The SC in its recent landmark judgement on November 15, 2019, in COC of Essar
Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and
has stemmed from the fact that since the introduction of Section 29A into
the IBC on the 23rd November 2017, resolution applicant were ineligible to
submit their resolution plans. Section 29A prescribes several criteria which
disqualify resolution applicants, persons acting in concert or jointly with
resolution applicants or persons connected with them.
The term connected
has defined in Section 29A cover a lot of persons such as those who
promote, control, and manage the resolution applicants. Inter alia, section 29A
rendered resolution applicants ineligible if they have an account or they have
an account of a CD which falls under their control and the account has been
classified as a non- performing asset in line with relevant guidelines issued by
the RBI and a period of one year has elapsed from the date the account was
classified as an NPA .
Key Highlights And Analysis Of Supreme Court’s Decision:
Role of Resolution Professionl (RP):RP is a person who not only manage the affairs of the CD as a going concern from
the stage of admission of an application under Sections 7, 9 or 10 of the Code
till a resolution plan is approved by the AA but also a key person who is to
appoint and convene meetings of the COC, so that they may decide upon resolution
plans that are submitted following the detailed information given to resolution
applicants by the RP. As per SC judgement, “Another very important function of
the RP is to collect, collate and finally admit claims of all creditors, which
must then be examined for payment, in full or in part or not at all, by the
resolution applicant and be finally negotiated and decided by the COC.
Role of the prospective resolution applicant: The PRA has a right to receive complete information as to the CD, debts owed
by it, and its activities as a going concern, before the admission of an
application under section 7, 9 or 10 of the Code. For this purpose, he has a
right to receive the information contained in the information memorandum as
well as the evaluation matrix mentioned in Regulation 36-B
Role of the Committee of Creditors (COC):The SC reinforced that the CoC are the key decision-makers in the rehabilitation
of CD. It observed that the commercial wisdom of the CoC in accepting a
resolution plan by a majority must drive decisions including the distribution of
proceeds under a resolution plan . The SC observed that such an analysis is
required to take into account “all the aspects of the resolution plan, including
the manner of distribution of funds among various classes of creditors”.
In this regard, the CoC is free to suggest a modification to the commercial
proposal and it may approve a resolution plan by a vote of not less than 66% of
the voting share of the FC after considering the 'feasibility and viability' of
such resolution plan and other requirements.
Constitution of a sub-committee by COC:Sub-committees cannot be constituted for:
- Exercising of the COC powers on questions which have a vital bearing on the
of the business of the CD.
- Approving a resolution plan.
However, sub-committees can be appointed to negotiate with resolution
applicants, or to
perform other ministerial or administrative acts, provided such acts are in the
ultimate analysis approved and ratified by the COC
Jurisdiction of NCLT and NCLAT:The AA generally cannot interfere on merits with the commercial decision taken
by the COC. However, the limited judicial review available is to see that the
COC has taken into account the fact that the CD needs to keep as a going concern
during the CIRP ; that it needs to maximise the value of its assets; and that
the interests of all stakeholders including OC.
If the AA finds, on a given set of facts, that the aforesaid parameters have not
been kept in view, it may send a resolution plan back to the COC to re-submit
such plan after satisfying the aforesaid parameters. The reasons given by the
COC while approving a resolution plan may thus be looked at by the AA only from
this point of view, and once it is satisfied that the COC has paid attention to
these key features, it must then pass the resolution plan, other things being
Scope of Judicial Review of the NCLT/NCLAT:The SC held that the NCLT has limited powers of judicial review on the business
decisions of the majority of the CoC, which are guided by Section 30(2) of the
Code which requires a RP to examine each resolution plan to ensure that it
provides for certain specified matters such as payment of CIRP costs, payment of
debts of OC, etc.
Concerning the NCLAT, it held that such review must be within the parameters of
Section 32 read with Section 61(3) of the Code, which provides that an appeal
from an order approving a resolution plan can be filed because the resolution
plan is in contravention of the law, has a material irregularity or does not
provide for debts owed by OC.
The SC has clarified that the NCLT and the NCLAT have not been endowed with the
jurisdiction to act as a court of equity or exercise plenary powers. It also
stressed that while the ultimate discretion of what to pay and how much to pay
each class or subclass of creditors lies with the CoC, the decision of the CoC
must necessarily reflect that it has considered three main parameters:
- ensuring that the CD is kept as a going concern during the CIRP process;
- maximising the value of the assets of the CD; and
- balancing the interests of all the stakeholders, including OC.
The NCLT and the NCLAT cannot interfere on merits with the commercial decisions
taken by the CoC. The CoC retains the ultimate discretion in determining what to
pay and how much to pay each class or sub-class of creditors.
Secured and unsecured creditors; the equality principle:Financial Creditors are in the business of lending money who are capital
providers for companies, who
in turn can purchase assets and provide working capital to enable such companies
to run their business operation.
Whereas Operational Creditors are beneficiaries of amounts lent by FC which are
then used as working capital, and often get paid for goods and services provided
by them to the CD, out of such working capital.
Hence, “If an “equality for all” approach recognising the rights of different
classes of creditors as part of an CIRP is adopted, secured FC will, in many
cases, be incentivised to vote for liquidation rather than resolution, as they
would have better rights if the CD was to be liquidated rather than a resolution
plan be approved.” This would defeat the entire objective of the Code which is
to first ensure that resolution of distressed assets takes place and only if the
same is not possible should liquidation follow.
