Essar Steel Judgment: Key Highlights

Essar Steel Judgment: Key Highlights

The Supreme Court in its recent judgment in Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors[1] has clarified several burning issues relating to the Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’). The present article seeks to encapsulate the crux of the judgment in a brief manner. The major conclusions in the judgment are as follows:

1. Jurisdiction of the Adjudicating Authority and the Appellate Tribunal

The Supreme Court has made it clear that the scope of judicial review to be exercised by the Adjudicating Authority has to be within the four corners of Section 30(2) of the Code while the review by the Appellate Tribunal has to be confined to the grounds provided in terms of Section 32 read with Section 61(3) of the Code.

The Adjudicating Authority cannot exercise discretionary or equity jurisdiction outside Section 30(2) of the Code when it comes to a resolution plan being adjudicated upon by the Adjudicating Authority. The Supreme Court stressed that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors (‘COC’)  with a caveat that the decision of the COC must reflect the fact that the COC has taken into account that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors have been taken care of.

It was observed that if nothing is to be paid to operational creditors, the minimum, being liquidation value – which in most cases  would amount to nil after secured creditors have been paid – would certainly not balance the interest of all stakeholders or maximise the value of assets of a corporate debtor if it becomes impossible to continue running its business as a going concern. The judicial review by the Adjudicating Authority would further include examining whether the resolution plan as approved by the COC has met the requirements referred to in Section 30(2) and would include the judicial review that is mentioned in Section 30(2)(e) i.e. that the resolution plan does not contravene any of the provisions of the law for the time being in force, as the provisions of the Code are also provisions of law for the time being in force. If the Adjudicating Authority finds, in the facts of the case, that there is a breach of the aforesaid, it may send a resolution plan back to the COC to re-submit such a plan after satisfying the aforesaid requirements.

2. Differentiation Between Secured and Unsecured Creditors

The Supreme Court categorically stated that equitable treatment is only applicable to similarly situated creditors and that the aforesaid principle cannot be stretched to treating unequals equally. Equitable treatment is to be accorded to each creditor depending upon the class to which it belonged to whether secured or unsecured, financial or operational. It was further held that there is no residual jurisdiction not to 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 looked into and taken care of.

3. Validity of the Constitution of a Sub-Committee by the COC

The Supreme Court held that with regard to exercise of COC’s powers on questions which have a vital bearing on the running of the business of the corporate debtor, the same shall not be delegated to any other person in terms of Section 28(1)(h). When it comes to approving a resolution plan under Section 30(4), such power also cannot be delegated to any other body as it is the COC alone that has been vested with this important business decision which it must take by itself. The Supreme Court clarified that sub-committees can be appointed for the purpose of negotiating with resolution applicants, or for the purpose of performing other ministerial or administrative acts, provided such acts are in the ultimate analysis approved and ratified by the COC.

4. Extinguishment of Personal Guarantees and Undecided Claims

The Supreme Court has made clear the effect of the approval of the resolution plan on the claims of creditors who have not submitted their claims before the Resolution Professional (Hereinafter referred to as the ‘RP’) within the time frame provided under the Code. The Supreme Court held that Section 31(1) of the Code posits that once a resolution plan is approved by the COC it shall be binding on all stakeholders, including guarantors. The Supreme Court held that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by him has been accepted as this would throw into uncertainty amounts payable by a prospective resolution applicant who has successfully taken over the business of the corporate debtor. All claims must be submitted to and decided by the RP so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor.

The Appellate Authority/ National Company Law Appellate Tribunal had in its judgment also extinguished the rights of creditors against guarantees that were extended by the promoters/promoter group of the corporate debtor. The Supreme Court set aside the aforesaid decision on the ground that the same was contrary to 31(1) of the Code and the judgment of the Supreme Court in State Bank of India v. V. Ramakrishnan[2].

