Authors: Akangsha Majumdar, Presidency University
Padmalaya Kanumgo, SLS, Hyderabad
Shrey Kumar Sinha, CLC, Faculty of Law, DU
Editor: Dyuthi Sutram, SLS, Pune
The Committee of Creditors of Essar Steel India Limited through its Signatories v. Satish Kumar Gupta & Ors, is one of the landmark judgements in the sphere of Insolvency and Bankruptcy (I&B) Laws. The Supreme Court brought an end to the proceedings of this case, which spanned over 800 days, on 15 November 2019. The three- judge bench overruled the ‘doctrine of equity’ laid down by National Company Law Appellate Tribunal (NCLAT) as well as upheld the constitutional validity of section 4 and 6 of Insolvency And Bankruptcy (Amending) Act, 2019.
Essar steel appointed its interim resolution professional who was subsequently confirmed as the resolution professional for Essar Steel. The resolution professional invited interested resolution applicants to showcase their resolution plans for the revival of Essar Steel Limited. Two companies, namely Arcelor Mittal India Private Limited and Numetal Limited were applicants in the Corporate Insolvency Resolution Process ( the CIRP) of the aforementioned corporate debtor. The resolution professional analysed the resolution plans of both the applicants and rejected them by declaring the same as ineligible as per section 29A of the Insolvency and Bankruptcy Code, 2016. The decision of the Resolution professional was challenged by both the applicants in the NCLT, Ahmedabad. Both the applicants were given one more opportunity under Article 142 of the Indian Constitution to pay off the NPA within a specified period. Arcelor Mittal made the required payments whereas Numetal failed to do so. This judgement given by NCLT was filed for an appeal before the NCLAT which held that there should not be any differentiation made between operational and financial creditors. They claimed that both should be treated with equality for the payment of dues. This decision was again challenged by the financial creditors before the Hon’ble Supreme Court.
1. What is the role of Resolution Applicant, Resolution Professional and Committee of Creditors (COC) in the resolution process of corporate debtor?
2. Whether National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have jurisdiction to reverse the commercial decisions of COC?
3. Whether the financial creditors and operational creditors ought to be treated equally?
4. Whether sections 4 and 6 of The Insolvency And Bankruptcy (Amending) Act,2019 constitutionally valid?
(1) Role of Resolution Applicant, Resolution Professional and COC :
“Resolution applicant” is a person, who either individually or jointly, submits a resolution plan to resolution professional in conformation with the invitation made u/s 25(2)(h) of the Insolvency And Bankruptcy Code, 2016. The Court observed that prior to admission of application, he has the right to full information about corporate debtor, the debts owed by it along with the information memorandum and ‘evaluation matrix’ under Regulation 36B. The plan submitted by the applicant should deal with all stakeholders` interest including financial creditors and operational creditors.
‘Resolution professional’(RP) is an insolvency professional who is appointed by NCLT for conducting corporate insolvency resolution process and also include interim- resolution professional. The Court reiterated its view, that functions of RP are administrative in nature. The RP should ensure that the resolutions plan is complete in all aspects before it is placed before COC for consideration and it should not with law in force for the time being.
COC is constituted u/s 21 of IBC, 2016 and comprises of all financial creditors of the corporate debtor. The Court clarified that paramount importance should be given to “commercial wisdom” of COC as it is “commercial wisdom” which operates to approve the best resolution plan based on its “feasibility” and “viability” with respect to all stakeholders, which is finally accepted after negotiating with the prospective resolution applicants. It is to ensure stated process gets completed timely without any judicial intervention. The COC should be able to maximize the assets for the corporate debtor and balance the interests of other stakeholders simultaneously.
2) Jurisdiction of NCLT and NCLAT:
The court held that there should be minimal intervention of NCLT or NCLAT regarding the commercial decisions of COC. The Court held the jurisdictional power of the NCLT is limited u/s 30(2) of Insolvency And Bankruptcy Code, 2016 which gives the NCLT the power to reject the resolution plan approved by COC if it does conform the grounds stated in aforesaid provision. Similarly, the jurisdiction of NCLAT is restricted u/s 32 which provides that appeal will lie against approved plan by COC on the grounds mentioned u/s 61(3) of the Insolvency And Bankruptcy Code, 2016. The Court while observing that neither NCLT nor NCLAT has any power to reverse the “commercial decisions” of COC, held that commercial or business decision of COC are not subject to judicial review. The NCLT or NCLAT does have jurisdiction to examine the approved plan of COC if the plan takes into account the interest of all stakeholders.
