A note on the insolvency proceedings of Essar Steel India Limited under the Insolvency and Bankruptcy Code, 2016
Author: Sajeev Srivatsava
3rd Year, BA LLB (Hons.),
1. Introduction:
1.1. This note is a concise encapsulation of the insolvency proceedings of Essar Steel India Limited in the Ahmadabad Bench of the National Company Law Tribunal (NCLT), with respect to the order passed on the 3rd of March 2019.
1.2. This note will attempt to make an accurate summary of the proceedings and the law applied in the therein.
2. Brief facts of the case:
2.1. The proceedings in question are various Interlocutory Applications filed during the Corporate Insolvency Resolution Process (CIRP); as triggered by the NCLT pursuant to the admission of an application to initiate the corporate insolvency process under Section 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘IBC’), which was filed by Standard Chartered Bank and others.
2.2. The main Interlocutory Application No. 431 of 2018 was filed by the Resolution Professional, Shri Satish Kumar Gupta seeking approval for the Resolution Plan from the NCLT as stipulated by Section 31 of the IBC.
2.3. There where various other Interlocutory Applications filed by financial or operational creditors, Government authorities and other stakeholders pursuant to the same CIRP. As all the Interlocutory Applications arose out of the same CIRP they were heard together and disposed by this common order.
2.4. There were 57 Interlocutory Applications filed pursuant to the CIRP, out of which 25 were disposed of prior to this order. The remaining Interlocutory Applications were thereafter disposed of by the common order on 3rd March 2018; which is the subject of this note.
2.5. Within the common order all the Interlocutory Applications, with the exception of the ones discussed below were disposed of as either being infractions or without merit.
2.6. The most important orders i.e., pertaining to Interlocutory Application No. 439 of 2018 and Interlocutory Application No. 431 of 2018
3. Interlocutory Application No. 439 of 2018:
3.1. This particular Interlocutory Application was submitted by M/s. Standard Chartered Bank. The respondents being the Resolution Professional and the Resolution Applicant, M/s. ArcelorMittal.
3.2. In the interlocutory application, the applicant M/s. Standard Chartered Bank, a dissenting Financial Creditor, opposed the resolution plan approved by the Committee of Creditors. Thus, the applicant prayed for the setting aside of the approved resolution plan submitted by the Resolution Applicant, M/s. ArcelorMittal.
3.3. Contentions submitted by the applicant:
3.3.1. The case of the applicant was that it lodged its claim before the Resolution Professional and the Committee of Creditors claiming Rs. 3487.09 Crores. The applicant was classified as a Secured Financial Creditor and out of the above sum, Rs. 2646.05 Crores was shown as principal outstanding due to the applicant, payable by the Corporate Debtor Company.
3.3.2. However, the formula used by the Committee of Creditors (hereinafter referred to as the ‘CoC’) was not on a pro-rata basis, but on the value of security possessed by the applicant upon liquidation of the Corporate Debtor Company. On this basis the applicant was set to receive only 1.7% of its admitted claim, which was around 60.71 Crores. Whereas, other Financial Creditors received around 92% of their admitted claims.
3.3.3. The applicant instead proposed that the apportionment receivable from the resolution process among all the Financial Creditors be distributed in a pro-rata basis wherein the sum of 42,000 Crores (amount to be apportioned to financial creditors) be dived equally. It is submitted by the applicant that if each Financial Creditor was given around 85.6% of their admitted claims then the apportionment would be reasonable and equitable to all admitted financial creditors. In furtherance of the same the applicant had duly annexed a comparative chart, showing the change in manner of distribution.
3.3.4. Furthermore, the applicant submitted that the CoC is not empowered to make a class within a class by discriminating against the applicant and thereby drastically reducing its share. Moreover, the applicant has also submitted that there exists material irregularity within the setting up of the CoC and its various sub-committees and delegation of power to negotiate with the Resolution Professional to these sub-committees. The applicant sought intervention of the Adjudicating Authority in the above matter.
