The Supreme Court of India (“SC”), on November 15, 2019 upheld the order approving the resolution plan submitted by ArcelorMittal India Private Limited (“ArcelorMittal”) for Essar Steel India Limited (“Essar”) and upheld the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.

FACTS
On August 02, 2017, the National Company Law Tribunal, Ahmedabad (“NCLT”) admitted Company Petition filed by Standard Chartered Bank together with a petition filed by the State Bank of India under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Satish Kumar Gupta was appointed as the interim resolution professional, who was later confirmed as Resolution Professional (“RP”).

Pursuant to the above, resolution plans were filed by ArcelorMittal and Numetal Limited (“Numetal”). Both the resolution plans were found to be ineligible under Section 29A of the IBC. On March 02, 2018, resolution plans were then submitted by ArcelorMittal, Numetal and Vedanta Limited. The resolution plan of ArcelorMittal specifically provided for an upfront payment of INR 35,000 crores in order to resolve debts amounting to INR 49,213 crores. It was stated that unsecured financial creditors shall be paid an aggregate amount of 5% of their admitted claims. Apart from the above, INR 8,000 crores of fresh capital infusion by way of capex and working capital was also to be infused. INR 3,339 crores – being the aggregate admitted claims of operational creditors, other than workmen and employees, were to be paid to the extent of INR 196 crores, but only to trade creditors and government creditors. Small trade creditors, defined as “having claims of less than one crore” were to be honoured in full, as was the claim of workmen and employees of the corporate debtor, amounting to INR 18 crores.

Importantly, ArcelorMittal empowered the Committee of Creditors (“COC”) to decide the manner in which the financial package being offered would be distributed among the secured financial creditors, vide a ‘core committee’. Standard Chartered Bank, which was stated to be an unsecured creditor, was to be paid an aggregate amount of 5% of its admitted claims. On April 19, 2018, the Adjudicating Authority directed the COC of the corporate debtor, to consider the eligibility of the aforesaid resolution applicants.

Since both ArcelorMittal and Numetal were ineligible by virtue of their resolution plans being hit by Section 29-A of the IBC, an order was passed by the SC under Article 142 of the Constitution, stating that one more opportunity be granted to both ArcelorMittal and Numetal to pay off the non-performing assets of their related corporate debtors within two weeks, failing which the corporate debtor would go into liquidation. On October 18, 2018, ArcelorMittal informed the RP and the COC that it had made payments as per the Supreme Court’s judgment. However, Numetal did not make any such payment. As a result, on October 19, 2019, ArcelorMittal resubmitted its resolution plan, which was then evaluated by the COC, which resulted in ArcelorMittal being declared as the highest evaluated resolution applicant. On October 25, 2019, the final negotiated resolution plan of ArcelorMittal was approved by the COC by a 92.24% majority, after which it was approved by the NCLT.

This approval was appealed to the National Company Appellate Law Tribunal (“NCLAT”), which held in an order dated March 20, 2019 that the funds from the winning bid must be distributed equally between operational and financial creditors, as the NCLAT opined that there can be no difference between a financial creditor and an operational creditor in the matter of payment of dues. Pursuant to the passage of this order, the government passed the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (“Amendment Act”) which, inter alia, clarified the fundamental principle that a secured creditor has priority over unsecured creditors.

Pursuant to this, on March 27, 2019 the COC decided to appeal against the NCLAT’s order, and, by a majority, making an ex gratia payment of INR 1,000 crores to operational creditors above INR 1 crore. Appeals filed against the interlocutory orders of the NCLAT were then heard by the SC, which by its order dated April 12, 2019, inter alia, directed non-implementation of the judgment dated March 8, 2019 of the NCLT and expeditious disposal of the appeal before the NCLAT.

ISSUE
If the NCLAT was correct in disallowing the resolution plan and stating that the resolution amount is to be distributed equally between the financial creditors and the operational creditors and if Sections 4 and 6 of the Amendment Act are constitutionally valid.

