Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors

Bench Strength – 3 ( R.F. Nariman, Surya Kant, V. Ramasubramanian JJ )

Date of Judgment – 15.11.2019

Facts of the case-

Standard Chartered Bank [SCB] had provided a loan to Essar’s fully owned foreign subsidiary, Essar Steel Offshore Limited (“ESOL”). Essar was a guarantor to this loan. Accordingly, SCB had issued a demand notice to Essar on ESOL’s failure to pay the amount due to them. Since Essar failed to respond to the demands of SCB, it sought to initiate the Corporate Insolvency Resolution Procedure [CIRP] and proposed a name for an Interim Insolvency Resolution Professional (“IRP”). SBI, unlike SCB, had been a part of the Joint Lenders’ Forum (“JLF”) whereby SBI had been authorized by other Banks of the JLF to file the CIRP Application. Based on JLF recommendations, SBI proposed an IRP. Essar did not raise any objections regarding the existence of the debt. It was admitted that they were in default, but they claimed that they were not wilful defaulters. Essar also contended that the application ought not to be admitted as prejudice would be caused to the company and its employees. In March 2019, National Company Law Tribunal (NCLT) approved global steel-giant ArcelorMittal’s bid for Essar Steel. The Committee of Creditors (CoC) approved the resolution plan offered by the ArcelorMittal. Under the resolution plan, ArcelorMittal offered an advance cash payment of about ₹42,000 crore to the financial creditors and capital infusion of ₹8,000 in the next few years. However, the offer did not have much for operational creditors to Essar Steel.

In 2019, the National Company Law Appellate Tribunal (NCLAT) cleared the CoC’s plan but changed the financial distribution plan by ordering an equal recovery plan for all creditors, including financial and operational creditors. Essar did not agree with the judgment of NCLT and went to Supreme Court.


For the ESSAR

  1. The provisions of the Code provide for a broad classification of creditors as financial creditors and operational creditors on the basis of the nature of the transaction between creditors and a corporate debtor.
  2. Code does not mandate identical treatment of differently situated creditors
  3. financial creditors as a class have a superior status as against operational creditors, the same being the case with secured creditors vis-a-vis unsecured creditors
  4. general law of the land as contained in Section 48 of the Transfer of the Property Act, 1882 and Section 77 of the Companies Act, 2013 would not have been taken away by the Code
  5. classification is permissible so as to differentiate persons who are unequal, who cannot then be treated equally
  6. relying strongly upon the IMF paper on “Development of Standards for Security Interest” by Pascale De Boeck and Thomas Laryea, in addition to several expert reports, that classification of creditors based on the nature of the debt and/or security interest is a sine qua non for any Insolvency Code. If secured financial creditors are to be treated at par with unsecured creditors, such secured creditors would rather vote for liquidation rather than Corporate Resolution, contrary to the main objective sought to be achieved by the Code.

For SCB –

  1. S. 30 of the IBC was amended on 16.08.2019. amendment would not apply to the facts of the present case, in as much as the amendment made is prospective in nature. The proceeding has been initiated in NCLT earlier.
  2. A reading of the amended Section 30(2)(b) together with the Explanations contained therein, and the amendment of Section 30(4) would leave nobody in any manner of doubt that the purpose of the amendment was to get over the NCLAT judgment in order that the huge amount of around INR 2,100 crores, that is payable to a private foreign bank namely Standard Chartered Bank, gets reduced to around INR 61 crores, so that nationalised banks and other entities in which the Government has an interest may get a larger share of the pie to the detriment of Standard Chartered Bank. The legislature has, therefore, overstepped the separation of powers boundaries to step in and legislatively adjudicate the facts of a particular case.

