ESSAR STEEL INDIA LTD. Vs. SATISH KUMAR GUPTA

 

CASE COMMENT

ESSAR STEEL INDIA LTD. Vs. SATISH KUMAR GUPTA

Appellant- Committee of Creditors of Essar Steel India Limited

Respondent- Satish Kumar Gupta and Ors.

Citation- Civil Appeal No. 8766-67 OF 2019

Date of judgment- November 15, 2019

Judge Bench- RohintonFaliNariman, Surya Kant, and V. Ramasubramaniyam, JJ.

INTRODUCTION 

By a judgment dated November 15, 2019, the Supreme Court of India ("Supreme Court") in the case of Committee of Creditors of Essar Steel India Limited (through authorized signatory) v. Satish Kumar Gupta and Others delivered its final verdict on the acquisition of Essar Steel India Limited ("Essar Steel") under the (Indian) Insolvency and Bankruptcy Code, 2016 ("IBC"). Essar Steel was one of India's largest steel manufacturers. Its overdue debt of about INR 55,000 crore was the largest among the companies being resolved under the IBC. Pursuant to the IBC process, a joint venture between ArcelorMittal and Nippon Steel acquired Essar Steel in December 2019.

The proceedings under the IBC in relation to the acquisition of Essar Steel lasted for more than two years and laid down precedents on several questions arising out of the then newly introduced insolvency legislation in India.

FACTS OF THE CASE

Insolvency proceedings were initiated against Essar Steel on August 2, 2017 by an order issued by the National Company Law Tribunal, Ahmedabad Bench ("NCLT") admitting an application filed by Standard Chartered Bank ("Standard Chartered") and the State Bank of India. Initially, resolution plans were submitted by ArcelorMittal India Private Limited ("ArcelorMittal") and Numetal Limited ("Numetal"), both of whom were found ineligible bythe resolution professional under Section 29A of the IBC. Pursuant to a fresh invitation, a resolution plan from Vedanta Limited was also received.

In the legal proceedings that ensued, the Supreme Court by its order dated October 4, 2018 declared ArcelorMittal and Numetal to be ineligible resolution applicants under Section 29A of the IBC. However, the Supreme Court granted ArcelorMittal and Numetal two weeks from the date of the judgment to pay off the non-performing assets ("NPAs") of their related corporate debtors to cure their ineligibility. Consequently, the committee of creditors ("CoC") of Essar Steel was required to reconsider and vote on the resolution plans submitted (including the plan submitted by Vedanta). If no plan had been accepted with the requisite majority by the CoC, Essar Steel would have gone into liquidation.

ArcelorMittal after having made payments in accordance with the aforementioned Supreme Court order, resubmitted its resolution plan and emerged as the successful resolution applicant for Essar Steel when its resolution plan was approved by the CoC on October 25, 2018.

ArcelorMittal's Resolution Plan

Under ArcelorMittal's resolution plan, the manner of distribution of funds among the secured financial creditors was left to the discretion of the CoC. The resolution plan of ArcelorMittal provided for an upfront payment of INR 42,000 crore and an equity infusion of INR 8,000 crore. Unsecured financial creditors were to be paid about 4% of their admitted claims. Operational creditors having claims of less than INR 1 crore, workmen and employees were to be paid their dues in full. Operational creditors with claims of INR 1 crore and above were not to be paid any amounts.

The plan also provided that upon payment to the financial creditors, all security documents (excluding corporate or personal guarantees provided by the erstwhile promoter group in relation to Essar Steel's loans) would be deemed to be assigned to ArcelorMittal and those documents that were not capable of being assigned were to be terminated. Further, upon approval of the resolution plan by the NCLT, all guarantees invoked prior to the effective date of the plan and claims of any guarantor on account of subrogation under such guarantee would be deemed to be extinguished. However, the rights of the financial creditors to enforce the corporate or personal guarantees against the erstwhile promoter group were to remain enforceable.

CONTENTIONS OF THE PARTIES

To render it eligible, AMIL argued that the disposal of its’ shareholding in KSS Petron and Uttam Galva, the deposit of approximately INR 7,000 crores into an escrow account in relation to the overdue amounts of Uttam Galva and KSS Petron.

