I. SUPREME COURT DECIDES ON STAGE OF INELIGIBILITY UNDER SECTION 29A OF THE INSOLVENCY AND BANKRUPTCY CODE WHILE RULING ON THE RESOLUTION PLANS SUBMITTED BY ARCELORMITTAL AND NUMETAL IN INSOLVENCY PROCESS AGAINST ESSAR STEEL
The Supreme Court of India in case of ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others (decided on October 4, 2018) interpreted Section 29A of the Insolvency and Bankruptcy Code, 2016 ("Code") to determine the stage of ineligibility of the resolution applicants. The Supreme Court also decided on the power of the resolution professional in relation to resolution plans submitted by the resolution applicants.
Financial creditors of Essar Steel India Limited ("ESIL") filed an application under Section 7 of the Code for initiation of corporate insolvency resolution process ("CIRP") before the National Company Law Tribunal, Ahmedabad ("NCLT"). NCLT admitted the application on August 2, 2017 and an order of moratorium was passed. Resolution Professional ("RP") appointed by the Committee of Creditors ("CoC") of ESIL published a 'request for proposal' for submission of resolution plans by January 29, 2018. On request of the CoC, the NCLT extended the duration of the CIRP by 90 days beyond the initial period of 180 days. Accordingly, date of submission of resolution plan by the resolution applicants was extended to February 12, 2018. In view of the same, ArcelorMittal India Private Limited ("AMIPL") and Numetal Limited ("Numetal") submitted their resolution plans.
Observation of the RP
On March 23, 2018, the RP found both AMIPL and Numetal to be ineligible under Section 29A of the Code and therefore refused to place their resolution plans before CoC. RP rejected the plan submitted by AMIPL on the ground that ArcelorMittal Netherlands BV ("AMNLBV"), which was a 'connected person' of AMIPL, was a promoter of Uttam Galva Steels Limited ("Uttam Galva"), and the account of Uttam Galva was classified as non-performing asset ("NPA") for more than a year before commencement of the CIRP. Similarly, RP rejected the plan submitted by Numetal on the ground that Aurora Enterprises Limited ("AEL"), one of the shareholders of Numetal was held completely by a person, namely, Rewant Ruia, who was deemed to be 'acting in concert' with his father Ravi Ruia. Ravi Ruia was promoter of ESIL, whose account was classified as an NPA for more than a year before commencement of the CIRP. Pursuant to the above, the RP invited for fresh plans, which were submitted by AMIPL, Numetal and one other entity, namely, Vedanta Resources Limited, before April 2, 2018.
Observation of the NCLT
Both, Numetal and AMIPL challenged the decision of the RP before the NCLT. The NCLT upheld the decision of the RP by its order dated April 19, 2018. The NCLT held that the date on which a person stands disqualified would be the date of commencement of the CIRP of the corporate debtor. However, the NCLT provided an opportunity to the resolution applicants to become eligible by payment of overdue amounts in accordance with proviso to Section 29A of the Code. The NCLT remanded matter back to the CoC and the RP on the ground that the RP ought to have produced both the plans before the CoC for their consideration. The NCLT directed that bids of the resolution applicants submitted pursuant to the revised request for proposal, should not be opened pending adjudication.
Observations of the NCLAT
The said order of the NCLT was challenged by both Numetal and AMIPL before the National Company Law Appellate Tribunal ("NCLAT"). Before the order of NCLAT, the CoC vide its orders dated May 8, 2018 rejected the plans submitted by both the applicants on the grounds of ineligibility under Section 29A of the Code. The NCLAT vide its order dated September 7, 2018, upheld the findings of the NCLT in part. The NCLAT found that at the time of submission of first resolution plan, AEL was a shareholder of the Numetal. Hence, Numetal was not an eligible person under Section 29A of the Code. However, at the time of submission of the revised plan, AEL was not a shareholder of Numetal and hence, the revised plan of Numetal was required to be considered by the CoC. On the other hand, the NCLAT found AMIPL to be ineligible under Section 29A of the Code in respect of both the plans and gave it an additional opportunity to become eligible by payment of overdue amounts. Aggrieved by the decision of the NCLAT, both Numetal and AMIPL filed appeals before the Supreme Court and the following issues came up for determination:
Issue 1: Whether the stage of ineligibility of the resolution applicant under Section 29A(c) of the Code attaches at the date of commencement of the CIRP or at the time when the resolution plan is submitted by the resolution applicant?
Issue 2: Whether the resolution applicant can challenge the rejection of the resolution plan by the RP?