For Government Side-\

Shri Tushar Mehta, learned Solicitor General of India, has supplemented the submissions of the learned Additional Solicitor General by written arguments. He has argued that it is well settled that the legislature can always take away the basis of a judicial decision without directly interfering with the judgment of the Court, and has cited several decisions to buttress this point. He also argued that Shri Sibal’s assault on the constitutional validity of Sections 4 and 6 of the Amending Act of 2019 on the ground that the Amendment was tailor-made to do away with the judgment in this very matter, so that his client may walk away without anything, is answered by the well settled principle that an Act of the legislature cannot be attacked on the ground of improper or bad motive, and cited certain judgments of this Court in support of the same

Before going into the judgement we should know a couple of defintions.

  1. Financial creditors are in the business of lending money. Financial creditors earn profit by earning interest on money lent with low margins, generally being between 1 to 4%. Also, financial creditors are capital providers for companies, who in turn are able to purchase assets and provide a working capital to enable such companies to run their business operation,
  • Operational creditors are beneficiaries of amounts lent by financial creditors which are then used as working capital, and often get paid for goods and services provided by them to the corporate debtor, out of such working capital. the business risk of operational creditors who operate with higher profit margins and shorter cyclical

repayments must needs be higher. Also, operational creditors have an immediate exit option, by stopping supply to the corporate debtor, once corporate debtors start defaulting in payment.

Judgement –

  1. The court studied the code and arrived at the conclusion that:
    1. the resolution professional is a person who
      1. manages the affairs of the corporate debtor 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 Adjudicating Authority,
      1. a key person who is to appoint and convene meetings of the Committee of Creditors, so that they may decide upon resolution plans
      1. Another very important function of the resolution professional is to collect, collate and finally admit claims of all creditors, which must then be examined for payment.
      1. Role of Resolution Professional is administrative and Not adjudicatory ( Arcelor Mittal case)
    1. Role of the prospective resolution applicant
      1. Under the Code, the prospective resolution applicant has a right to receive complete information as to the corporate debtor, debts owed by it, and its activities as a going concern, prior to the admission of an application under section 7, 9 or 10 of the Code
      1. For this purpose, it has a right to receive information contained in the information memorandum.
      1. the resolution plan submitted by the prospective resolution applicant must provide for measures as may be necessary for the insolvency resolution of the corporate debtor for maximisation of the value of its assets, which may include transfer or sale of assets or part thereof, whether subject to security interests or not.
      1. Regulation 38 of the code then deals with the mandatory contents of a resolution plan, making it clear that such plan must contain a provision that the amount due to operational creditors shall be given priority in payment over financial creditors
    1. Role of the committee of creditors in the corporate resolution process
      1. Section 21(2) of the Code mandates that the Committee of Creditors shall comprise all financial creditors of the corporate debtor. “Financial creditors” are defined in Section 5(7) of the Code as meaning persons to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred. “Financial debt” is then defined in Section 5(8) of the Code as meaning a debt along with interest, if any, which is disbursed against the consideration for the time value of money. “Secured creditor” is separately defined in Section 3(30) of the Code as meaning a creditor in favour of whom a security interest is created
      1. in order to trigger application of the Code, a neat division has been made between financial creditors and operational creditors.
      1. The rationale for only financial creditors handling the affairs of the corporate debtor and resolving them is for reasons that have been deliberated upon by the ( Bankruptcy Lar Reforms committee) BLRC Report of 2015, which formed the basis for the enactment of the Insolvency Code.
      1. Section 24 of the Code deals with meetings of the Committee of Creditors. Though voting on the approval of a resolution plan is only with the financial creditors who form the Committee of Creditors, yet the resolution professional is to conduct the aforesaid meeting at which members of the suspended board of directors may be present, together with one representative of operational creditors, provided that the aggregate dues owed to all operational creditors is not less than 10%
      1. Even though it is the resolution professional who is to run the business of the corporate debtor as a going concern during the intermediate period, yet, such resolution professional cannot take certain decisions relating to management of the corporate debtor without the prior approval of at least 66% of the votes of the Committee of Creditors
      1. Thus, it is clear that since corporate resolution is ultimately in the hands of the majority vote of the Committee of Creditors, nothing can be done qua the management of the corporate debtor by the resolution professional which impacts major decisions to be made in the interregnum between the taking over of management of the corporate debtor and corporate resolution by the acceptance of a resolution plan by the requisite majority of the Committee of Creditors
      1. Majority decision of the Committee of Creditors is the “feasibility and viability” of a resolution plan, which obviously takes into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors.
      1. Example on the power of Committee of Creditors-

