India: Between The Lines... July 2019

Last Updated: 24 July 2019
Article by Vaish Associates Advocates

I. NCLAT approves the resolution plan submitted by ArcelorMittal in the resolution proceedings in respect of Essar Steel India Limited while modifying the distribution of money to the financial and the operational creditors

National Company Law Appellate Tribunal ("NCLAT") in case of Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited and Others (decided on July 4, 2019), approved the resolution plan submitted by ArcelorMittal India Pvt. Ltd. ("ArcelorMittal") in the resolution proceedings in respect of Essar Steel India Limited ("Corporate Debtor") while modifying the distribution of money to the financial and the operational creditors.

Facts

In the corporate insolvency resolution process ("CIRP") initiated against the Corporate Debtor, the committee of creditors ("COC") approved the resolution plan submitted by ArcelorMittal. Thereafter, the National Company Law Tribunal, Ahmedabad ("NCLT") approved the said resolution plan with certain modifications by its order dated March 8, 2019. A number of applications were preferred by the operational creditors and the financial creditors against the said order in relation to distribution of assets to different financial creditors and the operational creditors on the ground of discrimination or the modification of resolution plan as suggested by the NCLT. Mr. Prashant Ruia, promoter of the Corporate Debtor ("Promoter") also challenged the order of the NCLT on the ground that the Resolution Applicant is ineligible in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016 ("Code"). NCLAT clubbed the said applications/ appeals and the following issues came up for determination:

Issues

  1. Whether ArcelorMittal is eligible to file the resolution plan under Section 29A of the Code?
  2. Whether the Promoter has right of subrogation under Section 140 and right to be indemnified under Section 145 of the Contract Act, 1872 ("Contract Act")?
  3. Whether COC can delegate its power to a sub-committee or core-committee for negotiation with the resolution applicant for revision of plan and distribution of the amount amongst the financial and the operational creditors?
  4. Whether the power of distribution of amount to the lenders, that is, financial creditors, operational creditors and other stakeholders is with the resolution applicant or with the committee of creditors?
  5. Whether distribution of amount amongst the financial creditors, operational creditors and other stakeholders as shown in the NCLT order dated March 8, 2019 was discriminatory?
  6. Whether the financial creditors can be classified on the ground of a 'Secured Financial Creditor' having charge on project assets of the Corporate Debtor and 'Secured Financial Creditor' having no charge on the project assets of the Corporate Debtor or on the ground that the financial creditor is an 'Unsecured Financial Creditor'?
  7. Whether the resolution plan can provide for priority of payment of dues to one class of creditors over others?
  8. Whether the operational creditors can be validly classified on the ground of (a) employees of the Corporate Debtor; (b) those who have 'supplied goods' and 'rendered services' to the Corporate Debtor; and (c) the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the local authorities?

Findings of the NCLAT

Issue 1:

Promoter argued that ArcelorMittal was ineligible in terms of Section 29A(c) read with Section 29A(j) of the Code. It submitted that Mr. L.N. Mittal held 10 shares in 'Navoday Consultants Ltd.' and as per the statutory filings, Mr. L.N. Mittal was classified as a person holding shares as a promoter and as part of the promoter group. Further, 'Navoday Consultants Limited' was a promoter of 'GPI Textiles Limited' ("GPI Textiles") and 'Gontermann Piepers India Limited' ("GPIL"). Hence, Mr. L.N. Mittal can be called as a member of the promoter group of GPI Textiles and GPIL and therefore, ArcelorMittal was ineligible to file the resolution plan under Section 29A of the Code.

The NCLAT observed that the Supreme Court in its judgment in case of Arcelormittal India Private Limited v. Satish Kumar Gupta and Others [(2018) SCC OnLine SC 1733], already rejected the objections with respect to nonperforming assets (NPAs) of GPIL and GPI Textiles. Any attempt to reopen those issues would effectively amount to review or reconsideration of the order of the Hon'ble Supreme Court. An issue which has been settled by the Supreme Court cannot be re-agitated again and again. Any such attempt is clearly barred by the principles of res judicata. Further, the NCLAT observed that such appeal was also barred by delay and laches, as the facts stated above were within the knowledge of Promoter and the shareholders of the Corporate Debtor.

