Outcomes from NCLATs judgment in the matter of Essar Steel India Limited
In the CIRP initiated against Essar Steel India Limited- (Corporate Debtor), the Committee of Creditors (CoC) approved the Resolution Plan submitted by ArcelorMittal India Pvt. Ltd.- (Successful Resolution Applicant) which was approved by the Adjudicating Authority (NCLT), Ahmedabad Bench, with certain modifications by impugned order dated 8th March, 2019. The said order is challenged before NCLAT and NCLAT has passed order on 4th July, 2019 accepting the Resolution Plan with modifications.
Time Line of the Case:
|02.08.2017||NCLT, Ahmedabad Bench, passed an order u/s 7 at the behest of financial creditors, being the State Bank of India and the Standard Chartered Bank, admitting a petition filed under the Code for financial debts owed to them by the corporate debtor Essar Steel India Limited (hereinafter referred to as “ESIL”), in the sum of roughly Rs.45,000 Crores.|
|04.09.2017||Appointed the Interim Resolution Professional.|
|06.10.2017||Seek expression of interest|
|11.10.2017||ArcelorMittal India Private Limited(AMIPL) submitted an expression of interest|
|20.10.2017||Numetal Limited (“Numetal”) submitted an expression of interest|
|23.10.2017||Last date for submission of an expression of Interest|
|29.01.2018||Last date for submission of resolution plans NCLT extended the duration of the CIRP by 90 days beyond the initial period of 180 days, i.e., upto 29.4.2018.|
|12.02.2018||Extended the date for submission of resolution plans to 12.2.2018.|
|23.03.2018||Declared AMIPL and Numetal to be ineligible under Section 29A.|
|26.03.2018||AMIPL filed I.A. No. 110 of 2018 before the Adjudicating Authority, challenging “the order” of the Resolution Professional dated 23.03.2018.|
|02.04.2018||Pursuant to the Resolution Professional’s invitation, fresh resolution plans were submitted by AMIPL, Numetal, and one other entity, namely ‘Vedanta Resources Ltd.’.|
|19.04.2018||NCLT passed its order-ordered that RP is right.|
|26.04.2018||Appeals were filed by Numetal|
|27.04.2018||Appeals were filed by AMIPL|
|08.05.2018||Committee of Creditors disqualified AMIPL & Numetal|
|04.10.2018||Supreme Court Order exercising power under article 142, allows ArcelorMittal & Numetal to submit fresh bids, pay dues in 2 weeks|
|08.03.2019||NCLT Order approving Resolution Plan|
|04.07.2019||NCLAT order(discussing under this Post)|
We have listed here important outcomes from above NCLAT judgment in the matter of Standard Chartered Bank Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors.[Company Appeal (AT) (Ins.) No. 242 of 2019 dated 04.07.2019]
1. Ineligibility of ArcelorMittal India Pvt. Ltd in terms of Section 29A:
Mr. Prashant Ruia (Promoter of Essar Steel India Limited) has challenged NCLT order on the ground that ArcelorMittal India Pvt. Ltd.- (Successful Resolution Applicant) is ineligible in terms of Section 29A of the Code.
NCLAT held that an issue which has been settled by the Hon’ble Supreme Court i.e.,eligibility of ArcelorMittal India Pvt. Ltd. as a Resolution Applicant for Essar Steel India Limited, cannot be re-agitated again and again. Any such attempt is clearly barred by the principles of res judicata. Therefore, the Application preferred by the Appellant- Mr. Prashant Ruia and Intervenor- Essar Steel Asia Holdings Limited deserves to be rejected. The issue of eligibility of ArcelorMittal India Pvt. Ltd. has been adjudicated upon after considering all the arguments by the Hon’ble Supreme Court and could not be re-opened before the Appellate Authority at a stage where the Resolution Plan approval is being considered by this Appellate Authority on grounds other than Section 29A ineligibility. Apart from the aforesaid facts, NCLAT found that the Resolution Plan was considered by the Adjudicating Authority in view of the decision and directions of the Honble Supreme Court under Article 142 of the Constitution of India in “Arcelormittal India Private Limited” (Supra). Hence, at this stage, we are not inclined to re-open the question of eligibility or ineligibility of ArcelorMittal India Pvt. Ltd., which stands closed in view of the decision and directions of the Honble Supreme Court.
