12/10/2018 0 Comments
DELEP GOSWAMI, FCS
Supreme Court of India,
Advocate, Supreme Court of India, New Delhi
1. In a landmark judgement dated 4th October, 2018, the Hon'ble Supreme Court of India not only dealt with an important issue regarding eligibility criteria under Section 29A of the Insolvency & Bankruptcy Code, 2016 (IBC) for bidding in the resolution plan for a debt-ridden company admitted under section 7 of the IBC, but also dealt with and passed its judgement in respect of many other legal issues relating to the interpretation of many other provisions of the IBC. Since the IBC is going through testing process, it is expected that the said Supreme Court's judgement in the case of Arcelor Mittal India Private Limited –versus- Satish Kumar Gupta (in short "Arcelor Mittal judgement") will serve as a guide to the Resolution Professionals ('RP') and the creditors forming part of the Committee of Creditors (COC) as well as the Resolution Applicants ('RA'). In this article some of the important aspects of the judgement have been discussed.
Background of the case and the complex structure of the resolution applicants
2. A brief background of the case is that Essar Steel India Limited (ESIL) was one of the initial 12 companies in respect of which the Reserve Bank of India (RBI) directed the lender Banks to file applications at the National Company Law Tribunal ('NCLT') under the IBC for initiating corporate insolvency resolution process. However, ESIL challenged the said directive of the RBI in the Court, but without success. It was reported that ESIL's dues to the financial institutions and other creditors amounted to more than Rs. 54,000 crores.
Once the case of ESIL was admitted by the NCLT and the RP was appointed, the corporate insolvency resolution process (CIRP) of ESIL started and the RP invited bids from prospective resolution applicants to submit their proposals. It needs to be highlighted here that in order to prevent the erstwhile promoters and persons acting in concert with them from bidding in the resolution application process, Section 29A was introduced in the IBC, whereby many disqualifications were inserted to disentitle the resolution applicants to be persons connected with the promoters of the debtor company. The provision of section 29A which came for interpretation was "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…" (i.e., various sub-clauses mentioned in section 29A)
Two resolution applicants submitted their bids/proposals for ESIL. One was by Arcelor Mittal controlled by Mr. Laxmi Narayan Mittal and another proposal was from Numetal, which was a Special Purpose Vehicle (SPV) created by the Ruias (i.e., the promoters of ESIL) solely for the purpose of bidding and submitting the proposal pursuant to the invitation to the prospective bidders by the RP. It is to be noted here that in the tug of war between bidders, on the one hand was Numetal, which had a complex corporate structure where at the time of incorporation, Mr. Rewant Ruia (son of ESIL promoter Mr. Ravi Ruia) held 100% shareholding (who later on divested his entire shareholding) and on the other hand was Arcelor Mittal which had interest in two other companies, viz., Uttam Galva Steels and KSS Petron, both of which had been declared NPAs by their respective lenders. In a hurry, both these resolution applicants wanted to cure their ineligibility under Section 29A and thus, in the case of Numetal, Rewant Ruia's control was brought down to less than 25% and in the case of Arcelor Mittal, promoter Mittal sold his shares in both the NPA companies, viz., Uttam Galva and KSS Petron. However, the RP found that both the bidders/resolution applicants were ineligible u/s. 29A of the IBC and rejected their proposals. Both these resolution applicants approached the NCLT against the said decision of the RP and the NCLT granted time to both the applicants to cure their ineligibility/defects. Meanwhile, Numetal completely dropped Rewant Ruia from the Numeral's complex structure. When appeals were filed against the said NCLT decision, the Appellate Authority, viz., NCLAT held that Numetal's second resolution plan would be eligible after Rewant Ruia had been completely dropped from the structure of the resolution applicant and the NCLAT also held that Mittal, in order to be eligible, had to pay the dues of the two companies which were declared NPAs, even though Mittal had already divested his shareholdings in these two companies.
Supreme Court examines and interprets provisions of Section 29A of IBC to determine eligibility of the resolution applicant.