Issue 3: Whether the NCLAT was right in holding that AMIPL was ineligible to submit the resolution plan and Numetal was eligible to submit the resolution plan in accordance with Section 29A of the Code?
Section 29A(c) of the Code as amended by The Insolvency and Bankruptcy Code (Amendment) Act, 2017, which came into force with retrospective effect from November 23, 2017, as applicable in the instant matter provides that, a person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person, has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as NPA in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and at least a period of one year has lapsed from the date of such classification till the date of commencement of the CIRP of the corporate debtor. However, the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to NPA accounts before submission of the resolution plan.
AMIPL argued that plain reading of Section 29A(c) of the Code establishes that the ineligibility in relation to the submission of a resolution plan must consist of the elements set out in Section 30 (Submission of Resolution Plan) of the Code. It submitted that responding to preliminary enquiries, that is, an expression of interest, is not the subject matter of a resolution plan, and therefore, the relevant time is the time of submission of a resolution plan. It further argued that the amendment made to Section 29A in June, 2018, expressly stating that the relevant time was the time of submission of a resolution plan, was clarificatory in nature. AMIPL also submitted that since AMNLBV was not a promoter of Uttam Galva at the time of submission of the resolution plan, hence, Section 29A of the Code was not attracted and therefore, the question of paying off the debts of Uttam Galva would not arise.
Numetal argued that as per the unamended Section 29A of the Code, the time at which Section 29A(c) can be said to operate was the date of commencement of the CIRP. Numetal argued that AEL held only 25% interest in Numetal which cannot be considered as exercising 'control' as per the provisions of the Companies Act, 2013. Numetal cannot possibly be described as a joint venture of its shareholders. Further, at the time of submission of revised resolution plan, AEL was not a shareholder of Numetal and hence, it was not hit by Section 29A of the Code.
Observation of the Supreme Court
Issue 1: The Supreme Court observed that the opening words of Section 29A of the Code state that "a person shall not be eligible to submit a resolution plan...". Hence, it is clear that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant and not when the CIRP is commenced. Further, the expression used in Section 29A(c) is "has", which is in praesenti which can also be contrasted by the expression "has been" used in Sections 29A(d) and 29A(g) of the Code, which refers to an anterior point of time. It was also subsequently clarified by an amendment of 2018.
Issue 2: With respect to challenging the RP's rejection of the plan submitted by concerned resolution applicant, the Supreme Court observed that Section 30(2)(e) of the Code does not empower the RP to "decide" whether the resolution plan does or does not contravene the provisions of law. The said provision shall be read in conjunction with Section 25(2)(i) and second proviso to Section 30(4) of the Code, which would show that the RP is required to examine that the resolution plan submitted by various applicants is complete in all respects, before submitting it to the CoC. The RP is not required to take any decision, but merely to ensure that the resolution plans submitted are complete in all respects before they are placed before the CoC, which may or may not approve it. Even though it is not necessary for the RP to give reasons while submitting a resolution plan to the CoC, it would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration, and to state briefly as to why it does or does not conform to the law.
Issue 3: The Supreme Court observed that the ineligibility to submit a resolution plan under Section 29A(c) of the Code attaches, if any person, either itself has an account, or is a promoter of, or in the management or control of, a corporate debtor which has an account, which account has been classified as an NPA, for a period of at least one year from the date of such classification till the date of commencement of the CIRP. In other words, for the purpose of application of ineligibility under Section 29A(c) of the Code, any one of the three things, which are disjunctive, needs to be established:
- the corporate debtor may be under the management of the person referred to in Section 29A;
- the corporate debtor may be a person under the control of such person; or
- the corporate debtor may be a person of whom such person is a promoter.
For the purpose of interpretation of Section 29A(c) of the Code, the Supreme Court observed that the expression "management" would refer to de jure management of a corporate debtor. The de jure management of a corporate debtor would ordinarily vest in a board of directors, and would include, in accord with the definitions of "manager", "managing director" and "officer" of the company, which have meaning as given to them under the Companies Act, 2013. The expression "control" which has meaning given to it in Section 2(27) of the Companies Act, 2013, is defined in two parts: de jure control and de facto control. De jure control includes the right to appoint the majority of directors of a company. So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be"in control". The expression "control", in Section 29A(c) of the Code, denotes only positive control. It means that mere power to block special resolutions of a company cannot amount to "control". The opening lines of Section 29A of the Code are 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. The term "promoter" has meaning given to it in the Companies Act, 2013.
