Rahul Kanoujia – Intern co-authored this article.
After a battle that lasted approximately 900 days, the Supreme Court of India in the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta, paved the way for ArcelorMittal to take over Essar Steel Ltd.('Essar') by upholding the primacy of the Committee of Creditors ('CoC') in distribution of funds of INR 42,000 crore received under the resolution plan submitted by ArcelorMittal.
In August 2017, a petition for initiating the insolvency resolution process against Essar was admitted by the National Company Law Tribunal, Ahmedabad bench ('NCLT') after the Reserve Bank of India identified 12 insolvent accounts responsible for 25% of non-performing assets on its balance sheet. It is notable that of these 12, 8 have currently been resolved.
In the corporate insolvency resolution process ('CIRP') of Essar, ArcelorMittal was the successful resolution applicant. The resolution plan submitted by ArcelorMittal provided that the operational creditors with an exposure of above INR 1 crore would not be entitled to any distributions. The NCLT approved ArcelorMittal's resolution plan and asked the CoC to distribute 85% of the amount under the resolution plan amongst financial creditors and the remaining 15% amongst the operational creditors. The decision of NCLT was subsequently challenged before the National Company Law Appellate Tribunal ('NCLAT').
By its judgment dated July 4, 2019, the NCLAT approved the resolution plan of ArcelorMittal but held that in a resolution plan there cannot be any difference between a financial creditor and an operational creditor with regard to payment of dues. The NCLAT further held that the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016 ('Code') cannot be applied in the event of a resolution plan, but will only apply at the stage of liquidation. The NCLAT ordered that each financial creditor (whether secured or unsecured) with a claim equivalent to or more than INR 10 lakh, be paid 60.7% of its admitted claim, irrespective of their security interest. The decision of the NCLAT assailed the supremacy of the CoC and their powers to approve a resolution plan, which is considered to be a cornerstone of the Code. Aggrieved by the decision of NCLAT, the CoC challenged the decision before the Supreme Court.
SUPREME COURT'S JUDGMENT:
ROLE OF THE RESOLUTION PROFESSIONAL: The role of the RP is administrative and not adjudicatory. It is the responsibility of the RP to (a) appoint and convene meetings of the CoC; (b) manage the affairs of the corporate debtor as a going concern during CIRP; and (c) collect, collate and admit claims of all creditors which must be examined in full or in part or not at all, for payment by the resolution applicant, finally to be approved by the CoC.
ROLE OF THE COC IN CIRP: The Supreme Court upheld the concept of supremacy of the commercial wisdom of the CoC in approval of the resolution plan, provided they take into consideration/ account for interest of all stakeholders.
The Supreme Court also held that nothing can be done qua the management of the corporate debtor by the RP which impacts major decisions to be made in the interregnum between the taking over the management of the corporate debtor and acceptance of a resolution plan by the requisite majority of the CoC. Under Section 30(4) of the Code, the CoC may approve a resolution plan by a vote of not less than 66% of the voting share of the financial creditors after considering its feasibility and viability and various other requirements, as may be prescribed by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ('CIRP Regulations'). It also held that the CoC is free to suggest modifications to the prospective resolution plan to ensure that dues of systemically important operational creditors are paid in full, so that the carrying on of the business of the corporate debtor does not become impossible for want of most basic and essential element, for example electricity.
The above clarification by the Court with respect to powers of the CoC make it clear that tribunals cannot trespass on any commercial decision of the CoC. The scope for judicial review of such commercial decisions is therefore limited.
SECURED AND UNSECURED CREDITORS- EQUITY VIS A VIS EQUALITY:
Placing reliance on the reasoning provided under the 2018 report of the Insolvency Law Committee and the fact that without payments to operational creditors it would be difficult to maintain the corporate debtor as a going concern, the Supreme Court held that while the minimum value payable to the operational creditors may be the liquidation value, the CoC must balance the interests of all stakeholders, including the operational creditors.
The Supreme Court set aside the observation of the NCLAT that there shouldn't be any discrimination between financial creditors and operational creditors with regard to payment of their dues, and held that equitable treatment is equitable only within the same class.
The Supreme Court recognized the value of security interest separately from the interest of the creditors who do not have security. The Supreme Court clarified that a 'secured creditor does not find a place in the resolution process' is only a concept restricted to liquidation proceedings. The reasoning being, in many cases, financial creditors might be incentivized to vote for liquidation rather than resolution. This would defeat the entire objective of the Code which is to ensure resolution of the corporate debtor.
Further, the Supreme Court has stated that there is no residual jurisdiction to not approve a resolution plan on the ground that it is unfair or unjust to a class of creditors, so long as the interest of each class has been taken care of.
GUARANTOR'S LIABILITY: The Supreme Court by relying upon its previous judgment in State Bank of India v. V. Ramakrishnan (2018), observed that Section 31(1) of the Code makes it clear that once a resolution plan is approved by the CoC, it shall be binding on all stakeholders including guarantors. Therefore, the Supreme Court set aside the NCLAT's judgment which was contrary to Section 31 (1) of the Code and its judgment in State Bank of India (supra). It further upheld the rights of the creditors to proceed against guarantees extended by the promoters/promoter groups of the corporate debtor while rejecting the argument of the promoters' right of subrogation cannot be extinguished under the resolution plan.
CONSTITUTIONAL VALIDITY OF THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2019:
INSOLVENCY PROCESS CANNOT 'MANDATORILY' END AFTER COMPLETION OF TIMEFRAME PRESCRIBED: As far as Section 4 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019 ('Amendment Act'), is concerned, it is clear that as per Section 12 of the principal act, a CIRP should be 'mandatorily' completed within the period of 330 days, including any extension and legal proceedings related to the resolution process. Failing this, the corporate debtor is required to be mandatorily referred to liquidation. The Supreme Court, while leaving the provision intact, struck down the word 'mandatorily' as being manifestly arbitrary under Article 14 of the Constitution of India. The Supreme Court held it to be an excessive and unreasonable restriction on the litigant's right to carry on business under Article 19(1) (g) of the Constitution of India.
With reference to the Section 6 of the Amendment Act i.e. the amendments to Section 30 (2) (b) of the Code, the amendments were upheld in view of the fact that the said amendments in fact are beneficial to the operational creditors as well as the dissenting financial creditors who were now guaranteed a higher value as compared to the provisions pre amendment.
However, this again does not in any manner limit the CoC from classifying creditors as financial or operational or as secured or unsecured. The Supreme Court rejected the argument that a serious conflict of interest may arise between secured and unsecured financial creditors, as the majority may get together to ride roughshod over the minority. The Supreme Court held that the CoC does not act in any fiduciary capacity to any group of creditors. The CoC is to take business decisions based upon ground realities, which then bind all stakeholders, including dissentient creditors.
The Supreme Court by transferring the control of Essar to ArcelorMittal is a big step forward for the working of the Code. The verdict penned down by Justice Rohinton Nariman reaffirms the soundness of the provisions of the Code. It also gives the CoC the discretion to determine the precise nature of the resolution process and the distribution of the proceeds amongst creditors.
It is expected that the banks will recover almost 92% of the INR 40,000-crore debt, which Essar owes them and with that State Bank of India will be one of the biggest beneficiaries, which will get around INR 12,000 crore.
The Code is moving towards achieving its intended goal of swift redeployment of productive assets trapped in insolvent companies, and discouraging the notion that big loans are the lenders' problem, not the borrowers'. The net result is significantly positive for credit discipline in India.
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