2. Whether the Financial Creditors can be classified on the ground of a Secured Financial Creditor having charge on project assets of the Corprorate Debtor and Secured Financial Creditor having no charge on the project asset of the Corporate Debtor or on the ground that the Financial Creditor is an Unsecured Financial Creditor?
NCLAT hled on Permissibility of classification:
If both Section 5(7) and Section 5(8) are read together, it is evident that there is no distinction made between one or other Financial Creditor. All persons to whom a financial debt is owed by the Corporate Debtor, which debt is disbursed against the consideration for time value of money, whether they come within one or other clause of Section 5(8), all of such person form one class i.e. Financial Creditor they cannot be sub-classified as Secured or Unsecured Financial Creditor for the purpose of preparation of the Resolution Plan by the Resolution Applicant.
NCLAT held that the Financial Creditors cannot be discriminated on the ground of Secured or Unsecured Financial Creditors for the purpose of distribution of proposed amount amongst stakeholders in the Resolution Plan by the Resolution Applicant.
3. Whether the Operational Creditors can be validly classified on the ground of :
(a) employees of the Corporate Debtor or
(b) those who have supplied goods and rendered services to the Corporate Debtor and
(c) the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the Local Authorities?
From the definition of Operational Debt under section 5(20), the following classification has been made by the Parliament:
(i) Those who have supplied goods and rendered services and thereby entitled for payment.
(ii) The employees who have rendered services for which they are entitled for payment.
(iii) The Central Government, the State Government or the Local Authority who has not rendered any services but derive the advantage of operation of the Corporate Debtor pursuant to existing law (statutory dues).
NCLAT held that from the aforesaid definition, the Operational Creditors can be classified in three different classes for determining the manner in which the amount is to be distributed to them. However, they are to be given the same treatment, if similarly situated.
4. Whether the power of distribution of amount to the lenders, i.e. Financial Creditors, Operational Creditors and other stakeholders is to be made by the Resolution Applicant or the Committee of Creditors (CoC)?
The distribution of debts to the Financial Creditors and the Operational Creditors during the CIRP cannot be equated with distribution of debts to all stakeholders after the liquidation for the following reasons:
Resolution Plan shows upfront payment in favour of the Creditors including the Financial Creditors, Operational Creditors and the other Creditors. It is not a distribution of assets from the proceeds of sale of liquidation of the Corporate Debtor and, therefore, the Resolution Applicant cannot take advantage of Section 53 for the purpose of determination of the manner in which distribution of the proposed upfront amount is to be made in favour of one or other stakeholders namely— the Financial Creditor, Operational Creditor and other creditors.
Sub-clause (b) of sub-section (2) of Section 30 of the Code mandates that the Resolution Plan must provides for the payment of the debts of Operational Creditors in such manner as may be prescribed by the Board which shall not be less than the amount to be paid to the Operational Creditors in the event of a liquidation of the Corporate Debtor under Section 53. That means, the Operational Creditors should not be paid less than the amount they could have received in the event of a liquidation out of the asset of the Corporate Debtor. It does not mean that they should not be provided the amount more than the amount they could have received in the event of a liquidation which otherwise amount to discrimination.
In view of the aforesaid position of law, NCLAT held that Section 53 cannot be made applicable for distribution of amount amongst the stakeholders, as proposed by the Resolution Applicant in its Resolution Plan.
5. Whether the Committee of Creditors (CoC) can delegate its power to a Sub Committee or Core Committee for negotiation with the Resolution Applicant for revision of plan?
NCLAT held that a Sub-Committee or Core Committee is unknown and against the provisions of the Code. There is no provision under the Code which permits constitution of a Core Committee or Sub-Committee nor the Code or Regulations empowers the CoC to delegate the duties of the CoC to such Core Committee/ Sub- Committee.
The other question arises for consideration is whether the Sub Committee or the CoC are empowered to distribute the amount amongst the Financial Creditors and the Operational Creditors and other Creditors. From the Section 30 read with Regulation 38 of CIRP, it is clear that the CoC have not been empowered to decide the manner in which the distribution is to be made between one or other creditors.