3.3.5. In support of the same the applicant submitted that it was held in the following cases that there could be no discrimination among the Financial Creditors; Swiss Ribbonv. Union of India W. P. (Civil) No. 99 of 2018 in the Supreme Court and in the matter of M/s. Binani Industries Ltd. v. Bank of Baroda, decided by the NCLAT (National Company Law Appellate Tribunal).
3.4. Prayer of the applicant:
3.4.1. The applicant prayed for the setting aside of the approved resolution plan, submitted by the Resolution Applicant, M/s. ArcelorMittal.
3.4.2. The applicant also submitted an alternative prayer that the Adjudicating Authority should direct the Resolution Applicant to distribute the sum of 42,000 Crores in such a manner that each Secured Financial Creditor be paid their respective pro-rata shares on the basis of their admitted claim therein, as proposed in a table of distribution submitted by the applicant.
3.4.3. In addition the applicant also prayed for a stay on the proceedings of I.A. No. 431 of 2018 and other actions being taken up by the Resolution Professional and the Committee of Creditors.
3.5. Submissions of the respondent:
3.5.1. The respondents, the Resolution Professional and the Resolution Applicant, have opposed the interlocutory application by making the following submissions before the Tribunal:
3.5.2. The decision of the CoC, in the matter of the approval of the resolution plan, is in conformity with the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). The CoC has taken a fair and reasonable decision in order to place the interests of the Corporate Debtor Company at the highest priority, which can only be procured if a viable Resolution Plan is passed.
3.5.3. The aforementioned plan is in the nature of equitable distribution of the receivable amount as per the Resolution Plan, it cannot be equal distribution.
3.5.4. Within the IBC itself, there is no such provision which prevents the CoC from constituting a core committee, in order to hasten the functioning of the CIRP (Corporate Insolvency Resolution Process).
3.5.5. It is further submitted that in the case of Sashidharan v. Indian Overseas Bank (2019) 148 CLA 497 (SC), the Supreme Court held that it is not open to the NCLT to make a judicial review on a commercial decision of the CoC in order to substitute its own view on the matter. The Adjudicating Authority can only satisfy itself on the basis of Section 31 and 30(2) of the IBC, after which it is bound to accept the Resolution Plan.
4. Judgment of the Tribunal:
4.1. It was found that the said loan given was a secured loan as guarantee, which was given by the present Corporate Debtor Company. As such in the view of the tribunal, when there is guarantee furnished by the Corporate Debtor Company itself, the recovery of debt cannot be restricted to value of shares pledged to the creditor.
4.2. As per settled law, a finding reached by a competent court, which includes the NCLT, by recording that the debt is established against and default is committed by the Corporate Debtor Company is to be treated as a decree of a Civil Court and as such the debt is recoverable from other assets of the Corporate Debtor Company and not necessarily from the securities provided.
4.3. The NCLT relied upon the Wednesbury Principle of Unreasonableness and the Doctrine of Proportionality applied by the Supreme Court in the cases of B. C. Chaturvedi v. Union of India, (1995) 6 SCC 749, and United Commercial Bank v. PC Kakkad (2003) 4 SCC 346. A brief summary of the principles are as follows:
4.3.1. Normally a Court should not interfere with an administrative decision unless it suffers from (1) illegality; (2) procedural impropriety and (3) is irrational in nature and is in defiance of logic and moral standards.
4.3.2. The Wednesbury Principle of Unreasonableness applies to a decision which is so reprehensible in its defiance of logic that no reasonable person could have arrived at such a conclusion. Therefore, if such a decision is subject to judicial review the Courts can order appropriate remedies, in order to ensure a well balanced and harmonious solution.
4.4. In light of the above the Court disposed the petition, stating that the alternative petition whereby the applicant proposed a pro-rata distribution of the amounts recoverable in the resolution would be suitably discussed in the main Interlocutory Application No. 431 of 2018 with due consideration of the Wednesbury Principle of Unreasonableness.
