Name of the case: committee of creditors of Essar Steel India Limited through Authorised signatory V. Satish Kumar Gupta and Ors.

Introduction

The Essar Steel Case is a landmark judgment in the arena of Insolvency & Bankruptcy Law, which decided the supremacy of the financial creditors in the Committee of Creditors in cases of distribution of claims. It is one of the oldest cases going under the IBC process which lasted for approximately 900 days. The Supreme Court set aside the NCLAT ruling and uphold the decision of the Committee of Creditors on how the funds from the ₹42,000-crore offer by ArcelorMittal would be distributed among the creditors. The law related to Insolvency and Bankruptcy is largely settled in this major case. 

Background

Factual

ArcelorMittal India Private Limited and Numetal Limited applied as resolution applicants in the Corporate Insolvency Resolution Process of Essar Steel. The Resolution Professional for Essar Steel, after duly analyzing the resolution plans of both the applicants, disqualified them and declared them ineligible for the same in accordance with the Section 29 A of the Insolvency and Bankruptcy Code, 2016.

Procedural

Both the companies approached the NCLT, Ahmedabad Bench in 2018, and it concurred with the decision of the RP to disqualify the Resolution Applicants.

This was because in the case of Numetal, one of the shareholders was Rewant Ruia and whose father i.e. Ravi Ruia was a promoter of the Essar Steel. It has also issued a guarantee in favour of the creditors of Essar Steel. Therefore, Numetal was held ineligible in view of Section 29A (c) and Section 29A (h) of the Indian Bankruptcy Code.

In the case of Arcelor Mittal, Netherlands was found to have been the promoter or exercised control over two companies namely, Uttam Galva Steels Limited and KSS Petron Limited becoming ineligible under Section 29A (c) of the Indian Bankruptcy Code.

When the case was taken to the appellate authority i.e. NCLAT, it held that the AMIPL shall stay disqualified but gave a different judgment for Numetal, contrary to what NCLT held. The reason being that Rewant Ruia had divested his interest in Numetal in favour of a third party. The NCLAT order brought parity between financial and operational creditors of Essar Steel in matters of distribution of proceeds.

Thereafter, AMIPL approached the SC against the decision of the NCLAT.

Law Applied

Section 29A of the Insolvency and Bankruptcy Code, 2016.Arguments

On behalf of Arcelor Mittal

To render it eligible, AMIL argued that the disposal of its’ shareholding in KSS Petron and Uttam Galva, the deposit of approximately INR 7,000 crores into an escrow account in relation to the overdue amounts of Uttam Galva and KSS Petron.

Declassification of AM Netherlands as the promoter of Uttam Galva, no appointed director on the board of Uttam Galva and no liability under any bank guarantees in relation to the indebtedness of either entity.

On behalf of Numetal

It was argued on behalf of Numetal that it should be eligible to be a resolution applicant, since Rewant Ruia, who was deemed to be acting in concert with the Promoter, had exited Numetal before the submission of the second round of bids and hence, he did not fall within the ambit of ‘control’, ‘promoter’ or ‘managing director’, which would otherwise, disqualify Numetal from being a bidder.

Ratio Decidendi

The SC in the present case has thrown light on these main conclusions mentioned below:

1.     The SC elucidated on the role and duties of the RP, holding that RP has no judicial authority and therefore, it is not its’ duty to determine the legal aspect of bids. The main responsibility includes forming a prima facie opinion based on facts presented to it, ensuring that all the essentials of a resolution plan are fulfilled.

    Further, it lay down that the RP is required to prepare a due diligence report for the Committee of Creditors stating the order of the Resolution Plan. The conclusion was that its role is to ‘examine‘ and ‘confirm’ that each resolution plan confirms the provision of Section 30(2) of the code.