3. Appeals were filed by both the RAs to the Supreme Court of India and the Supreme Court, vide its judgement dated 4th October, 2018 held the following while interpreting Section 29A of the IBC :-
"The opening lines of Section 29A of the amended 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. A wooden, 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 example, it is well-settled that a shareholder is a separate legal entity from the company in which he holds shares. This may be true generally speaking, but when it comes to a corporate vehicle that is set-up 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 a company. In such cases, the principle laid down in Solomon v. A. Solomon and Co. Ltd. (1897-AC22) will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan."
To examine eligibility of resolution applicant, its business structure can be examined by piercing the corporate veil.
4. The Supreme Court pierced the corporate veil and analysed in details the complex structure of both the RAs and held that "since 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." Further, the Supreme Court held that "it is important for the competent authority to see that persons, who are otherwise ineligible and hit by sub-clause (c), do not wriggle out of the proviso to sub-clause (c) by other means, so as to avoid the consequences of the proviso. For this purpose, despite the fact that the relevant time for the ineligibility under sub-clause (c) to attach is the time of submission of the resolution plan, antecedent facts reasonably proximate to this point of time can always be seen to determine whether the persons referred to in Section 29A are, in substance, seeking to avoid the consequences of the proviso to sub-clause (c) before submitting a resolution plan. 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 © of Section 29A, as well as the larger objective sought to be achieved by the said sub-clause in public interest, will be defeated."
Entities prohibited by SEBI : ineligible to submit resolution plan
5. The Supreme Court held that "When we come to sub-clause (f), it is clear that, if any of the persons mentioned in section 29A is prohibited by SEBI from either trading in securities or accessing the securities market – again ineligibility of the person submitting the resolution plan attaches. Under sub-clause (f), if a person situate abroad is subject to any disability which corresponds to sub-clause (f), such person also gets interdicted." Further, the Supreme Court held that "it is clear that 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-limit of maximum 270 days prescribed under the IBC : not extendable.
6. On the question as to whether adhering to the time limit set out in the IBC for approval of the resolution plan was mandatory or not, the Supreme Court held that "in fact, even the literal language of section 12(1) makes it clear that the provision must be read as being mandatory. The expression "shall be completed" is used. Further, sub-section (3) makes it clear that the duration of 180 days may be extended further "but not exceeding 90 days", making it clear that a maximum of 270 days is laid down statutorily. Also, the proviso to section 12 makes it clear that the extension 'shall not be granted more than once'". Further, the Supreme Court held that "what is important to note is that a consequence is provided in the event that the said period ends either without receipt of a resolution plan or after rejection of a resolution plan under Section 31.This consequence is provided by Section 33, which makes it clear that when either of these two contingencies occurs, the corporate debtor is required to be liquidated in the manner laid down in Chapter III. Section 12, construed in the light of the object sought to be achieved by the Code, and in the light of the consequence provided by Section 33, makes it clear that the periods previously mentioned are mandatory and cannot be extended." However, the Supreme Court further held that the act of the Court shall harm no man and this is a maxim firmly rooted in our jurisprudence and that a reasonable and balanced construction of the Statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, time taken in litigation ought to be excluded, as otherwise a good resolution plan may have to be shelved resulting in corporate death and the consequent displacement of employees and workers.
RP cannot "decide", but only examine legality of the Resolution Plan for consideration of CoC.