Issue 2:

Promoter argued that its right of subrogation under Section 140 of the Contract Act and right to be indemnified under Section 145 of the Contract Act are statutory rights, which have been extinguished by ArcelorMittal in the resolution plan in violation of Section 30(2)(e) of the Code. The NCLAT observed that the Promoter had executed a 'Deed of Guarantee' between the lenders and the Corporate Debtor. Such guarantee was with regard to clearance of debt. Once the debt payable by the Corporate Debtor stands cleared in view of the approval of the plan by making payment in favour of the lenders, the effect of 'Deed of Guarantee' comes to an end as the debt stands paid. The guarantee having become ineffective in view of payment of debt by way of resolution to the original lenders, the question of right of subrogation of the Promoter's right under Section 140 of the Contract Act and the right to be indemnified under Section 145 of the Contract Act does not arise.

Issue 3:

In the instant case, the NCLAT observed that the COC instead of going through the resolution plan for approval by vote, delegated the power to a sub-committee/ core committee. The NCLAT held that a sub-committee or core-committee is unknown and against the provisions of the Code. There is no provision under the Code, which permits constitution of a core-committee or sub-committee nor the Code or the regulations made thereunder empowers the committee of creditors to delegate their duties to such core-committee/ sub-committee. The NCLAT held that the committee of creditors do not enjoy any authority to delegate to itself the role of the resolution applicant including the manner of distribution of amount amongst the stakeholders, which is exclusively within the domain of the resolution applicant and thereafter before the adjudicating authority, if found discriminatory. Such being the position, the COC cannot delegate its power to a sub-committee or core-committee for negotiating with the resolution applicant(s).

Issue 4:

The NCLAT examined the issue by considering various provisions of the Code and regulations made thereunder. The NCLAT observed that under Section 30(2)(b) of the Code, it is clear that the resolution professional is required to notice whether the resolution plan provides for the payment of the debts of the operational creditors in such manner as may be specified by the Insolvency and Bankruptcy Board of India ("IBBI"). The said provision makes it clear that the resolution applicant in its resolution plan must provide the amount it proposes to pay to one or other creditors, including the operational creditors and the financial creditors. The NCLAT also examined Section 30(3) of the Code, which suggests that the resolution professional is required to present before the committee of creditors, the resolution plan which confirms the conditions referred to in Section 30(2) of the Code. It means that if the resolution plan does not show the distribution amongst the financial creditors and the operational creditors, it cannot be placed before the committee of creditors. The NCLAT also examined Section 30(4)of the Code, which provides that the resolution plan is required to be approved by a vote of not less than 66% of voting share of the financial creditors, "after considering its feasibility and viability and such other requirements as may be specified by the Board". Thereby, all members of the committee of creditors, who are present, are required to go through the resolution plan to find out whether it is in accordance with Section 30(2) of the Code; and whether it is feasible and viable and meets all the requirements as specified by IBBI. With regard to Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("Regulations"), the NCLAT observed that the resolution plan must include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and the operational creditors, of the corporate debtor. Therefore, the distribution of amount to the operational creditors, financial creditors and other stakeholders are to be made by the resolution applicant and required to be reflected in the resolution plan.

The financial creditors being the claimants at par with other claimants like other financial creditors and the operational creditors, having conflict of interest, cannot distribute the amount amongst themselves. The members of the committee of creditors being interested party are also not supposed to decide the manner in which the distribution is to take place. Thus, it is clear that the committee of creditors have not been empowered to decide the manner in which the distribution is to be made between one or other creditors.

Issue 5:

The NCLAT observed that the suggestion of ArcelorMittal to distribute the financial package offered by it, only to the secured financial creditors, denying the right of operational creditors and other stakeholders, was against the provisions of Section 30(2) of the Code and Regulation 38(1A) of the CIRP Regulations, which thereby cannot be upheld.