3) Principle of equality between financial and operational creditors:
Financial creditors are those groups of people who lend money to companies to carry out their business operations whereas operational creditors belong to the group who provide goods and services to the corporate debtor and are more like beneficiaries of amounts provided by financial creditors. The judgment delivered by NCLAT held that both, financial and operational creditors should be treated equally under a resolution plan without any difference been made concerning the payment of dues.
However, the judgement of NCLAT was overruled by the Hon’ble Supreme Court. The Supreme Court pointed out the fact that there is a distinction between equal and equitable treatment. It stated that the very objective and purpose of the Insolvency and Bankruptcy Code is being defeated along with Article 14 Constitution if unequal are treated equally. The amended Regulation 38 of the Code was clarified by stating that it was not necessary to pay the same amounts to Financial and Operational creditors or secured and unsecured creditors under a resolution plan since they belong to two different classes and hence can be treated differently. The Supreme Court observed that the object of the Code is not “Equality for all” and it was allowed to give differential treatment to different classes of people provided that the distinction was not made arbitrarily but on reasonable grounds.
The Supreme Court was of the opinion that as long as the resolution plan is in accordance to the provisions of the Code and CIRP Regulations, the decision of the CoC must be upheld and the NCLT possess no residual jurisdiction to disqualify a plan on the ground that is unjust to a class of creditors. The main objective is not only to protect the creditors in general but also to protect the creditors from each other by taking care of the interests of both the classes.
4) Constitutional validity of Section 4 and 6:
Section 4 of the Amending Act, 2019 states about a mandatory timeline of 330 days for the completion of CIRP, or else the corporate debtor would be liquidated. The 330-day mark is a violation of Article 14(right to equality) and Article 19(1)(g) ( Right to carry out any business) of the Constitution. Therefore, the Supreme Court struck down the word “mandatory" from section 4 of the act as it clearly violated Article 14 and also was a restriction on the litigant’s right to carry on business under Article 19(1)(g). It was held that the time taken in CIRP of the corporate debtor must be completed within the outer limit of 330 days from the occurrence of insolvency, including extensions and time taken in legal proceedings. And beyond 330 days, if it is shown to the court that only a short span of time is left for the completion of the CIRP, 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, the Adjudicating Authority and/or Appellate Tribunal may extend the time beyond 330 days.
Section 6, specified the minimum payment that is to be made to the operational and financial creditors in the resolution plan. The Supreme Court held that it was a beneficial provision for the operational and financial creditors as they are now to be paid a minimum amount that was not payable earlier, according to this section. And as for sub clause (b) of section 6, it was held that the provision is a mere guideline for the COC, which may be applied while arriving at a business decision for the acceptance or rejection of a resolution plan. And thereby, Section 6 was upheld in its entirety.
The Supreme Court set aside the judgement by the NCLAT and accepted that financial and operational creditors are distinct and cannot be equated. It is likely to reduce legal wrangling between financial and operational creditors and accelerate the resolution process. The judgement of this case also laid down the role of the COC, and the adjudicating authority and also, the word "mandatorily" was removed in the provision that restricted CIRP beyond 330 days. It paved the way for Arcelor Mittal and Numetal Steel to take over the debt-laden Essar Steel Company. It also dealt with the issue of the interference of courts with the decision of the COC. In conclusion, the verdict has resolved many issues that were affecting the proper functioning of the code.
 Sect. 5(27), Insolvency And Bankruptcy Code, 2016.  Sect 2(Ha), Insolvency And Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations,2016  I& B Board Of India(Insolvency Resolution Process For Corporate Persons) Regulations, 2016  Regulation 38(1a), Insolvency And Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016  Sect. 5(27),Insolvency And Bankruptcy Code 2016, No.31 Of 2016 Arcelor Mittal India Private Limited V. Satish Kumar Gupta And Ors. K. Sashidhar V. Indian Overseas Bank 2019 Scc Online Sc 257.  Sect.21(2), Insolvency And Bankruptcy Code 2016, No.31 Of 2016