2.     RP needs to finalize the resolution proposals first and then the COC will make a final decision on the bids. Until then, authorities like NCLT cannot interfere in the process and further not entertaining any application in regard to the same. Further, a writ petition filed before a High Court would also be turned down stating that no right is affected at this stage. Only after the COC has discovered that a resolution plan contravenes section 29A, that the resolution applicant can challenge the order before the NCLT. This situation of law was taken forward by the judgment on account of Swiss Ribbons v. Union of India. Right now, the Supreme Court, in an incredibly expressive and extensive way, decided that financial creditors hold the most elevated situation in the hierarchy in a resolution plan and the cases of operational creditors have to respect those of financial creditors. This judgment additionally set very still the controversy in regards to the role of a resolution professional in the resolution procedure as only the facilitator with no adjudicatory forces.

 3.     SC interpreted and analyzed the IBC, and lay down that litigations involving stay due to any substantive issue in the Corporate Insolvency Resolution Process, should remove the 270-day timeline to facilitate a resolution plan. Other litigations including any procedural matters will still come under this timeline.

The Supreme Court also shed a light on other ingredients of Section 29 A of the IBC, 2016 such as Lifting of the Corporate Veil,  Management and Control, along with strict compliance of time limit under the Code.

Critical Analysis

The Supreme Court has put its trust in the Committee of Creditors and its commercial intelligence with respect to the feasibility and viability of a resolution plan and the manner in which distribution is to be made under it. This principle was also held and affirmed in a previous judgment by SC in the K. Sashidhar Case.  The SC affirmed that the distinction between different classes of Creditors such as Operational and Financial creditors is mentioned in the provisions of the IBC as well as the general law governing classes of creditors. 

The SC has tried to make sure that equal treatment between creditors falling in the same category is necessary, even if the IBC lays down different classes of Creditors to be treated differently.  SC has continually preserved the view that claims of financial creditors are of primary importance, this judgment assumes great significance as it aims to strengthen the state of the claims of operational creditors in comparison to the claims of financial creditors. The judgment calls for payment of dues of operational creditors to ensure that a corporate debtor can continue to carry on its business as a going concern. It was also of utmost importance that a balance must be struck between adhering to the timelines provided under the IBC and the possibility of an insolvent company’s liquidation if the process is carried out in haste.

As we further analyze the rationale behind the judgment delivered, it ensures the escalation of the value of assets of corporate debtors and the balance the interests of all stakeholders, which are the primary and the most important objectives of the IBC. These factors should be taken in account by the Committee of Creditors while it takes any decision to revive the Corporate Debtor and to pay off the dues of Financial and Operational Creditors and the decision of the COC shall reflect the consideration of all of the above-mentioned factors. This judgment sets the law for resolution processes that will follow in the times ahead. However, several challenges still remain.

Judgment

The final judgment of the SC was that both the Resolution Applicants were disqualified from submitting resolution plans as the plans submitted by them were in contravention of Section 29A of the Code.

But, exercising its extraordinary power under Article 142 of the Constitution of India, SC gave the Resolution Applicants one final opportunity which was to clear any outstanding dues regarding their NPA accounts within 2 weeks of the SC verdict.

Conclusion

The final outcome in the Essar Steel case will provide a significant boost to efforts to revive several corporate entities which are in a distressed state. It also lays down an important responsibility for NCLT and NCLAT to look at cases under the IBC beyond their legal issues and monetary claims. The implicants and consequences on the creditors, stakeholders, promoters, along with everyone whose interest depends on the revival of the company, should be kept in mind while exercising the adjudicatory power by these authorities.

This judgment will set a precedent for other corporations which are going through an insolvency process and are awaiting resolution over the distribution of funds between different classes of creditors.

Endnotes

1. Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Ors, Civil Appeal Nos. 9402-9405 of 2018
2. Numetal Ltd. v. Satish Kumar Gupta and Ors, [2018] 209 Comp Cas 181. 
3.  K. Sashidhar v. Indian Overseas Bank 2019 SCCOnline SC 257.

Read the Full Judgement Here