Further, NCLAT held that the CoC has no role to play in the matter of distribution of amount amongst the Creditors including the Financial Creditors or the Operational Creditors. The CoC is only required to notice the viability, feasibility of the Resolution Plan, apart from other requirements as specified by the Board and ineligibility of the Resolution Applicant in terms of Section 29A. The Financial Creditors being Claimants at par with other Claimants like other Financial Creditors and the Operational Creditors having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other Financial Creditors and minimum or NIL amount in favour of some other Financial Creditors or the Operational Creditors. The members of the CoC being interested party are also not supposed to decide the manner in which the distribution is to take place.
The CoC do not enjoy any authority to delegate to itself the role of the Resolution Applicant including the manner of distribution of amount amongst the stakeholders, which is exclusively within the domain of the Resolution Applicant and thereafter before the Adjudicating Authority, if found discriminatory. Such being the position, the CoC cannot delegate its power to a Sub Committee or Core Committee for negotiating with the Resolution Applicant(s).
6. Role of Committee of Creditors (CoC) under the Code:
The CoC, therefore, has a duty to take commercial decisions which further the objectives of the Code and do not allow the interests of Financial Creditors overshadow the interests of the Corporate Debtor or the other Creditors, such as Operational Creditors. A CIRP entails a large variety of decisions by an Operational Creditor, Financial Creditor, the IP, the CoC and Resolution Applicants. This piece, however, enumerates four key commercial decisions, which a CoC is required to take in a CIRP, to reorganise the Corporate Debtor as a going concern to maximise the value of its assets.
(a) A Corporate Debtor in a market economy fails to deliver for two broad reasons. First, it carries on a business which is no more viable for exogenous reasons such as innovation. Most such Corporate Debtors have economic distress and are unviable. However, a few of them may have resources to change the business line and become viable. Second, the Corporate Debtor is not doing well for endogenous reasons such as its inability to compete at market place, while other Corporates in the same business are doing well. Many of such Corporates have financial distress but are viable. However, a few of them may have significantly depleted their resources and become unviable. The CoC must correctly identify if the Corporate Debtor under CIRP is viable or not and must rescue a failing, viable Corporate Debtor and close a failing, unviable one.
b) If the Corporate Debtor is viable, the CoC must visualise the Resolution Plan required for reorganisation of the Corporate Debtor. Resolution Plan may entail a change of management, technology, or product portfolio; acquisition or disposal of assets, businesses or undertakings; restructuring of ownership, balance sheet or organisation; etc. Much in the same way a promoter invites subscription for shares in an IPO, the CoC must create visibility of the underlying value of the Corporate Debtor and invite and encourage appropriate Resolution Plans for reorganisation of the Corporate Debtor. It must express its mind as to what kind of Resolution Applicant can reorganise the Corporate Debtor keeping in view its complexity and scale of business; what can possibly address the failure by the Corporate Debtor; what are parameters to assess the viability and feasibility of the Resolution Plans; etc. to enable prospective Resolution Applicants design and submit competing Resolution Plans for reorganisation of the Corporate Debtor.
(c) The CoC must ensure that the Corporate Debtor continues as a going concern and its value does not deteriorate during CIRP. For this purpose, it must appoint a competent IP who can run the business of the Corporate Debtor as a going concern at its optimum potential, provide complete, correct and timely information about the Corporate Debtor to resolution applicants for design of resolution plans, and safeguard the assets of the Corporate Debtor. It must facilitate interim finance, and co-operate in detection of avoidance transactions, wherever required. It must expedite various tasks for closure of the CIRP at the earliest.
(d) The Code envisages the CoC to consider only those Resolution Plans which (i) have been received from credible and capable Resolution Applicants, (ii) comply with the applicable laws, (iii) are feasible and viable, (iv) have potential to address the default, and (v) have provision for effective implementation of the plan. These considerations ensure that the Resolution Plan achieves reorganisation of the Corporate Debtor as a going concern, on a sustained basis. Of the plans which meet these requirements, the CoC must approve that Resolution Plan which maximises the value of the assets of the Corporate Debtor and balance all the stakeholders, irrespective of realisation for creditors under the plan.
7. Whether Resolution Professional have jurisdiction to decide and/ or reject the claim:
The Adjudicating Authority has noticed that the Resolution Professional has no jurisdiction to decide and/ or reject the claim, it is only required to collate the claim. The Resolution Professional on behalf of the Corporate Debtor having moved before the Honble Supreme Court even during the pendency of the resolution process and having lost, it was the duty of the Resolution Professional to bring the aforesaid facts to the notice of the Adjudicating Authority for accepting the claim.
