Arcelor Mittal Bid For Essar Steel: Key Aspects In SC Judgment

The SC Bench comprising of Justices R F Nariman, Surya Kant and Ramasubramanian, has clarified that the wisdom of the CoC's decision is not subject to the adjudicating authority or the appellate authority's purview, and has also refused to apply the "equality for all" approach, as prayed for by the Operational Creditors (OCs), and the unsecured financial creditor Standard Chartered Bank (SCB).

SC began hearing the oral arguments in the matter on 16^th October 2019, and the same were concluded on 24^th October 2019, giving the parties liberty to file written submissions if they so wished. The judgment deals with 10 key aspects pertaining to the corporate insolvency resolution process (CIRP) in one of the biggest insolvency matters of the country.

The key aspects taken into account by the SC to arrive at the decision in the Essar Insolvency case are:

1. Role of the Resolution Professional

The Bench referred to several provisions and regulations made under the Code (IBC) to describe the role of the Resolution Professional (RP). While discussing the various duties of the RP to be carried out in the CIRP, the Bench confirmed that the role of the RP under the Code and the aforesaid Regulations, is not adjudicatory but administrative. Relying on its judgment in Swiss Ribbons, the SC Bench reasserted that RP 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 CoC, who may or may not approve it.

2. Role of the Prospective Resolution Applicant

Certain provisions and Regulations made under the Code were referred to show that the prospective RA must get complete information memorandum (IM) as well as the evaluation matrix (provided for under Regulation 36-B). The Bench asserted that the resolution plan submitted by the prospective RA must provide for necessary measures for the insolvency resolution of the corporate debtor for maximisation of the value of its assets. A reference was made to Regulation 38(1), which mandates the provision of priority in payment of amount due to operational creditors over financial creditors. In addition, the Bench was of the view that the RA in its Resolution Plan, must include provisions to deal with the interests of all stakeholders including financial creditors and operational creditors of the CD.

3. Role of the CoC in the CIR process

The Bench observed that since 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 of management of the CD and corporate resolution by the acceptance of a resolution plan by the requisite majority of the Committee of Creditors, corporate resolution is ultimately in the hands of the majority vote of the CoC. The CoC decides the "feasibility and viability" of a resolution plan, after taking into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. It was clarified that it was open to the CoC to suggest a modification to the prospective RA's plan, affecting the payment of priority of dues. Thus, the SC essentially upheld the sanctity of the commercial wisdom of the CoC to determine as to how, and in what manner, the CIRP is to take place.

4. Jurisdiction of the Adjudicating Authority and the Appellate Tribunal

The SC's decision in K. Sasidhar was relied upon to hold that neither the adjudicating authority (NCLT) nor the appellate authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the CoC. It was concluded that the scope of enquiry and the grounds on which the decision of "approval" of the resolution plan by the CoC can be interfered with by the adjudicating authority (NCLT), is limited to what is set out in Section 31(1) read with Section 30(2), and by the appellate tribunal (NCLAT) under Section 32 read with Section 61(3) of the 66 of the Code.

SC further held that Section 60(5)(c) of the IBC is in the nature of a residuary jurisdiction vested in the NCLT so that the NCLT may decide all questions of law or fact arising out of or in relation to insolvency resolution or liquidation under the Code. A harmonious reading of Section 31(1) and Section 60(5) of the Code shows that the residual jurisdiction of the NCLT under Section 60(5)(c) cannot, in any manner, whittle down Section 31(1) of the Code.

The Bench took the view that the commercial wisdom has been exercised by the CoC after taking into account all the factors leading to maximisation of asset value of the CD, but the ultimate discretion of what to pay and how much to pay each class or subclass of creditors lies with the CoC.

5. Secured and unsecured creditors - the equality principle

NCLAT judgment had applied an 'equality principle' stating whether creditors are secured or unsecured, financial or operational, equitable treatment demands that they all be treated as one group of creditors similarly situated, as a result of which no differences can be made in terms of the amount of debt to be repaid to them.

The Bench noted that reading the amended Regulation 38 does not lead to the conclusion that financial creditors (FC) and operational creditors (OC), or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan. So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the CoC which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors.

The SC referred to the UNCITRAL Legislative Guide and BLRC 2015 Report, found that if an "equality for all" approach to different classes of creditors is adopted, then in many cases, the secured financial creditors will be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This in turn, the SC Bench noted, would defeat the purpose of the Code.

The Apex Court on reading the Code and Regulations made thereunder, observed that the equality principle cannot be stretched to treating 'unequals equally', as that will destroy the objective of the Code to resolve stressed assets.

6. The constitution of a sub-committee by the Committee of Creditors

Standard Chartered Bank (SCB) had argued that the constitution of sub-committee comprising of secured financial creditors SBI,IDBI, ICICI and EARC, illegally negotiated in private with AMIL (Arcelor Mittal India Ltd.), and that the very constitution of such a sub-committee/core committee was illegal as it led to delegation of powers, which is not allowed under the Code.