ARGUMENTS
The counsel for Essar submitted that the IBC provides for a broad classification of creditors as financial creditors and operational creditors on the basis of the nature of the transaction between creditors and a corporate debtor, but does not mandate identical treatment of differently situated inter se creditors either within financial creditors, who may be secured or unsecured, and/or financial creditors vis-a-vis operational creditors and that financial creditors as a class have a superior status as against operational creditors, same as with secured creditors vis-a-vis unsecured creditors. It was further argued that if secured financial creditors are to be treated at par with unsecured creditors, such secured creditors would rather vote for liquidation rather than corporate resolution, contrary to the main objective sought to be achieved by the IBC.

It was also argued that since a resolution plan is a consent-based plan proposed by the resolution applicant for a corporate debtor, any modification, as has been done by the NCLAT, of such plan is illegal. It was further argued that the NCLAT judgment deserves to be set aside because it has curtailed the authority of the COC; expanded the jurisdiction of the Adjudicating Authority as well as the NCLAT beyond the bounds contained in the IBC; and has transgressed the most basic tenet of the COC’s commercial wisdom being reflected by an over 66% majority vote, which has been nullified by the NCLAT by completely modifying and substituting the resolution plan approved by the COC.

Further, the counsel for the State Bank of India argued that the NCLAT had upped the figure to approximately INR 2160 crores completely beyond its limited jurisdiction under the IBC. Further, Standard Chartered Bank is precluded from raising any challenge to the constitution of a sub-committee as it had participated in several meetings in which it raised no objection to the sub-committee, and had in fact requested to be a part of the sub-committee.

The counsel for Standard Chartered Bank, who was opposing the appeal, argued that the very formation of a core committee/sub-committee, was against the provisions of the IBC, and was manifestly illegal. Further, the role of the COC is limited to considering the feasibility and viability of the resolution plan, which does not include the manner of distribution of the amount payable by the resolution applicant to the erstwhile creditors of the corporate debtor. It was also argued that the Parliament has consciously chosen not to create different classes of financial or operational creditors when it comes to the process of resolution of debts. Section 53 of the IBC would apply only during liquidation and not at the stage of resolving insolvency as is clear from the fact that “secured creditor” as defined by Section 3(30) of the IBC is used only in Section 53 (distribution of assets) of the IBC which is contained in Chapter III, titled ‘Liquidation Process’ and not at all in Chapter II of the IBC which is titled ‘Corporate Insolvency Resolution Process’. Further, it was argued that neither the COC, nor any sub-committee could possibly decide the manner of distribution as it would give rise to a serious conflict of interest, as the majority may get together to ride roughshod over the minority.

Further, arguments were made by Ideal Movers Limited, which was an operational creditor of the Corporate Debtor to oppose the appeal. It stated that from a reading of the preamble of the IBC and some of its provisions that a key objective of the IBC is to ensure that the corporate debtor goes on doing its business as a going concern during the Corporate Insolvency Resolution Process (“CIRP”) as a result of which a large number of operational creditors have to be paid their dues – such as workmen, electricity dues, etc. It was further contended that the process of revival and the process of liquidation are distinct and separate and have been so treated by the IBC. It was argued that, priorities of payment which apply in liquidation cannot apply when the corporate debtor is being run as a going concern as otherwise secured creditors alone will be paid and not operational creditors who are necessary for the running of the business.

With regards to the constitutional validity of Sections 4 and 6 of the Amendment Act, Ms. Madhvi Diwan, the Additional Solicitor General of India stated that the amendments further the objects sought to be achieved by the IBC, which is maximization of value of the assets of the corporate debtor in a time bound manner, and this loophole that was sought to be plugged in accordance with the original conception for the framework of the IBC. With respect to Section 6 of the Amendment Act, it was argued that there is a symbiotic relationship between a resolution applicant and the COC, who alone are to take a commercial decision by the requisite majority whether or not to put the corporate debtor back on its feet. Mr. Tushar Mehta, Solicitor General of India further added that it is well settled that the legislature can always take away the basis of a judicial decision without directly interfering with the judgment of a court.