4.5. However, the petition to set aside the proposed Resolution Plan was held to be legally unsustainable; except for the consideration of the alternative prayer made for the distribution for the amount to be received from the insolvency proceedings.
5. Interlocutory Application No. 431 of 2018:
5.1. This main Interlocutory Application was filed by Satishkumar Gupta, the Resolution Professional of Essar Steel India Limited i.e., the Corporate Debtor Company. The application was filed under Section 31(1) of the IBC, wherein if the Adjudicating Authority is satisfied that the Resolution Plan meets the requirements under Section 30(2) of the IBC; it may by order approve the Resolution Plan which shall be binding upon the Corporate Debtor Company, its members, employees, creditors, guarantors and other stakeholders involved in the Resolution Plan.
5.2. Submissions of the Applicant (exhaustive);
5.2.1. As part of the Resolution Plan the applicants made the following submissions:
5.2.2. Reliefs and exemptions from stamp duty in the States in which the Corporate Debtor Company is located along with relief from the ministry of Corporate affairs for the same.
5.2.3. The requir
ement of obtaining a no due certificate according to Section 281 of the Income tax Act, 1961 and provisions for taking over its predecessor’s tax liability under Section 170 of the Income tax Act, 1961 to be deemed inapplicable. Further the direction of the transaction shall not be deemed void under the Income Tax Act, 1961 and any waivers required under the statue shall be deemed to have been granted by this Adjudicating Authority.
ement of obtaining a no due certificate according to Section 281 of the Income tax Act, 1961 and provisions for taking over its predecessor’s tax liability under Section 170 of the Income tax Act, 1961 to be deemed inapplicable. Further the direction of the transaction shall not be deemed void under the Income Tax Act, 1961 and any waivers required under the statue shall be deemed to have been granted by this Adjudicating Authority.
5.2.4. Moreover, the Corporate Debtor Company and Resolution Applicant shall be deemed to have been granted an exemption from all taxes, charges, levies, surcharges and transfer the premiums that arise or are in relation to the Resolution Plan at hand.
5.2.5. All actions in furtherance of the application of the Resolution Plan shall be exempt from any stamp duty and all applicable taxes.
5.2.6. All non-compliances of the Corporate Debtor Company and the Resolution Applicant in relation to any tax benefit scheme or duty benefit scheme such as the Export promotion Credit Guarantee Scheme shall be waived by the relevant Government Authority for an additional period of 12 months following the Effective Date.
5.2.7. Seeks wavier of all non-compliances issued by the Ministry of Environment Forrest and Climate Change, the Gujarat State Pollution Control Board, the Odisha State Pollution Control Board the Central Pollution Control Board, the Chief Inspector of Police and all other non-compliances issued under any other applicable law being in force before the effective date.
5.2.8. All business permits of the Corporate Debtor Company that have lapsed or expired shall be renewed by the respective Government Authority with effect from the Plan Approval Date.
5.2.9. Pending approval from the Government Authority the Corporate Debtor Company shall be permitted to continue to operate its business as a going concern for a period of 24 months or until the approval is granted, whichever is earlier.
5.2.10. The Corporate Debtor Company shall have immunity form any liability from any non-compliance of any applicable law and also for breach in any contract that it has entered into, during this period.
5.2.11. From the Plan Approval Date, any investigations, proceedings in suits, claims etc, in connection with the Corporate Debtor or the affairs of the Corporate Debtor, pending or threatened, arising out of the implementation of the Resolution Plan shall stand withdrawn and dismissed.
5.2.12. No Governmental Authority (including regulatory, judicial and quasi-judicial) shall issue any orders, directions, decrees, judgments etc that shall be in contravention of the Resolution Plan as well as the financial plan.
5.2.13. The relevant organizations (Indian Oil, GAIL, Bharat Petroleum Corporation Limited) shall engage in re-gasification contracts in order ot facilitate the Resolution Plan.