The NCLAT relied on the Supreme Court judgment in case of Swiss Ribbons Pvt. Ltd. & Another v. Union of India & Others [2019 SCC OnLine SC 73], and observed that Regulation 38 of CIRP Regulations strengthens the rights of the operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors rights, together with priority in payment over financial creditors. The Supreme Court in the said judgment noticed that the NCLAT, while looking into viability and feasibility of the resolution plan that are approved by the committee of creditors, had always gone into whether operational creditors are given roughly the same treatment as financial creditors. If it is not the case then such plans are either rejected or modified so that the operational creditors rights are safeguarded.

In the instant case, the NCLAT noticed that a huge discrimination was made by the COC in distribution of proposed amount to the operational creditors qua financial creditors. Majority of the financial creditors were allowed over 90% of their claim amount, whereas 'NIL' that is 0% was allowed in favour of the operational creditors. The NCLAT observed that such distribution was not only discriminatory but also arbitrary. Further, the financial creditors have discriminated amongst themselves on the grounds of having charge or no charge on the project assets of the corporate debtor. Even though it is accepted that the 'Standard Chartered Bank' is also a secured financial creditor, however, it has been discriminated by the COC on the ground of it having no charge on project assets of the corporate debtor.

Issue 6:

The NCLAT on a conjoint reading of the definitions of financial creditor and financial debt under Sections 5(7) and 5(8) of the Code, respectively, found that it is evident that there was no distinction made between one or other financial creditors. All persons to whom a financial debt is owed by the corporate debtor constitute one class, that is, financial creditor, irrespective of whether they fall within the purview of different clauses of Section 5(8) of the Code. They cannot be sub-classified as secured or unsecured financial creditor for the purpose of preparation of the resolution plan by the resolution applicant.

Issue 7:

With regard to priority of payment of dues of a financial creditor, it was noted that a resolution plan provides for upfront payment in favour of the creditors including the financial creditors, operational creditors and the other creditors. It is not a distribution of assets from the proceeds of sale of liquidation of the corporate debtor and, therefore, the resolution applicant cannot take advantage of Section 53 of the Code for the purpose of determination of the manner in which distribution of the proposed upfront amount is to be made in favour of one or other stakeholders namely, the financial creditor, operational creditor and other creditors. Hence, the NCLAT held that Section 53 cannot be made applicable for distribution of amount amongst the stakeholders, as proposed by the resolution applicant in its resolution plan.

The NCLAT referred to its earlier decision in case of Binani Industries Limited v. Bank of Baroda and Another (decided on November 14, 2018), where it observed that "Any 'Resolution Plan' if shown to be discriminatory against one or other 'Financial Creditor' or the 'Operational Creditor', such plan can be held to be against the provisions of the I&B Code".

The NCLAT observed that Section 30(2)(b) of the Code mandates that the resolution plan must provide for the payment of the debts of operational creditors in such manner as may be prescribed by the IBBI which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under Section 53 of the Code. That means, the operational creditors should not be paid less than the amount they could have received in the event of a liquidation out of the asset of the corporate debtor. It does not mean that they should not be provided the amount more than the amount they could have received in the event of liquidation; which otherwise amount to discrimination.

Issue 8:

The NCLAT examined the definition of 'Operational Debt', and concluded that the following classification has been made by the Parliament: (i) those who have 'supplied goods' and 'rendered services' and thereby entitled for payment; (ii) the employees who have 'rendered services' for which they are entitled for payment; and (iii) the Central Government, the State Government or the local authority who has not rendered any services but derive the advantage of operation of the 'Corporate Debtor' pursuant to existing law (statutory dues). The NCLAT observed that from the aforesaid definition, the 'Operational Creditors' can be classified in three different classes for determining the manner in which the amount is to be distributed to them. However, they are to be given the same treatment, if similarly situated.