OBSERVATIONS OF THE SUPREME COURT
The SC confirmed that the role of the RP under the IBC and the regulations thereunder, is not adjudicatory but administrative, and that 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 resolution applicant’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.

The SC further clarified that protecting creditors in general is an important objective, and what is meant by protecting creditors from each other is only that a bankruptcy code should not be read so as to imbue creditors with greater rights in a bankruptcy proceeding than they would enjoy under the general law. An “equality for all” approach recognizing the rights of different classes of creditors as part of an insolvency resolution process, if adopted, secured financial creditors will, in many cases, be incentivized 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 would defeat the entire objective of the IBC which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.

It is the COC, under Section 30(4) of the IBC read with Regulation 39(3) of the CIRP Regulations that is vested with the power to approve resolution plans and make modifications therein as the COC deems fit. It is this vital difference between the jurisdiction of the High Court under Section 392 of the Companies Act, 1956 and the jurisdiction of the Adjudicating Authority under the IBC that must be kept in mind when the Adjudicating Authority is to decide on whether a resolution plan passes muster under the IBC. When this distinction is kept in mind, it is clear that there is no residual jurisdiction not to approve a resolution plan on the ground that it is unfair or unjust to a class of creditors, so long as the interest of each class has been looked into and taken care of.

The SC observed that Section 53 of the IBC would be applicable only during liquidation and not at the stage of resolving insolvency. Section 30(2)(b) of the IBC 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, SC held that this does not in any manner limit the COC from classifying creditors as financial or operational and as secured or unsecured. Full freedom and discretion have been given to the COC to classify creditors and to pay secured creditors amounts which can be based upon the value of their security, which they would otherwise be able to realize outside the process of IBC, thereby stymying the corporate resolution process itself. SC further went on to hold that the NCLAT judgment which substitutes its wisdom for the commercial wisdom of the COC, and which also directs 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, must be set aside.

The SC analyzed the Amendment Act and observed that it consists of several sections which have been enacted/amended as difficulties have arisen in the working of the IBC. Further, it observed that though the law laid down by the NCLAT in this case formed the basis for some of the amendments, it could not be said that the legislature has directly set aside the judgment of the NCLAT. Since an appeal against the judgment of the NCLAT lies to the SC, 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 curing of a defective reading of the law by NCLAT. For all these reasons, therefore, the SC observed that it was difficult to hold Sections 4 and 6 of the Amendment Act as constitutionally invalid. In Section 4 of the Amendment Act the SC struck down the word “mandatorily” as 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 of India. The effect of this is that in exceptional cases, the time can be extended beyond 330 days for completion of the CIRP, however the general rule of 330 days as the outer limit has been retained by the SC.

DECISION OF THE SC
The SC held that the CIRP will take place in accordance with the resolution plan of ArcelorMittal, as amended and accepted by the COC. It also upheld the constitutional validity of Sections 4 (regarding the time limit for the resolution process) and 6 (regarding the inter se treatment amongst creditors) of the Amendment Act.

Vaish Associates Advocates View
While the bench has made several noteworthy observations regarding the IBC and the role and responsibilities of each stakeholder in it, the key takeaway from this decision is the importance of the COC’s commercial wisdom, as the intention of the legislature was made clear pursuant to the Amendment Act.

This decision clears all hurdles to the takeover of Essar Steel by ArcelorMittal. Another knock down effect should be the clarification that operational and financial creditors cannot be given the same treatment and that the IBC mandates that they receive equitable, and not equal treatment, a move that has been welcomed by the banking industry as a flexible approach rather than one-size-fits-all approach. Further, this should significantly reduce the scope for long winding litigation under the IBC.

For more information please write to Mr. Bomi Daruwala at [email protected]

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