The SC Bench observed that Section 28(1)(h) of the IBC provides that the powers of the CoC are administrative in nature, but they shall not be delegated to any other person, and specified that the power of approving a resolution plan under Section 30(4) cannot be delegated to any other body. However, the Bench took the view that there was no bar on the appointment of sub-committees for the purpose of negotiating with resolution applicants, or for the purpose of performing other ministerial or administrative acts, per se. In this case, the subcommittee was made with the requisite majority of the CoC and was used only for purposes of initiating proceedings and negotiating with ArcelorMittal, which ultimately culminated in the successfully negotiated resolution plan, which was passed by the requisite majority of creditors on 23.10.2018.

The Bench further remarked that SCB's plea was not bona fide, as it is only when SCB found that things were going against it that it started raising objections on the technical plea that sub-committees cannot be constituted under the Code. Thus, the constitution of the sub-committee was upheld.

7. Extinguishment of Personal Guarantees and Undecided Claims

Relying upon its previous judgment in State Bank of India v. V. Ramakrishnan, the SC Bench asserted 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. This is for the reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were. In view of this, the Bench was not satisfied with the argument 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.

The NCLAT judgment being contrary to Section 31(1) of the Code and the SC's judgment in State Bank of India (supra), was set aside. Applying the same finding, the Bench also set aside the part of the NCLAT judgment which held that claims existing apart from those decided on merits by the RP and by the NCLT or NCLAT, can now be decided by an appropriate forum in terms of Section 60(6) of the Code.

8. Utilisation of profits of the corporate debtor during CIRP to pay off creditors

The Request For Proposal (RFP) issued in terms of Section 25 of the Code and consented to by ArcelorMittal and the CoC had already provided that distribution of profits made during the CIRP will not go towards payment of debts of any creditor. Thus, the NCLAT judgment holding that such profits will be used to pay off dues of creditors arising during the CIRP was also set aside.

9. Constitutional Validity of Section 4 and 6 of the Amending Act, 2019

It was argued by SCB that Sections 4 and 6 of the Amending Act of 2019 were tailor-made to do away with the judgment of the NCLAT in this very matter. SC was of the opinion that since an appeal against the judgment of the NCLAT lies to the Supreme Court, the legislature is well within its bounds to lay down laws of general application to all persons affected, bearing in mind what it considers to be a curing of a defective reading of the law by an Appellate Tribunal.

While agreeing that timely resolution of stressed assets is a key factor in the successful working of the Code, the challenge to constitutional validity of section 4 that amendment, which mandated the competition of CIRP in 330 days, was heard. The Bench agreed that the time taken in legal proceedings cannot ever be put against the parties before the NCLT and NCLAT based upon a Latin maxim which sub-serves the cause of justice namely, 'actus curiae neminem gravabit'. While leaving the provision otherwise intact, SC struck down the word "mandatorily" for 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.

Coming to the challenge to validity of section 30(2) amendment, it was clarified by the Bench that Explanation 1 has only been inserted in order that the NCLT and the NCLAT cannot enter into the merits of a business decision of the requisite majority of the CoC. Likewise, Explanation 2 applies the amended explanation 1 to pending proceedings. To explain the retrospective application of the amended section 30(2), the SC has relied on various judgements to conclude that since an appellate proceeding is a continuation of an original proceeding, a change in law can always be applied to an original or appellate proceeding. As a result, the validity of amended section 30(2) was also upheld.

10.The resolution plan of ArcelorMittal as amended and objections thereto

The final resolution plan as approved on 23.10.2018 was as follows - in the place of Rs 35,000 cr. to be paid on the effective date as an upfront amount, Rs 39,500 crores and Rs 2,500 cr. aggregating INR 42,000 cr. was to be paid. Arcelor Mittal agreed that the CoC will decide the manner in which the financial proceeds will be distributed to secured financial creditors.

The SC Bench refused to accept the submission of SCB, as argued by Kapil Sibal, that "feasibility and viability" of a resolution plan will not include distribution of the amount of debt under the said plan. SC was further of the view that the resolution plan does not necessarily provide for distribution inter se between secured financial creditors. As long as the resolution plan provides for distribution of amounts payable towards debts based upon a classification of various types of creditors, the Bench was of the view that the decision to distribute the proceeds is to be taken by the CoC.

Section 30(2)(b) of the Code refers to Section 53 not in the context of priority of payment of creditors, but only to provide for a minimum payment to operational creditors. However, this did not, in any manner, limit the CoC from classifying creditors as financial or operational and as secured or unsecured. Rejecting 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 SC was of the view that the CoC does not act in any fiduciary capacity to any group of creditors, and it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors.

Since the NCLAT judgment substituted its wisdom for the commercial wisdom of the CoC, and which also directed the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, was also set aside.

Thus, after having looked at the above 10 aspects in the judgment, SC has allowed the appeals of the CoC of Essar Steel and upheld the constitutional validity of the Amendment Act, 2019. The Bench clarified that the CIR process of Essar Steel will move forward in accordance with the amended resolution plan of Arcelor Mittal, as it has provided for amounts to be paid to different classes of creditors by following Section 30(2) and Regulation 38 of the Code.

Click to Read the Judgment.