Judgments

COMMITTEE  OF CREDITORS OF ESSAR STEEL INDIA  LTD  VS SATISH KUMAR GUPTA : CASE SUMMARY

The Supreme Court in Committee of Creditors of Essar Steel India Ltd  vs Satish Kumar Gupta (2020)  8 SCC 531 struck down “mandatorily” word in Section 12 IBC, which made it compulsory to complete CIRP in 330 days. The Supreme Court also held that CoC does not need to treat all creditors equally. The Supreme Court also reiterated that NCLAT cannot replace its wisdom with commercial wisdom of Committee of Creditors.

FACTS OF THE CASE

The NCLT, Ahmadabad admitted Petition under Section 7 of IBC filed by Standard Chartered Bank and State Bank of india. Satish Kumar Gupta was appointed as Interim Resolution Professional who was later confirmed as Resolution professional. During CIRP Resolution Plans were submitted by Arcelor Mittal India Ltd and another by Numetal Ltd which were found to be ineligible under 29A.  Litigation regarding the same reached to the Supreme Court wherein both were held to be ineligible to submit Resolution Plans but the Supreme Court invoked jurisdiction under Article 142 and gave opportunity to both Arcelor Mittal and Numetal to pay off  their NPAs within two weeks failing which Corporate Debtor has to go into liquidation.  Arcelor Mittal made payments but Numetal  did not make payments.

Final Resolution Plan of Arcelor Mittal  was  approved by CoC   on 23.10.2018  wherein  upfront amount of Rs. 42,000 Crore was to be paid.  Rs. 17.4 crore was to be paid to unsecured financial creditors with a claim amount of more than Rs. 10 lakhs and  Rs. 30.55 Lakh to such financial creditors with claim amount of less than Rs. 10 lakhs. No change was made in respect of operational creditors. Workmen and employees were to be paid in full. Small trade creditors having claims of less than one crore were to be paid in full.  Other trade and Government Creditors were to be paid in aggregate Rs. 196 Crore. Other operational creditors were to be given nothing. Allocation of Rs. 1000 Crore extra to operational creditors was approved by majority of 70.73% of Committee of Creditors.

NCLT vide its judgment dated 08.03.2019 approved the Resolution Plan. Appeals were filed before NCLAT.  NCLAT in its final judgement held that  (i) there cannot be any difference between financial creditor and operational creditor in matter of payment of dues (ii) Security and Security interest is irrelevant at the stage of resolution for the purpose of allocation of payment   (iii) Operational Creditors by its definition have sub-classes and can be treated differently for purpose of payments (iv) Profits generated by Corporate Debtor will be distributed equally among Financial Creditors and Operational Creditors (v) A core committee or sub-committee cannot be constituted under the Code (vi) Committee of Creditors has not been empowered to decide the manner in which distribution is to be made between one or more creditors (vii) Section 53 cannot be applied during CIRP (viii) Claims which have not be decided by NCLT or NCLAT may be decided by appropriate forum (ix)  Financial Creditor in whose favour guarantees were executed as their total claim stand satisfied to the extent of guarantee cannot reagitate claims as against the principal borrower.

FINDINGS OF THE SUPREME COURT

The Supreme Court discussed in detail role of Resolution Professional, Role of Prospective Resolution Applicant, Role of Committee of Creditors in the Corporate Resolution Process, Jurisdiction of NCLAT and NCLAT.

Equality of treatment to all creditors

The Supreme Court observed that NCLAT has held that equitable treatment demands that  secured, unsecured, financial and operational creditors have to be treated equally.

The Supreme Court observed that importance of valuing security interest separately from interests of creditors who do not have security is well recognized in several jurisdictions.  if “equality for all” approach in respect of  all creditors is adopted, secured creditors will vote for liquidation as they would have better rights during liquidation. This will defeat the whole objective of the code of reviving the Corporate Debtor.

The Supreme Court noted that by vesting the Committee of Creditors with the discretion of accepting Resolution Plans only with Financial Creditors , operational creditors having no vote, the Code itself creates two types of Creditors.

The Constitution of Sub- committee

The Supreme Court observed that for taking decisions on questions which have vital bearing on running of business of Corporate Debtor, Section 28 (1) (h) provides that though these powers are administrative in nature, they shall not be delegated to any other body. This does not mean that sub-committees cannot be appointed for purpose of negotiating with resolution applicants or for the purpose of performance of other ministerial or other administrative acts, provided such acts are in ultimate analysis approved and ratified by the Committee of Creditors.

Extinguishment of Personal Guarantees and Undecided Claims

The Supreme Court observed that Section 31 (1) IBC makes it clear that once Resolution Plan is approved by Committee of Creditors it shall be binding on all stakeholders including guarantors. This provision ensures that the successful Resolution Applicant starts running the business of the Corporate Debtor on   a fresh slate.

The Supreme Court observed that findings of the NCLAT that claims undecided by NCLT or NCLAT can be determined by appropriate forum militates against rationale of Section 31. A successful Resolution Applicant cannot suddenly be faced with “undecided claims” after approval of Resolution Plan as this would amount to a hydra head popping up throwing uncertainty in amount payable to creditors by the Resolution Applicant.

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

Section 4 of Amending Act of 2019 provided that CIRP will be completed within 330 days including extension of CIRP given and legal proceedings.

The Supreme Court observed that time taken in legal proceedings cannot possibly harm a litigant if the Tribunal itself cannot take up a litigant’s case within the requisite period for no fault of the litigan . A provision which mandatorily requires the CIRP to end by a certain date – without any exception thereto – may well be excessive interference with a litigant’s fundamental right to non-arbitrary treatment under Article 14 and an excessive,  arbitrary and therefore unreasonable restriction on a litigant’s fundamental right to carry on business under Article 19 (1) (g) of the Constitution of India.

The Supreme Court while leaving the provision intact, struck down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India as being an excessive and unreasonable restriction on litigant’s right to carry on business under Article 19 (1) (g) of the Constitution.   But at same time the Supreme Court observed that only in exceptional cases time can be extended, general rule being that 330 days is the outer limit within which resolution of the stressed assets of the Corporate Debtor must take place beyond which the Corporate Debtor is driven into Liquidation.

Section 6 of the Amendment Act, 2019 , which substituted  Section 30 (2) (b) and made some changes in Section 30 were held to valid.  The Supreme Court noted that Section 30 (2) (b) provides better treatment to operational creditors and dissenting financial creditors as they will get minimum amount as prescribed in the amended Section.

The Supreme Court held that NCLAT judgment which substitutes its wisdom for the commercial wisdom of the Committee of Creditors must therefore be set aside.

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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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