that phrases such as "persons acting in concert" and "control" are meant not only to pierce the corporate veil, but also to get to the real persons who present resolution plans.
  • Any circular method, by which payment of debts of an NPA of a person acting jointly or in concert under the proviso to Section 29A(c) is sought to be avoided, should be interdicted.

SUPREME COURT'S RULING

Section 29A has to be construed on the background of the speech of the Hon'ble Finance Minister and Statement of Objects and Reasons of the Bill.

Court cited the case of Ms. Eera through Dr. Manjula Krippendorf v. State & Anr. (2017) 15 SCC 133 by stating that in this case after referring to the golden rule of literal construction, and its older counterpart the "object rule" in Heydon's case, referred to the theory of creative interpretation by stating that

"Instances of creative interpretation are when the Court looks at both the literal language as well as the purpose or object of the statute in order to better determine what the words used by the draftsman of legislation mean."

Purposive interpretation of Section 29A is to be applied, depending both on the text and the context in which the provision was enacted;

  • The opening lines of Section 29A contained in the Ordinance of 2017 are different from the opening lines of Section 29A as contained in the Amendment Act of 2017.
  • The phrase "persons acting in concert" is conspicuous by its absence in the Ordinance of 2017.
  • The concepts of "promoter", "management" and "control" which were contained in the opening lines of Section 29A under the Ordinance have now been transferred to sub-clause (c) in the Amendment Act of 2017. It is, therefore, important to note that the Amendment Act of 2017 opens with language which is of wider import than that contained in the Ordinance of 2017, evincing an intention to rope in all persons who may be acting in concert with the person submitting a resolution plan.
  • The opening lines of Section 29A of the Amendment Act refer to a de facto as opposed to a de jure position of the persons mentioned therein. This is a typical instance of a "see through provision", so that one is able to arrive at persons who are actually in "control", whether jointly, or in concert, with other persons
  • Literal, interpretation would obviously not permit a tearing of the corporate veil when it comes to the "person" whose eligibility is to be gone into. However, a purposeful and contextual interpretation, such as is the felt necessity of interpretation of such a provision as Section 29A, alone governs.
  • For the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such acompany.
  • Where a statute itself lifts the corporate veil, or where protection of public interest is of Supreme importance, or where a company has been formed to evade obligations imposed by the law then the court will disregard the corporate veil.
  • The expression "acting jointly" in the opening sentence of Section 29A cannot be confused with "joint venture agreements" as was sought to be argued by Shri Rohatgi.
  • Person Acting in Concert Originally defined in the SEBI Regulations, 1994 then Justice P.N. Bhagwati Committee Report on Takeovers, 1997, pursuant to which the Regulations of 1997 were framed defines Person Acting in Concert then by Regulation 2(1)(q) of the 2011 Takeover Regulations, "persons acting in concert" is defined.
  • The report of the Insolvency Law Committee of March, 2018, wanted to curtail the wide definition of persons acting jointly or in concert however that has not been accepted by the legislature.
  • The opening words of Section 29A state: "a person shall not be eligible to submit a resolution plan..." Therefore it is clear that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant.
  • The expression used in sub-clause (c) is "has", which is in present. This is to be contrasted with the expression "has been", which is used in sub-clauses (d) and (g), which refers to an anterior point of time.
  • Section 29A(c) speaks of a corporate debtor "under the management or control of such person". The expression "under" would seem to suggest positive or pro-active control, as opposed to mere negative or reactive control.
  • The expression "management or control", the two words take colour from each other, in which case the principle of noscitur a sociis must also be held to apply.
  • What is referred to in sub-clauses (c) and (g) is dejure or de facto proactive or positive control, and not mere negative control which may flow from an expansive reading of the definition of the word "control" contained in Section 2(27) of the Companies Act, 2013, which is inclusive and not exhaustive in nature.
  • If a person is prohibited by a regulator of the securities market in a foreign country from trading in securities or accessing the securities market, the disability under sub-clause (i) would then attach.

TIME LINE WITHIN WICH INSOLVENCY PROCESS IS TO BE COMPLETED

  • The existing framework for insolvency and bankruptcy was not only inadequate and ineffective, but resulted in undue delays in resolution. One of the primary objects of the Code, therefore, is to resolve such matters in a time bound manner.
  • Court in this case dealt the CIRP Process in detail (that would be dealt in the next part) and applied the maxim of Actus curiae neminemgravabit which means the act of the Court shall harm no man and held that If there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible because there are several employees and workmen whose daily bread is dependent on the outcome of the CIRP.
  • The consequence of the chopper falling is corporate death. The only reasonable construction of the Code is the balance to be maintained between timely completion of the CIRP otherwise the corporate debtor being put into liquidation.
  • In the event of the NCLT, or the NCLAT, or this Court taking time to decide an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be excluded, as otherwise a good resolution plan may have to be shelved, resulting in corporate death, and the consequent displacement of employees & workers.

RATIO OF THE SUPREME COURT

  1. Resolution plan submitted on 02.04.2018 by both the resolution applicant i.e. Arcelor Mittal & Numetal are hit by Section 29A(c).
  2. In order to do complete justice under Article 142 of the Constitution of India, and also for the reason that the law on Section 29A has been laid down for the first time therefore Supreme Court gave one more opportunity to both resolution applicants to pay off the NPAs of their related corporate debtors within a period of 2 weeks from the date of receipt of this judgment.
  3. If payments are made within the aforesaid period then both the resolution applicants can resubmit their resolution plans dated 02.04.2018 to the COC, who are then given a period of 8 weeks from this date, to accept, by the requisite majority, the best amongst the plans submitted, including the resolution plan submitted by Vedanta.
  4. If no plan is found worthy of acceptance by the requisite majority of the COC, the corporate debtor, i.e. ESIL, shall go into liquidation.

AMLEGALS CONCLUSION

We consider that this is a very important decision of the Apex Court as it has clarified the following major issues:

a. Lifting of corporate veil while interpreting Section 29A(c) of the Code

It elaborated that any person acting jointly, or in concert with other persons wishes to submit a resolution plan, which person or other persons happen to either manage or control or be promoters of a corporate debtor, who is classified as a NPA and whose debts have not been paid off for a period of at least 1 year before commencement of the CIRP, becomes ineligible to submit a resolution plan.

The first proviso to sub-clause (c) makes it clear that once the resolution applicant pay off the debt classified as a NPA then only he can become eligible under Section 29A(c).

Since, Court held that "Section 29A(c) is a see-through provision, great care must be taken to ensure that persons who are in charge of the corporate debtor for whom such resolution plan is made, do not come back in some other form to regain control of the company without first paying off its debts. The Code has bifurcated such persons into two groups, as a perusal of sub-clauses (c) and (g) of Section 29A."

b. The CIRP beyond 270 days can be extended in exceptional cases, like this case, by invocation of Article 142 which is very exceptionally invoked by SC.

c. The CIRP process has been clarified by SC in a very lucid manner.

In Part–III of this case study, the CIRP Process laid down by Supreme Court will be discussed in detail.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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