The expression "acting jointly" in the opening sentence of Section 29A of the Code cannot be confused with "joint venture agreements". All that is to be seen by the expression "acting jointly"is whether certain persons have got together and are acting "jointly" in the sense of acting together. The Supreme Court observed that doctrine of piercing the corporate veil is applied to group companies so as to look at the economic entity of the group as a whole. The expression "in concert" shall have the same meaning as assigned to it in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations"). While interpreting the expression "in concert", any understanding, even if it is informal, and even if it is to indirectly cooperate to exercise control over a target company, is included. What is of great importance is that whenever persons act jointly or in concert with the "person" who submits a resolution plan, all such persons are covered by Section 29A of the Code.
The Supreme Court observed that "if it is shown, on facts, that, at a reasonably proximate point of time before the submission of the resolution plan, the affairs of the persons referred to in Section 29A are so arranged, as to avoid paying off the debts of the non-performing asset concerned, such persons must be held to be ineligible to submit a resolution plan, or otherwise both the purpose of the first proviso to sub-section (c) of Section 29A, as well as the larger objective sought to be achieved by the said sub-clause in public interest, will be defeated."
While examining the eligibility of Numetal under Section 29A(c) of the Code, the Supreme Court observed that transfer of its shareholding by AEL in Numetal to other shareholders does not make Numetal an eligible entity. The Supreme Court has given two reasons for this: (a) the earnest money credited to the account of the corporate debtor, provided to Numetal by AEL as a shareholder of the resolution applicant, continued to remain with the RP showing thereby that Rewant Ruia continued to be present, insofar as Numetal's second resolution plan was concerned;(b) having regard to the reasonably proximate state of affairs before submission of the resolution plan, beginning with Numetal's initial corporate structure, and continuing with the changes made till date, it was evident that, the object of all the transactions that have taken place after Section 29A came into force was undoubtedly to avoid the application of Section 29A(c) of the Code, including its proviso.
With regard to eligibility of AMIPL, the Supreme Court rejected the argument of AMIPL that AMNLBV sold its entire shareholding in Uttam Galva before submission of the resolution plan and therefore AMNLBV was not a promoter of Uttam Galva. Applying the doctrine of piercing the corporate veil, the Supreme Court observed that both AMIPL and AMNLBV are managed and controlled by Shri L. N. Mittal, and were therefore persons deemed to be acting in concert as per the Takeover Regulations. Hence, the Supreme Court concluded that AMNLBV was a promoter of Uttam Galva. After examining the reasonable proximity of the facts, the Supreme Court also observed that it was clear that there was no doubt whatsoever that AMNLBV's shares in Uttam Galva were sold only in order to get out of the ineligibility mentioned in Section 29A(c) of the Code, and consequently the proviso thereto.
Decision of the Supreme Court
The Supreme Court held that the stage of ineligibility attaches when the resolution plan is submitted by the resolution applicant. Further, with respect to RP's rejection of plan, the Supreme Court held that the resolution applicant cannot challenge the rejection of the resolution plan by the RP. However, the Supreme Court also held that the RP does not have the power to reject the resolution plan and directed him to present all the plans before the CoC for their consideration. With regard to eligibility of Numetal and AMIPL, the Supreme Court held that since both the resolution applicants had not paid their respective NPAs prior to submission of their resolution plans, they were hit by Section 29A of the Code and therefore were ineligible to submit their plans. On request of the CoC, the Supreme Court gave one more opportunity to the resolution applicants to re-submit the resolution plans upon payment of their respective NPAs.
The Supreme Court while interpreting Section 29A of the Code reiterated the well settled principle of law, that is, "what cannot be done directly, cannot be done indirectly". Looking at both the literal interpretation as well as the object of the Code, the Supreme Court has clarified that a person cannot be considered as an eligible resolution applicant by using the tactics such as declassification as a promoter without paying off its unpaid NPAs.
This judgment is important and will serve as a good precedent in holding that 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 their debts.
The Supreme Court also goes lengthily into the discussion of the applicable provisions of the Code in relation to the CIRP and the timeline of 180 + 90 days. While strictly interpreting the provisions of the Code, the Supreme Court also directed the tribunals to conduct the proceedings in timely manner by holding that the time taken by a tribunal should not set at naught the time limits within which the CIRP must take place.
The Supreme Court also slammed the autonomous power exercised by the RPs by holding that the RPs do not have power to take any decision in relation to the resolution plan and therefore they cannot reject or approve a plan without presenting the same for consideration before the CoC. The RP can merely ensure that the plans submitted are complete in all respects before they are placed before the CoC. In other words, only a prima facie opinion can be given by the RP to the CoC as to any contravention of the law, including Section 29A of the Code.
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