In this case it is for the first time that the principles of Section 29A and circumstances of its applicability has been adjudged by the National Company Law Appellate Tribunal (hereinafter “NCLAT”). This judgment is not about maximization of value of entity at the time of bidding but focuses and restricts itself on the qualification and consideration of bidders and what would happen if both the bidders i.e. ArcelorMittal India Ltd.(hereinafter “AMIL”) and Numetal Ltd. (hereinafter “Numetal”) are in the race for Essar Steel India Limited (hereinafter “ESIL”).
In the instant case applications under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”) were filed by the Standard Chartered Bank and State Bank of India to initiate Corporate Insolvency Resolution Process (hereinafter“CIRP”) against ESIL. Subsequently the Resolution Professional (hereinafter“RP”) issued advertisement on 6th October 2017 seeking Expression of Interest (hereinafter“EoI”) to submit Resolution Plan for ESIL to be submitted before 23rd October 2017.
AMIL submitted its EoI on 11th October 2017 whereas Numetal submitted its EoI on 20th October 2016. After the submission of EoI Section 29A was inserted by the I&B (Amendment) Act, 2017 on 23rd November 2017. In view of insertion of Section 29A of the Code the RP by an addendum dated 8th February 2018 asked the applicants to submit the Resolution Plans. Both AMIL and Numetal submitted the Resolution Plan on 12th February 2018.
The RP after analyzing the plans submitted by AMIL and Numetal declared them ineligible Resolution Applicants (hereinafter “RA”) in view of Section 29A of the Code. Aggrieved by the decision of the RP both the RA preferred applications before NCLT Ahmedabad Bench under Section 60(5) of the Code. The Ahmedabad bench of NCLT vide order dated 19th April 2018 held that both, AMIL and Numetal, are ineligible under Section 29A of the Code stating that the Committee of Creditors (hereinafter “CoC”) has not followed the procedures under Section 30(4) of the Code. The bench ordered the CoC to reconsider their decision in light of proviso to Section 29A(c) read with proviso to Section 30(4) of the Code. It is clear from the reading of the aforementioned provisions that if a RA is found ineligible under clause (c) of Section 29A of the Code then he should be granted a period of not less than 30 days to make payment of the overdue amount. The bench held that the CoC in the instant case did not follow the prescribed procedure to afford reasonable opportunity for making payment of the overdue amount in order to remove the ineligibility.
The bench granted liberty to the parties to challenge the reconsidered decision of the CoC before the appellate forum (NCLAT) and hence this appeal was preferred.
II. Issues Involved
1. Whether Numetal and AMIL are qualified under Section 29A of the Code? If yes, what is the criterion for analyzing the eligibility of the bidders under Section 29A of the Code?
2. Whether the person ineligible to make a bid by virtue of Section 29A of the Code becomes eligible merely by selling or transferring shares of the company whose accounts have been declared as NPA?
Numetal was disqualified under Section 29A of the Code from submitting the Resolution Plan because of its shareholding pattern. The main highlight of the shareholding pattern was 25% shares which were held by Aurora Enterprise Limited (hereinafter “AEL”) in Numetal as AEL was a related party to Rewant Ruia (son of Ravi Ruia who is the promoter of ESIL). After the insertion of Section 29A the shareholding pattern of Numetal underwent changes. The 25% shares held by Rewant Ruia backed AEL were further distributed among the other shareholders due to which AEL ceased to be the shareholder of Numetal.
Keeping in mind the aforementioned circumstances the NCLAT pronounced its judgment declaring Numetal as an eligible bidder as it has rectified the disqualification criterion under Section 29A of the Code.
B. Arcelor Mittal
The main reason behind the disqualification of AMIL under Section 29A of the Code was that ArcelorMittal Societe Anonyme (hereinafter “AMSA”) was a holding company of both ArcelorMittal Netherlands (hereinafter “AM Netherlands”) and AMIL. AM Netherlands is a connected person with AMIL. AM Netherlands was a promoter and a shareholder of Uttam Galva representing about 29% shares. The account of AM Netherlands with Uttam Galva is classified as NPA for more than one year before 2nd August 2017. To escape this disqualification AM Netherlands ceased to be a promoter in Uttam Galva by transferring its entire shareholding to Sainath Trading Company Pvt. Ltd.
The arrangement with the KSS Petron is almost the same as with Uttam Galva. Mittal Investments SR (wholly owned by LN Mittal Group) has substantial control in KSS Petron and is a connected party to AMIL. Mittal Investments is the promoter of KSS Petron which is classified as an NPA. Similarly in this case also to escape the disqualification under Section 29A the shares held by Mittal Investments were transferred on 9th February 2018.
The NCLAT after closely analyzing the situation held that there is no provision in Code which permits an ineligible person to be eligible merely by selling or transferring shares of the company whose accounts have been declared as NPA in accordance with the guidelines of the Reserve Bank of India. The only manner in which the ineligibility can be escaped is by making payments of all overdue amounts in accordance with the proviso to clause (c) of Section 29A of the Code. Therefore, in the light of aforementioned findings the NCLAT directed AMIL that in order to become eligible for making the bid it should transfer Rs 7000 Crore kept in the Escrow Account to make payment of all overdue amounts with interest thereon and charges relating to NPA of both Uttam Galva and KSS Petron in their respective accounts.
In the instant case the structural flexibility of Numetal has proved beneficial in its bid for ESIL. Numetal had promptly diluted the stake of Rewant Ruia backed AEL in Numetal to become eligible for the bid. It would be correct to conclude that at present Numetal is at a better position compared to the AMIL. This is a very crucial time for AMIL as it has to make a very important decision as to the point that whether it should deposit Rs 7000 Crore along with interest from the escrow account to the accounts of Uttam Galva and KSS Petron to become eligible for a bid which it may not win.
The main questions which have remained unanswered and which remain a substantial ground for challenging the decision before the Supreme Court by AMIL are -:
1. How far the question of relation back of holding of share does extend? Does it extend beyond the date of lodgment of Resolution Plan?
2. Whether a person is liable to cure the NPA of only that account for which it is bidding or all the accounts?
It will be interesting to see that how both the players play the game further and, in the end, who wins the race taking ESIL as the winning trophy.