As an example, take the case of a resolution plan which does not provide for payment of electricity dues. It is certainly open to the Committee of Creditors to suggest a modification to the prospective resolution applicant to the effect that such dues ought to be paid in full, so that the carrying on of the business of the corporate debtor does not become impossible for want of a most basic and essential element for the carrying on of such business, namely, electricity. This may, in turn, be accepted by the resolution applicant with a consequent modification as to distribution of funds, payment being provided to a certain type of operational creditor, namely, the electricity distribution company, out of upfront payment offered by the proposed resolution applicant which may also result in a consequent reduction of amounts payable to other financial and operational creditors. What is important is that it is the commercial wisdom of this majority of creditors which is to determine, through negotiation with the prospective resolution applicant, as to how and in what manner the corporate resolution process is to take place.

  • Jurisdiction of the adjudicating authority and the appellate tribunal – it is the Adjudicating Authority which first admits an application by a financial or operational creditor, or by the corporate debtor itself under Section 7, 9 and 10 of the Code.the Adjudicating Authority then appoints an interim resolution professional who takes administrative decisions as to the day to day running of the corporate debtor; collation of claims and their admissions; and the calling for resolution plans in the manner stated above.[ Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Macquarie Bank Ltd v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674] After a resolution plan is approved by the requisite majority of the Committee of Creditors, the aforesaid plan must then pass by  the Adjudicating Authority under Section 31(1) of the Code. The Adjudicating Authority’s jurisdiction is circumscribed by Section 30(2) of the CodeAs per K. Shasidhar v. Indian Overseas Bank limited judicial review is available to the judgments of the adjudicating authority and the appellate tribunal. The limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned.At this juncture it is important to read s. 60(5) of the code.

“60. Adjudicating Authority for corporate persons

 xxx xxx xxx

(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—

 (a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.”

The counsel for the petitioner said, as there is a non-obstante clause in S. 60(5) it means the NCLT  ( as the appellate tribunal) can make any modification to the jurisdiction of the adjudicating body constituted under the code. The non-obstante clause of Section 60(5) speaks of any other law for the time being in force, which obviously cannot include the provisions of the Code itself. Secondly, Section 60(5)(c) is in the nature of a residuary jurisdiction vested in the NCLT so that the NCLT may decide all questions of law or fact arising out of or in relation to insolvency resolution or liquidation under the Code. Such residual jurisdiction does not in any manner impact Section 30(2) of the Code which circumscribes the jurisdiction of the Adjudicating Authority when it comes to the confirmation of a resolution plan, as has been mandated by Section 31(1) of the Code. A harmonious reading, therefore, of Section 31(1) and Section 60(5) of the Code would lead to the result that the residual jurisdiction of the NCLT under Section 60(5)(c) cannot, in any manner, whittle down Section 31(1) of the Code, by the investment of some discretionary or equity jurisdiction in the Adjudicating Authority outside Section 30(2) of the Code, when it comes to a resolution plan being adjudicated upon by the Adjudicating Authority. This argument also must needs be rejected

