SHORT NOTE ON JUDGEMENT DATED 15 NOVEMBER, 2019 OF THE HON’BLE SUPREME COURT OF INDIA IN THE MATTER OF COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY VS. SATISH KUMAR GUPTA & ORS. (C.A. NO. 8766-67 OF 2019) & OTHER PETITIONS
Held: The Supreme Court allowed the appeal filed by Committee of Creditors of Essar Steel Indian and had set aside the Order of the National Company Law Appellate Tribunal, the Hon’ble Supreme Court made several important findings and rulings as under:
|1.||Secured and unsecured creditors; the equality principle||a. The Supreme Court while considering the treatment of unsecured, secured, financial and operational creditors relied on UNCITRAL Legislative Guide, BLRC Report 2015, American Jurisprudence, 2d, Volume 9, IMF paper on Development of Standards for Security Interest by Pascale De Boeck and Thomas Laryea, Counsel, IMF Legal Department, World Bank Report of 2015 titled Principles for Effective Insolvency and Creditor/Debtor Regimes and Philip R. Wood’s book titled “Principles of International Insolvency”.
b. The UNCITRAL Legislative Guide ensures and propounds equitable treatment of creditors with similar legal rights and should not be treated identically.
c. It is necessary to classify the claims which shall not detriment any class of creditors. And the treatment of creditors needs to ensure that the plan shall be made for appropriate protection for treatment.
d. The judgment relying on The American jurisprudence which reflects that the treatment through principles of design, distribution and reorganization to connect all creditors.
e. Indeed, if an equality for all approach recognizing the rights of different classes of creditors, in many cases, be incentivized to vote for liquidation rather than resolution, as they would defeat the purpose of the code will be defeated.
f. It is clear that the financial creditors steps further more than operational creditors. Generally, the financial creditors participate in every activity of the company. It is to be noted that the operational creditors have no such stipulations as financial creditors.
g. As per the amended regulation 38 states mandatory contents in which the resolution plan shall be source of funds to be paid. Moreover, the content denotes the priority of creditors, the view of approval of resolution plan by CoC which roughly treats the financial creditors and operational creditors as either they are amended or modified.
h. Together with all observations, this judgment lead to the conclusion the equality principle cannot be stretched. Therefore, the equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.
“So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors”.
|2.||Extinguishment of Personal Guarantees and Undecided Claims||a. The part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile directors of the corporate debtor.|
|3.||Utilisation of profits of the corporate debtor during CIRP to pay off creditors.||a. The RFRP issued in terms of Section 25 of the Code and consented to by ArcelorMittal and the CoC had provided that distribution of profits made during the corporate insolvency process will not go towards payment of debts of any creditors.|
|4.||Constitutional Validity of Section 4 and 6 of the Amending Act, 2019||a. Time taken in legal proceedings cannot ever be put against the parties before the NCLT and NCLAT based on Latin maxim which sub-serves the cause of justice namely, actus curiae neminem gravabit.
b. A provision which mandatorily requires the CIRP to end by a certain date- without any extension thereto may will be an 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.
c. While leaving the provision otherwise intact, the Supreme Court strike down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution. The said provision of the Amended Code has been reproduced here under:
“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate 10 insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:”
d. The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the rime taken in legal proceedings.
e. If it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be 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 Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days.
f. Under the newly added proviso of Section 12, if by reason of all aforesaid factors the grace period of 90 days from the date of commencement of the Amending Act of 2019 is exceeded, there again a discretion can be exercised by the Adjudicating Authority and/or Appellate Tribunal to further extend the time keeping the aforesaid parameters in mind. It is only in such exceptional cases that time can be extended, the general rule being that 330 days is the outer limit. The said provision of the amended code has beed reproduced here under:
“Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days 15 from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019 ”
g. Section 30(2)(b) gives operational creditors something more than was given earlier as it is the higher of the figures mentioned in sub-clauses (i) and (ii) of the sub-clause (b) that is now to be paid as a minimum amount to operational creditors. The same goes for the latter part of sub-clause (b) which refers to dissentient financial creditors.
h. Explanation 1 has only be inserted in order that the Adjudicating Authority and the Appellate Tribunal cannot enter into the merits of business decision of the requisite majority of the Committee of Creditors.
i. Explanation 2 applies the substituted Section to pending proceedings either at the level of the Adjudicating Authority or the Appellate Authority or in a Writ or Civil Court.
j. Explanation 2 is constitutionally valid, not having any retrospective operation so as to impair vested rights.
Prepared by: KESAR DASS B. & ASSOCIATES, 4A, Mathura Road, Jangpura-A, New Delhi – 110014, India