NCLAT in M/s. Dynepro Private Limited vs. Mr. V. Nagarajan – Company Appeal (AT) (Insolvency) No. 229 of 2018 etc. This Appellate Tribunal by its judgment dated 30th January, 2019 held that Resolution Professional has no jurisdiction to decide the claim of one or other creditor, including Financial Creditor, Operational Creditor, Secured Creditor or unsecured Creditor. Referring to sub-section (6) of Section 60 of the I&B Code, this Appellate Tribunal further observed that after completion of the period of moratorium, a suit or application can be filed against the Corporate Debtor.
In “M/s. Roma Enterprises v. Mr. Martin S.K. Golla, Resolution Professional− Company Appeal (AT) (Ins.) No. 232 of 2018”, NCLAT by its order dated 6th May, 2019 held that where the claim of an Operational Creditor involves a disputed question of fact as it cannot be decided by the Resolution Professional or the Adjudicating Authority, such Operational Creditor can raise such issue and claim at an appropriate stage i.e. after Moratorium is over.
8. Profit generated during the CIRP:
During the course of hearing, Mr. Gopal Subramanium, learned Senior Counsel appearing on behalf of the CoC casually argued that the Operational Creditors have earned a huge amount during the CIRP. It was informed that during the CIRP, the Corporate Debtor did business of about Rs. 55,000/- Crores (data not available and, therefore, not verified). Therefore, according to him, the Operational Creditors have not been allowed any amount.
Having heard rival contentions, we are of the view that the amount of profit if generated during the CIRP, cannot be given to the Successful Resolution Applicant as the Successful Resolution Applicant has not invested any money during the CIRP. If one or other Financial Creditors would have invested money during the CIRP to keep the Corporate Debtor as a going concern, it can claim that it should get the interest out of the profit amount. In the aforesaid background, we are of the view where the Successful Resolution Applicant does not pay the total dues to the Creditors such as the Financial Creditors or the Operational Creditors but pays lesser amount than the claim, then in such case, the profit should be distributed amongst all the Creditors including the Financial Creditors and the Operational Creditors. We, accordingly direct that after the distribution of the amount of Rs. 42,000 Crores in a manner as shown in the preceding paragraphs, if any amount is found to have been generated as profit during the CIRP after due verification by the Auditors, it should be distributed amongst all the Financial Creditors and the Operational Creditors on pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim.
9. Whether after approval of the plan under Section 31, the claim of all the Creditors is extinguishing against the Corporate Debtor:
In “M/s. Prasad Gempex v. Staer Agro Marine Exports Pvt. Ltd. & Ors.− Company Appeal (AT) (Ins.) No. 291 of 2018 etc.”, this Appellate Tribunal by its order dated 1st February, 2019 held that notwithstanding the order passed under Section 31 of the I&B Code (which comes within the purview of any existing law), it is open to a person to file a suit or an application against the Corporate Debtor after completion of the period of Moratorium in accordance with Section 60(6) of the I&B Code.
In “M/s. Prasad Gempex v. Star Agro Marine Exports Pvt. Ltd & Anr.− Company Appeal (AT) (Ins.) No. 469 of 2019”, this Appellate Tribunal held that the parties having given opportunity to move against the Corporate Debtor under sub-section (6) of Section 60 of the I&B Code, the Adjudicating Authority cannot prohibit the aggrieved person from filing claim before the Court of Competent Jurisdiction or an application before the appropriate forum.
In this background, the cases in which the Adjudicating Authority or this Appellate Tribunal could not decide the claim on merit, we have allowed such Appellants to raise the issue before an appropriate forum in terms of Section 60(6) of the I&B Code. The Financial Creditors and the Operational Creditors whose claims have been decided by the Adjudicating Authority or this Appellate Tribunal, such decision being final and is binding on all such Financial Creditors and the Operational Creditors in terms of Section 31 of the I&B Code. Their total claims stand satisfied and, therefore, they cannot avail any remedy under Section 60(6) of the I&B Code. The Financial Creditors in whose favour guarantee were executed as their total claim stands satisfied to the extent of the guarantee, they cannot reagitate such claim from the Principal Borrower.
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