5.2.14. The Moratorium Period stipulated under Section 14 of the IBC shall apply between the Plan Date and the Effective Date.
5.3. The Applicant has also submitted the following as key directions to be issued by the Adjudicating Authority (not exhaustive):
5.3.1. Continued uninterrupted supply of power to the Corporate Debtor Company, with no less favorable conditions than the power is currently being supplied.
5.3.2. Access to port: the Applicant sought direction from the Adjudicating Authority to direct the Gujarat Maritime board to take all actions and grant all approvals necessary in order to facilitate the use of the deep water jetty, without the requirement of additional fees or charge.
5.3.3. Sought approval for regularization of land parcels.
5.4. The Applicant also submitted a table containing the compliance requirements under Section 30(2) of the IBC and the measures taken in furtherance of the same.
5.5. The following are the Key Contents of the Resolution Plan:
5.5.1. Total admitted claims amounted to Rs. 5,45,49,88,56,433.
5.5.2. Proposal to the financial creditors:
(i) AcrelorMittal India has proposed an upfront payment of Rs. 42000 Crores to the secured financial creditors of Essar Steel India Limited (ESIL) as identified by the Resolution Professional on 22 October, 2018, to be paid of the Effective date. The manner and distribution of the Financial Package shall be decided by the CoC.
(ii) AcrelorMittal India has offered an upfront cash payment of Rs. 17.4 Crores to the unsecured creditors, paid of the Effective date. Further an amount of Rs. 3,055,738 is proposed to be paid to unsecured creditors with a claim of less than Rs 10 lakhs on the effective date.
(iii) AcrelorMittal India will further provide an upfront capital infusion of Rs 8000 Crores in order to improve operations and enhancing the revival prospects of the Corporate Debtor.
5.5.3. Proposal to the Unsecured Creditors:
(i) AcrelorMittal India has proposed to make a payment of Rs 196 Crores to trade and government creditors and to pay all admitted claims to small trade creditors.
(ii) AcrelorMittal India has proposed to pay a further amount of 18 Crores to all workmen and employees of ESIL in full against their admitted claims.
(iii) AcrelorMittal India has not proposed to make payments to any other creditors.
5.5.4. Terms of settlement:
(i) Financial creditors: The payments to the Financial Creditors shall be treated as full and final payment of all outstanding dues in accordance with the Resolution Plan as of the Effective Date, with no rights subsisting or accruing to the Financial Creditors terminated with effect from the Effective Date.
(ii) In relation to the loans and security given, each of the Financial Creditors shall novate/assign the same and shall additionally pledge the shares of the Corporate Debtor Company to AcrelorMittal India or its connected persons and shall comply with the directions provided in the terms of settlement regarding the same.
(iii) Any guarantees made by the Corporate Debtor on behalf of itself, its subsidiaries or third parties shall stand extinguished and will not constitute to financial debt. The beneficiaries of such guarantees shall be expected to recover such monies from the principal debtor and for any shortfall shall not have any recourse against the Corporate Debtor Company.
(iv) Operational Creditors: the payments made to the government and Trade Creditors shall be treated as full and final.
(v) Workmen and employees: when the Resolution Plan is approved by the Adjudicating Authority, they will be deemed to have agreed that the settlement amount shall be treated as the full and
final payment of their respective outstanding dues and they shall have no further claims against the Corporate Debtor.
final payment of their respective outstanding dues and they shall have no further claims against the Corporate Debtor.
5.5.5. The acquisition of 100% of the equity of the Corporate Debtor Company and the process for the same by the Resolution Applicant has also been elucidated. The setting-up of the Monitoring Committee and other compliance requirements have also been provided for the proposed Resolution Plan.
5.6. Judgment of the Adjudicating Authority (operative sections):
5.6.1. The Court observed that although some operational creditors had an outstanding debt of 1 Crore or more, they received no appropriation in the Resolution Plan, whereas Financial Creditors received almost 92% of the outstanding amount, except Standard Chartered Bank which received only 1.7% of its outstanding debt, which prima facie seemed unequitable and discriminatory.