7. With regard to the role and duty of the RP especially if the resolution plan received by him conform to the norms set out in the IBC and connected Regulations, the Supreme Court held that "what has now to be determined is whether any challenge can be made at various stages of the corporate insolvency resolution process. Suppose a resolution plan is turned down at the threshold by a Resolution Professional under section 30(2). At this stage is it open to the concerned resolution applicant to challenge the Resolution Professional's rejection? It is settled law that a statute is designed to be workable and the interpretation thereof should be designed to make it so workable." It further stated that "given the timeline referred to above and given the fact that a resolution applicant has no vested right that his resolution plan be considered, it is clear that no challenge can be preferred to the Adjudicating Authority at this stage. A writ petition under Article 226 filed before a High Court would also be turned down on the ground that no right, much less a fundamental right, is affected at this stage. This is also made clear by the first proviso to section 30(4), whereby a Resolution Professional may only invite fresh resolution plans, if no other resolution plan has passed muster. However, it must not be forgotten that a Resolution Professional is only to "examine" and "confirm" that each resolution plan conforms to what is provided by Section 30(2). Under Section 25(2)(i), the Resolution Professional shall undertake to present all resolution plans at the meetings of the Committee of Creditors. This is followed by section 30(3), which states that the Resolution Professional shall present to the Committee of Creditors, for its approval, such resolution plans which confirm the conditions referred to in sub-section(2). This provision has to be read in conjunction with Section 25(2)(i), and with the second proviso to Section 30(4),which provides that where a resolution applicant is found to be ineligible under Section 29A(c) the resolution applicant shall be allowed by the Committee of Creditors such period, not exceeding 30 days, to make payment of overdue amounts in accordance with the proviso to Section 29A(c). A conspectus of all these provisions would show that the Resolution Professional is required to examine that the resolution plan submitted by various applicants is complete in all respects before submitting it to the Committee of Creditors. The Resolution Professional 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 Committee of Creditors, who may or may not approve it…… His prima-facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to "decide" whether resolution does or does not contravene the provisions of law." The Supreme Court further held that 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 state briefly as to why it does, or does not conform to the law.
Adjudicating Authority to finally decide the recommendation of the CoC and approve/disapprove the resolution plan and the appeal provisions.
8. With regard to the question as to when the aggrieved resolution applicant can approach the Court, the Supreme Court's judgement held that an aggrieved resolution applicant can approach the NCLT (i.e., the Adjudicating Authority) for relief only after a resolution plan has been considered by the CoC after voting and not prior to that. The AA acting quasi-judicially, can determine whether the resolution plan violates provisions of any law, including section 29A of the IBC, after hearing arguments from the RA, as well as the CoC, after which an appeal can be preferred from the AA's decision to the NCLAT. The NCLAT decision can further be challenged u/s. 62 of the IBC before the Supreme Court on the question of law arising out of such an order of the NCLAT.
Supreme Court invoking the provisions of Article 142 of the Constitution of India
9. In ESIL's case, the Supreme Court found that both the resolution applicants were ineligible and hit by section 29A (c). However, acceding to the request made on behalf of the CoC, the Supreme Court 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 by its judgement, gave one more opportunity to both the RAs to pay off the NPAs of their related corporate debtor companies within a period of two weeks and allowed the RAs to resubmit their resolution plans to the CoC, who were then given a period of 8 weeks from the date of the judgement, to accept by requisite majority, the best amongst the plans submitted, including the resolution plan submitted by Vedanta.
Events happening after the Supreme Court judgement
10. The various newspaper reports indicate that the CoC of ESIL voted to approve Arcelor Mittal's bid, with upfront payment of Rs. 42,000 crore towards ESIL's resolution debt and that Arcelor Mittal will further inject Rs. 8000 towards capital to support operational improvement, increase production and enhanced productivity. The said plan is now awaiting approval of the NCLT. After such NCLT approval, Arcelor Mittal will own and operate ESIL in partnership with Nippon Steel and Sumitomo Metal Corporation. However, it is reported that the promoters of ESIL are invoking the provision of Section 12A in the IBC which allows withdrawal of the debtor's case 90% of the lenders agree to it. Meanwhile 29 operational creditors of ESIL to whom ESIL owed Rs. 381 crores have moved application before the NCLT to direct the successful bidder to pay them in full or allow the proposal of the owners of ESIL to bring in Rs. 54,389 crores which will enable full payment to the operational creditors. Another operational creditor First Orissa Stevedores to whom ESIL owed Rs. 20.46 has also moved application before the NCLT to direct the CoC to consider the proposal of the owners of ESIL which talks of full payment to the operational creditors.
All these later developments indicate that despite Supreme Court's clear verdict, further legal battles will ensue from what NCLT decides on the recommendation of the CoC of ESIL. It is hoped that once the ESIL case reaches finality, it will pave way for smoother processes for other debt-ridden companies under IBC jurisdiction.
Anirrud Goswami, Advocate, Goswami & Goswami, Associates and Advocates,