For the aforesaid reasons, the NCLAT held that if the employees or those who have 'supplied goods' and 'rendered services' having claim less than INR 1 Crore are given 100% of their dues, the other 'Operational Creditors' whose claim are more than INR 1 Crore or the 'Central or State Government' or the 'Local Authority', who raise their claim on the basis of the statutory dues, cannot ask for same treatment as allowed in favour of the aforesaid class of 'Operational Creditors'. For the said reasons, the NCLAT held that 100% payment as suggested in the resolution plan in favour of the workmen and employees, unsecured financial creditors whose claim was less than INR 1 Crore and the operational creditors whose admitted claim was less than INR 1 Crore was not discriminatory and the other operational creditors or financial creditors cannot ask for 100% of their claim on the ground that they should also be provided with same treatment.

Decision of the NCLAT

In view of the aforesaid observations, the NCLAT decided not to reject the resolution plan submitted by ArcelorMittal, and modified the plan as approved by the NCLT by its judgement dated March 8, 2019 to safeguard the rights of the operational creditors and other financial creditors. However, the other conditions laid down by the NCLT and as mentioned in the resolution plan were not interfered with.

With respect to the amount to be paid to the financial creditors and operational creditors whose claim was more than INR 1 Crore, the NCLAT calculated the percentage of amount to be paid to the relevant stakeholders against their original admitted claim by dividing the amount available for distribution (as offered by ArcelorMittal in its resolution plan) by the total debt amount payable to the stakeholders. After calculation, the NCLAT held that financial creditors with claim of more than INR 1 Crore will be eligible for 60.7% of the amount of debt claimed. The NCLAT also calculated the revised percentage for amount to be paid to operational creditors with claim of more than INR 1 Crore, and held that 59.614% shall be payable to such operational creditors. The aggregate amount allocated to all the operational creditors and the financial creditors was 60.7% of their respective admitted claims. The operational as well as the financial creditors with claim of less than INR 1 Crore were allowed 100% of their respective admitted claims.

The NCLAT also made a direction to the effect that after the distribution of the amount of INR 42,000 Crores, if any amount would be found to have been generated as profit during the CIRP after due verification by the auditors, it cannot be given to the successful resolution applicant as the successful resolution applicant has not invested any money during the CIRP. If one or other financial creditors would have invested money during the CIRP to keep the corporate debtor as a going concern, it can claim that it should get the interest out of the profit amount. In the present case, since the financial creditors had not invested money during the CIRP, the NCLAT held that it should be distributed amongst all the financial creditors and the operational creditors on pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim.

With regard to disputed claims and remedies available in respect thereof, the NCLAT referred to its earlier judgements and held that the cases where the adjudicating authority or the appellate authority could not decide the claims on merits, the applicants can raise the issue before the appropriate forum in terms of Section 60(6) of the Code. However, the creditors, whose claims have already been decided, cannot avail any remedy under Section 60(6) of the Code. Further, the financial creditors in whose favour guarantee were executed, can also not reagitate such claim from the principal borrower as their total claim stands satisfied pursuant to the resolution plan.

VA View

This judgement will have a significant impact on the status of operational creditors as it places the operational creditors at the same pedestal as financial creditors who form part of the committee of creditors. For the first time, the NCLAT also dealt with profit generated during the CIRP and held that the same should be distributed amongst all the creditors on pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim.

The NCLAT in this judgment criticized the committee of creditors for deciding the distribution of money to the creditors and reiterated that this is the duty and responsibility which vests with the resolution applicant. The NCLAT further stated that the formation of sub-committee/ core committee to renegotiate the terms of the plan are against the provisions of law and any delegation of power to such committees shall be invalid.

It will be interesting to note the fate of this judgment in the pending appeals filed before the Supreme Court. Further in light of this judgement, the Government has acted swiftly and moved an amendment to the Code in respect of the primacy of secured creditors over unsecured creditors in recovery of their dues and setting strict timelines for the resolution and litigation process. Moreover, the amendment proposes to vest the power with committee of creditors in respect of commercial decisions on distribution of funds to various classes of creditors as against the aforesaid judgement of NCLAT, where the NCLAT has given such power to the resolution applicant. The proposed amendments will help in cutting legal delays and help banks to recover more dues and boost India's credit market for future growth.

Download >> Between The Lines... July 2019

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