5.6.2. The Court observed that had the CoC adopted some other method/fair formula of apportionment on a pro-rata basis, almost all the outstanding debts of the all the stakeholders, including all the operational and financial creditors would have been fully paid and satisfied. Such an apportionment would be prudent and more transparent and would not be afoul of the Wednesbury Principle of Unreasonableness and the Doctrine of Proportionally. The Adjudicating Authority fortified their stance by relying on the Apex Court Judgment in the case of Chairman, All India Railway Rec. Board & Another v. K Shyam Kumar & Others(2010) 6 SCC 614, which relied on the above principle.
5.6.3. By providing the above observations the Adjudicating Authority felt it appropriate to make suitable suggestions for reconsideration of the formula used for appropriation.
5.6.4. The Court suggested 85% of the Appropriation amount of Rs 42000 should be divided among the Financial Creditors on a pro-rata basis. The Remaining 15% which came up to Rs. 6300 Crores would be distributed among the operational creditors having admitted claims of more than one Crores, so that least 50% of their principal claim admitted claim would be satisfied.
5.6.5. If the Apportionment was carried out according to the above stipulations then the Insolvency process would have would in the opinion of the Adjudicating Authority be in conformity with Section 30(2) and with the spirit of the Act.
5.6.6. While making such an observations the NCLT was cognizant of the Supreme Court decision in K. Sashidhar v. Indian Overseas Bank and Others (2019) 148 CLA 497 (SC), wherein the Court held that the Adjudicating Authority did not have the power to judicially review a commercial decision of the CoC, therefore its opinions on the Apportionment scheme could only be suggestive in nature. The Apex Court reasoned that if the CoC had secured more that the 75% requisite in the passage of the Resolution Application, it reflected a consensus among the Financial Creditors and avoided the process of liquidation which was a principle objective of the Act.
5.6.7. Additionally the matter of further concessions and statutory reliefs sought by the Applicant was considered. In the view of the Court such concessions were to be considered by the relevant statutory authority and not the Adjudicating Authority in question. As such the Resolution Applicant could approach the relevant authorities after the proceedings to avail these concessions; hence it would be for the appropriate government body to consider the same in light of the successful implementation of the Resolution Plan.
5.6.8. In light of the above submissions observations and the various Interlocutory Applications submitted before the Adjudicating Authority, the NCLT disposed of the Interlocutory Application No. 431 by conditionally accepting the Resolution plan under Section 31(2) of the IBC. It was the view of the NCLT that a more transparent and fair distribution scheme could be considered by the CoC epically in the case of the operational creditors and with regard to the unfair distribution of the apportionment amount between the Financial Creditors.
5.6.9. Nevertheless, considering the application in light of the relevant portions of Section 31 and Section 32(2) & (6) of the IBC it is settled law that the NCLT must accept the Resolution Plan if it has been approved with the requisite majority by the CoC and if it conforms with the relevant requirements within the IBC. If the NCLT were to reject the Corporate Debtor Company would be forced to go into liquidation, which is not the aim of the IBC. Hence the present Interlocutory Application was allowed.
5.6.10. However, even as the suggestions made by the Adjudicating Authority were to be considered by the CoC, the same was not to be construed as non-approval of the Resolution Plan. Furthermore, deferring approval of various concessions and reliefs to the relevant Statutory Authorities in question was a severable clause in the Resolution Plan and the same would not constitute as failure of the Resolution Plan. The reasoning of the NCLT being that the statue already provided for a one year moratorium period where the Resolution Applicant could seek permission from various authorities.
5.6.11. Hence the Resolution Plan stood conditionally approved and the moratorium period effectuated.
6. Conclusion:
6.1. For many years India has been a debtor’s paradise, with the average percentage of Non-Performing Assets (NPAs) of banks and other financial institutions constantly on the rise for many years. After the consolidation of insolvency laws into the IBC, there were 12 NPAs that constituted to almost 25% of outstanding debt in the country, Essar Steel India Limited being one of them.