  • There is no doubt that a key objective of the Code is to ensure that the corporate debtor keeps operating as a going concern during the insolvency resolution process and must therefore make past and present payments to various operational creditors without which such operation as a going concern would become impossible. If nothing is to be paid to operational creditors, the minimum, being liquidation value – which in most cases would amount to nil after secured creditors have been paid – would certainly not balance the interest of all stakeholders or maximise the value of assets of a corporate debtor. Thus, it is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code ( to run the company during the process of insolvency) before it arrives at a commercial decision to pay off the dues of financial and operational creditors.
  • There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors. The decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors.
  1. while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of
  • If the Adjudicating Authority 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 Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.
    • Secured and unsecured creditors: equality principle
      • The impugned NCLAT judgment has applied an equality principle down the board stating that
        • whether creditors are secured or unsecured, financial or operational,
        • equitable treatment demands that they all be treated
        • as one group of creditors similarly situate,
        • as a result of which no differences can be made in terms of the amount of debt to be repaid to them
        • based on whether they are secured or unsecured, and whether they are financial or operational creditor
      • But if an “equality for all” approach recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being 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. So, equality principle cannot be applicable literally.
      • Fair and equitable dealing of operational creditors’ rights under the Regulation 38 of the code involves the resolution plan stating as to how it has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their debt proportionately. Also, the fact that the operational creditors are given priority in payment over all financial creditors does not lead to the conclusion that such payment must necessarily be the same recovery percentage as financial creditors. 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.
      • By vesting the Committee of Creditors with the discretion of accepting resolution plans only with financial creditors, operational creditors having no vote, the Code itself differentiates between the two types of creditors for the reasons given above.
      • Further, as has been reflected in Swiss Ribbons (supra), most financial creditors are secured creditors, whose security interests must be protected in order that they do not go ahead and realise their security in legal proceedings, but instead are incentivised to act within the framework of the Code.
      • Secured creditors as a class are subsumed in the class of financial creditors, as has been held in Swiss Ribbons. Secured and unsecured financial creditors are differentiated when it comes to amounts to be paid under a resolution plan, together with what dissenting secured or unsecured financial creditors are to be paid. And, most importantly, operational creditors are separately viewed from these secured and unsecured financial creditors. Hence, the equality principle cannot be stretched to treating unequal equally, as that will destroy the very objective of the Code – to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.
  • Constitutional Validity of Section 4 and 6 of the Amending Act, 2019
  1. In Swiss Ribbons the court held that the legislature must be given free play in the joints when it comes to economic legislation. Apart from the presumption of constitutionality which arises in such cases, the legislative judgment in economic choices must be given a certain degree of deference by the courts.
    1. It is alleged that Sections 4 and 6 of the Amending Act of 2019 is tailor-made to do away with the judgment of the NCLAT in this very matter. This being so, such legislation would be clearly outside the bounds of the legislature as the legislature cannot interfere with a particular judgment and set it aside. The amendment aims to create clear distinction between the financial and operational creditors.
    1. While it is true that it may well be that the law laid down by the NCLAT in this very case forms the basis for some of these amendments, it cannot be said that the legislature has directly set aside the judgment of the NCLAT. Since an appeal against the judgment of the NCLAT lies to the Supreme Court, the legislature is well within its bounds to lay down laws of general application to all persons affected, bearing in mind what it considers to be a curing of a defective reading of the law by an Appellate Tribunal.  Also, it is settled law that bad faith, in the sense of improper motives, cannot be ascribed to a legislature making laws.  [K.C. Gajapati Narayan Deo and Others v. State of Orissa 1954 SCR 1]
  • Next, the Section 4 of the code (as amended) prescribes time limit for completion of proceeding.  The court held that,
  1. the time taken in legal proceedings cannot possibly harm a litigant if the Tribunal itself cannot take up the litigant’s case within the requisite period for no fault of the litigant,
    1. a provision which mandatorily requires the CIRP to end by a certain date – without any exception thereto – may well be an excessive interference with a litigant’s fundamental right to non-arbitrary treatment under Article 14
    1. It is 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.
    1. Hence, the word “mandatorily” is struck down from S. 4 of the code ( with regards to completion time) 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 Constitution. 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 time taken in legal proceedings. However, on the facts of a given case, 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.
  • In response to another submission by the counsel of Mital, the court referred State Bank of India v. Orissa Manganese and Minerals Ltd. CA(IB) No. 391/KB/2018, and held that, ultimately it is the commercial wisdom of the requisite majority of the Committee of Creditors that must prevail on the facts of any given case, which would include distribution in the manner suggested.

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