Apart from the aforesaid, the guarantors of the corporate debtor argued that their rights of subrogation, which they may have if they are ordered to pay amounts guaranteed by them in the pending legal proceedings could not be extinguished by the resolution plan.  The Supreme Court observed in this regard that that it was difficult to accept that the part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile directors of the corporate debtor. However, with regard to the present case, the Supreme Court clarified that it was not stating anything nothing which may affect the pending litigation on account of invocation of these guarantees.

5. Utilisation of Profits of the Corporate Debtor during CIRP to Pay Off Creditors

The Appellate Authority had held that the profits of the corporate debtor during CIRP shall be used to pay off creditors of the corporate debtor. The Supreme Court set aside the aforesaid decision on the ground that the request for proposal issued and consented to by ArcelorMittal and the COC had provided that distribution of profits made during the corporate insolvency process will not go towards payment of debts of any creditor.

6. Constitutional Validity of Section 4 and 6 of the Insolvency and Bankruptcy (Amendment) Act 2019

The constitutional validity of Section 4 and 6 of the Insolvency and Bankruptcy (Amendment) Act, 2019 (hereinafter referred to as the ‘Amending Act, 2019’) was under challenge before the Supreme Court.

Section 4 and 6 of the Amending Act, 2019 sought to introduce a mandatory timeline of 330 days for completion of CIRP, failing which, the corporate debtor would be liquidated. Section 6, on the other hand, specified the minimum payment to be made to operational creditors and dissenting financial creditors in the resolution plan. The Supreme Court observed that the time taken in legal proceedings should not harm a litigant if the tribunal itself cannot take up the litigant’s case within the requisite period for no fault of the litigant and a  mandatory deadline without any exception would fall foul of Article 14 and Article 19(1)(g) of the Constitution of India. Thereby, the Supreme Court while leaving section 4 of the Amending Act, 2019 otherwise intact, struck down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution.

The effect of this declaration was clarified and it was held that ordinarily the time taken in relation to the CIRP of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it could be shown to the that only a short period is left for completion of the CIRP beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it was held that the Adjudicating Authority and/or Appellate Tribunal may extend the time beyond 330 days. Similarly, even under the new proviso to Section 12, if by reason of all the aforesaid factors the grace period of 90 days from the date of commencement of the Amending Act of 2019 is exceeded, the Adjudicating Authority and/or Appellate Tribunal may further extend time keeping the aforesaid parameters in mind. It was stated that only in such exceptional cases, time can be extended.

With regard to Section 6 of the Amending Act of 2019, the Supreme Court held that it was is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a minimum amount in terms of the section and the computation of such minimum amount was more favorable to operational creditors while in the case of dissentient financial creditor the minimum amount provided was a sum that was not earlier payable.

With regard to the challenge to sub-clause (b) of Section 6 of the Amending Act of 2019, the Supreme Court held that the provision was merely a guideline for the COC which may be applied by the COC in arriving at a business decision as to acceptance or rejection of a resolution plan and thereby, the aforesaid provision was upheld. It was also clarified that the COC does not act in any fiduciary capacity to any group of creditors. The COC has to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors. Thereby, Section 6 of the Amending Act of 2019 was upheld in its entirety.

7. Treatment of Disputed Claims Filed before the RP

In the instant case, the RP admitted the claim of certain creditors notionally at INR 1 on the ground that there were disputes pending before various authorities in respect of the said amounts. However, the Adjudicating Authority directed the RP to register their entire claim and the same was upheld by the Appellate Authority. The Supreme Court set aside the decision of the Appellate Authority on the ground that the RP was correct in only admitting the claim at a notional value of INR 1 due to the pendency of disputes with regard to these claims.

Swaroop George is an independent advocate practicing at New Delhi

[1]Judgment dated 15.11.2019 in Civil Appeal No. 8766-67 OF 2019

[2] 2018 (9) SCALE 597

Read Judgment

Bar and Bench - Indian Legal news