6.2. Even though one of the objectives of the Act is to facilitate a speedy insolvency process, most insolvency proceedings take more than the time stipulated in the Act this hasn’t been the case in a large number of proceedings, with various appeals in a multitude of forums being the norm rather than the exception.
6.3. While the IBC provides for a much more uniform system of dealing with corporate debt as opposed to the earlier system and credit is due for the same; over the course of the duration of the Act coming into force a number of problems with the implementation of the Act have come into focus.
6.4. With respect to some fallacies that can be observed by this very judgment, the following can be observed;
6.4.1. The committee of creditors has extensive power to decide the manner of distribution of the Apportionment Amount, from the admittance of claims to the formula used for distribution to the creation of separate classes within larger classifications that are defined under the Act. Such power is often concentrated with specific consortiums/creditors being largely responsible for deciding the same, often at the cost of other creditors.
6.4.2. The concept of ‘conditional acceptance’ of the resolution submitted for approval by the Resolution Applicant is non-existent within the Act. In effect the ‘condition’ is largely inefficacious as the Resolution will take effect regardless of whether the CoC takes into account the suggestions of the NCLT, somewhat analogous to an argument that is merely persuasive before a court of law.
6.4.3. Even though the submissions of Standard Chartered Bank are considered to be meritorious, the NCLT has little or authority to order the necessary remedies, exposing lacunae in the existing law; resulting in patently unfair treatment of a single Financial Creditor at the behest of the CoC.
6.5. Clash with existing legislation: the IBC also raises some questions with respect to its interaction with existing legislations. An example that comes to mind is hypothetically during the moratorium period during which Section 14(2) of the Act stipulates that all essential goods and services shall not be terminated or interrupted during the moratorium period; in case the suppliers or the service provider is found to be afoul of the law or the good or service is deemed illegal, will an except
ion be made only with respect to the Corporate Debtor or will the Corporate Debtor have to make alternate arrangements, an illustration of the following would be: if a supplier of an essential raw material is found not to have the requisite clearances and a notification/order to the effect of immediate stoppage of all operations is issued, will the notification/order take precedence over the Act or will exceptions be allowed? Time being of essence, it is foreseeable the Corporate Debtor in question will face considerable difficulty regarding the same, but consideration must also be given to larger public interest and equality before the law. Another question that comes to mind is that during the moratorium period the assets of the Corporate Debtor is not to be seized or otherwise interfered with, yet the Fugitive Economic Offenders Act, 2018 under Section 8 provides for the search and seizure of property and other such possessions; can the authorities be prevented from exercising the same during the moratorium period. Considering the congruence of persons who can now be classified as fugitive economic offenders such as Vijay Malaya and Nirav Modi with their companies/themselves being also eligible for the Insolvency Process, the conflict is largely unresolved.
ion be made only with respect to the Corporate Debtor or will the Corporate Debtor have to make alternate arrangements, an illustration of the following would be: if a supplier of an essential raw material is found not to have the requisite clearances and a notification/order to the effect of immediate stoppage of all operations is issued, will the notification/order take precedence over the Act or will exceptions be allowed? Time being of essence, it is foreseeable the Corporate Debtor in question will face considerable difficulty regarding the same, but consideration must also be given to larger public interest and equality before the law. Another question that comes to mind is that during the moratorium period the assets of the Corporate Debtor is not to be seized or otherwise interfered with, yet the Fugitive Economic Offenders Act, 2018 under Section 8 provides for the search and seizure of property and other such possessions; can the authorities be prevented from exercising the same during the moratorium period. Considering the congruence of persons who can now be classified as fugitive economic offenders such as Vijay Malaya and Nirav Modi with their companies/themselves being also eligible for the Insolvency Process, the conflict is largely unresolved.