Declassification of AM Netherlands as the promoter of Uttam Galva, no appointed director on the board of Uttam Galva and no liability under any bank guarantees in relation to the indebtedness of either entity.

It was argued on behalf of Numetal that it should be eligible to be a resolution applicant, since RewantRuia, who was deemed to be acting in concert with the Promoter, had exited Numetal before the submission of the second round of bids and hence, he did not fall within the ambit of ‘control’, ‘promoter’ or ‘managing director’, which would otherwise, disqualify Numetal from being a bidder.

ISSUES INVOLVED

1.Whether the ineligibility of a resolution applicant under section 29A of the IBCattaches the date of commencement of the CRIP when the RP is submitted by the resolution applicant?

2.Whether the resolution applicant can challenge the rejection of the resolution plan by the Resolution Professional?

3.Whether the NCLAT was right in holding that Mittal was ineligible to submit the Resolution plan in accordance with Section 29A of the Code?

JUDGMENT OF THE HON’BLE COURTS

The Hon’ble Supreme Court held that the stage of ineligibility attaches when the resolution plan is submitted by the resolution applicant. As a result, it must be considered at the time of submission of the resolution plan, not at the time of application. The Supreme Court pointed out that Section 29A of the Code states that "a person shall not beeligible to submit a resolution plan." Hence, the stage of ineligibility begins when aresolution applicant submits a resolution plan, not when the CIRP begins. It was also clarified later in 2018 by an amendment. The SC stated that the principle of equity cannot be extended to treating non-equals equally as it weakens the very objective of the IBC. The Principle of equity is different with each creditor depending on the class, secured or unsecured, financial or operational and a resolution plan can therefore provide for differential payment to different classes as long as the provisions of the IBC.By overturning the NCLAT judgment, the Supreme Court reaffirmed what had already been upheld in its Swiss Ribbons judgment,171 albeit in different words, that only similarly situated creditors will be treated in the same way.

It was held that the RP, does not have the authority to reject the resolution plan, and that he must offer all the plans to the CoC for review. The Supreme Court held that the CoCcannot be directed on how to distribute the financial package.172 In response to a challenge to the RP's rejection of the concerned resolution applicant's plan, the Supreme Court held that Section 30 (2) (e) of the Code does not give the RP the authority to "decide" whether the resolution plan violates the law. The RP must analyze the resolution plan given by various applicants to ensure that it is complete in all respects before submitting it to the CoC. The RP's role is to ensure that the resolution plans are complete before they are presented to the CoC, which may or may not accept them. Although it is not required for the RP to provide reasons when submitting a resolution plan to the CoC, it would be in the best interests of the situation if he attached his due diligence report for each of the resolution plans under consideration.

In terms of eligibility of Mittal, the SC ruled that Mittal had not paid their respective NPAs prior to submitting their resolution plans, hit by Section 29A, therefore were ineligible to submit their plans. The Supreme Court stated that any person who has an account, or is a promoter of, or in the management or control of, a corporate debtor who has an account, is ineligible to submit a resolution plan under Section 29A(c) of the Code. After evaluating the reasonable proximity of the circumstances, the Supreme Court concluded that there was no doubt that Mittal’s shares in Uttam Galva were sold solely to avoid the ineligibility described in Section 29A(c) of the Code. Therefore, the Supreme Court held that the financial creditors could enjoy supremacy over the operational creditors and finally Mittal can acquire Essar steel.

OTHER CONSIDERATIONS

The apex court observed that the tribunals must come into picture only when the issue is settled by an RP and CoC. Also added that the tribunals should finalize only after the resolution process is completed and they should not jump in when the preceding is going on before the RP and CoC. The tribunals must not interrupt at every stage of the CRIP.

The apex court brings into consideration the 'Clear Slate Theory' if a resolution plan is approved then no CoC can initiate a procedure to recover claims that are not part of the resolution plan.

CONCLUSION

The Supreme Court judgment could not have come at a more opportune time. After the consolidation of multiple insolvency laws, the establishment of the IBC has made conducting business in India much easier. It encourages entrepreneurship while also attempting to balance the interests of diverse stakeholders. By transferring the control of Essar steels to Mittal, the Supreme Court has taken a big step in the working of the IBC. The judgment sets a precedent for other companies going through an insolvency procedure.