The utilisation profits of the CD during the Corporate Insolvency Resolution
Process:The request for proposal for the resolution plan issued in terms of the Code and
consented to by ArcelorMittal and the CoC provided that the distribution of
profits made during the CIRP would not go towards the payment of the creditors.
The NCLAT, however, directed that the profits of the CD during the CIRP be
distributed among all financial and OC on a pro-rata basis of their claims,
provided that such amount did not exceed the admitted account of their claims.
The SC set aside this direction and held that as per the RFP, the distribution
of profits made during the CIRP could not be applied towards the payment of a
debt of any of the creditors.
- The constitutional validity of Sections 4 and 6 of the IBC (Amendment) Act,
Section 4:So far as Section 4 is concerned, it is clear that the original timelines under
Section 12 of the Code in which a CIRP must be completed have now been extended
to 330 days, which is 60 days more than 180 plus 90 days. The Court, hence,
while leaving the provision otherwise intact, 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
The effect of this declaration is that ordinarily the time taken
concerning the corporate resolution process of the CD must be completed within
the outer limit of 330 days from the insolvency commencement date, including
extensions and the time taken in legal proceedings. It was, however, explained
that on the facts of a given case, if it can be shown to the AA and/or Appellate
Tribunal under the Code that only a short period is left for the completion of
the insolvency resolution process beyond 330 days, and that it would be in the
interest of all stakeholders that the CD is put back on its feet instead of
being sent into liquidation and that the time taken in legal proceedings is
largely due to factors owing to which the fault cannot be ascribed to the
litigants before the AA and/or Appellate Tribunal, the delay or a large
part thereof being attributable to the tardy process of the AA and/or the
Appellate Tribunal itself, it may be open in such cases for the AA and/or
Appellate Tribunal to extend the time beyond 330 days .
Section 6:Section 30(2)(b) of the Code as substituted by Section 6 of the Amending Act is,
in fact, a beneficial provision in favour of OC and dissentient FC as they are
now to be paid a certain minimum amount, the minimum in the case of OC being the
higher of the two figures calculated under sub-clauses (i) and (ii) of clause
(b), and the minimum in the case of dissentient financial creditor being a
minimum amount that was not earlier payable. Pre- amendment, secured FC may
cramdown unsecured FC who are dissentient, the majority vote of 66% voting to
give them nothing or next to nothing for their dues. In the earlier regime, it
may have been possible to have done this but after the amendment, such FC are
now to be paid the minimum amount mentioned in sub-section (2). It was also
noticed that the discretion is given to the COC by the word “may” again makes it
clear that this is only a guideline which is set out by this sub-section which
may be applied by the COC in arriving at a business decision as to acceptance or
rejection of a resolution plan.
Liability of guarantors:The NCLAT had extinguished the rights of creditors against guarantees that were
extended by the promoter/promoter group of the CD. The NCLAT held that once the
guaranteed debt stood cleared according to the approval of the resolution plan
providing for payment to the lenders, the deed of guarantee would no longer be
The SC set aside this finding of the NCLAT on grounds that Section 31(1) of the
Code provides that once a resolution plan is approved by the CoC, it shall be
binding on all stakeholders, including the guarantors. The resolution plan would
therefore limit the guarantor's right of subrogation towards the creditor. The
guarantee constitutes an independent obligation that the guarantor has
Therefore, even where the debt of the CD is satisfied under the resolution
plan, the lenders can pursue the guarantor for the recovery of their remaining
claim amount. The SC has stated that the resolution plan is approved by the CoC,
case, does not affect pending litigations on account of invocation of
personal guarantees .
With the SC giving a go-ahead to the sale of Essar Steel, it is expected
that banks will recover over 90% of their dues worth over INR 40,000 crore that
the company owes them. OC are estimated to receive close to INR 1,200 crore.
This should help improve the financial position of weak public sector banks and
bolster profitability given that the dues owed by Essar Steel were fully written
off by almost all lenders . Unless a review is preferred by the OC against this
landmark judgement of the SC, this judgement should put to rest key questions
concerning the treatment of operational and FC as well as the role of the CoC,
the NCLT and the NCLAT in the CIRP of a CD under the Code. The SC has correctly
recognised the difference between secured and unsecured creditors which is
essential for the banking industry. Additionally, due recognition has been given
to the commercial wisdom of the lenders by reinstating the CoC to be the primary
It is expected that this ruling of the SC will result in
large-scale disposal of pending appeals before NCLAT and disposals at NCLT on
similar questions of law. Recent news reports have however indicated that the
government is considering revising the framework of distribution of proceeds to
FC and OC under the Code on account of protracted litigations (in multiple
cases) based on challenges from OC . These litigations have led to delays in
completion of the process and distribution of proceeds to creditors. It remains
to be seen whether the government will treat this decision as to the final
settled position in this regard.
- Essar Steel verdict - INSIGHTSIAS
- https://www.ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdfhttps://www.trilegal.com/index.php/publications/analysis/essar-steel-judgment-key-ighlights https://nualslawjournal.com/2020/01/14/essar-steel-judgement-as-promising-as-it-seems/