Case: COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY Vs. SATISH KUMAR GUPTA


Decision reasoning: 0[ds]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 rejected45. However, as has been correctly argued on behalf of the operational creditors, the preamble of the Code does speak of maximisation of the value of assets of corporate debtors and the balancing of the interests of all stakeholders. 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. Sections 5(26), 14(2), 20(1), 20(2)(d) and (e) of the Code read with Regulations 37 and 38 of the 2016 Regulations all speak of the corporate debtor running as a going concern during the insolvency resolution processThus, 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 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 sub- class of creditors is with the Committee of Creditors, but, 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. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, 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 equal47. 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 creditors56. By reading paragraph 77 de hors the earlier paragraphs, the Appellate Tribunal has fallen into grave error. Paragraph 76 clearly refers to the UNCITRAL Legislative Guide which makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors. This being so, the observation in paragraph 77 cannot be read to mean that financial and operational creditors must be paid the same amounts in any resolution plan before it can pass muster. On the contrary, paragraph 77 itself makes it clear that there is a difference in payment of the debts of financial and operational creditors, operational creditors having to receive a minimum payment, being not less than liquidation value, which does not apply to financial creditors. The amended Regulation 38 set out in paragraph 77 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster. Fair and equitable dealing of operational creditors rights under the said Regulation 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 creditors57. Indeed, 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 as persons who will resolve stressed assets and bring a corporate debtor back to its feet. Shri Sibals argument that the expression secured creditor does not find mention in Chapter II of the Code, which deals with the resolution process, and is only found in Chapter III, which deals with liquidation, is for the reason that secured creditors as a class are subsumed in the class of financial creditors, as has been held in Swiss Ribbons (supra)When this distinction is kept in mind, it is clear that there is no residual jurisdiction not to approve a resolution plan on the ground that it is unfair or unjust to a class of creditors, so long as the interest of each class has been looked into and taken care of. It is important to note that even under Sections 391 and 392 of the Companies Act, 1956, ultimately it is the commercial wisdom of the parties to the scheme, reflected in the 75% majority vote, which then binds all shareholders and creditors. Even under Sections 391 and 392, the High Court cannot act as a court of appeal and sit in judgment over such commercial wisdom59. A large part of Shri Sibals submission was centered around the fact that the Committee of Creditors delegated its functions to a sub- committee, which delegation is impermissible. As a result of this delegation, the sub-committee secretly made negotiations with ArcelorMittal, which secret negotiations then produced a wholly inequitable result in that Standard Chartered Bank, though a financial creditor, was only paid 1.74% of its admitted claim of INR 3487 crores as opposed to other financial creditors who were paid 74.8% of what was claimed by them62. We find, that when it comes to the exercise of the Committee of Creditors powers on questions which have a vital bearing on the running of the business of the corporate debtor, Section 28(1)(h) provides that though these powers are administrative in nature, they shall not be delegated to any other person, meaning thereby, that the Committee of Creditors alone must take the decisions mentioned in Section 28 and not any person other than such Committee. When it comes to approving a resolution plan under Section 30(4), there is no doubt whatsoever that this power also cannot be delegated to any other body as it is the Committee of Creditors alone that has been vested with this important business decision which it must take by itself. However, this does not mean that sub-committees cannot be appointed for the purpose of negotiating with resolution applicants, or for the purpose of performing other ministerial or administrative acts, provided such acts are in the ultimate analysis approved and ratified by the Committee of Creditors. We find, having gone through the minutes of all the important creditors meetings that were held, that every single administrative decision qua approving and administering the resolution plan submitted by ArcelorMittal was in fact done by the requisite majority of the Committee of Creditors itself, the sub- committee having been used only for purposes of initiating proceedings and negotiating with ArcelorMittal, which ultimately culminated in the resolution plan as finally negotiated, being passed by the requisite majority of creditors on 23.10.2018. In point of fact, Standard Chartered Bank voted in favour of the constitution of a sub- committee on the 12 th committee of creditors meeting of 02.05.2018, as also, in favour of decisions of the Committee of Creditors finalizing drafts of sub-committees on eligibility of resolution applicants at the 13 th Committee of Creditors meeting on 05.05.2018. Also, as a matter of fact, on 31.05.2018, at the 16 th Committee of Creditors meeting, a request was made by Standard Chartered Bank to be a member of the sub-committee, which request was later withdrawn. We also find that in the authorisation to the sub-committee to negotiate with ArcelorMittal, mooted at the 20 th Committee of Creditors meeting on 19.10.2018, a request was made by Standard Chartered Bank for inclusion in the said sub-committee. However, Standard Chartered Bank did not agree to put the reconstitution of the sub-committee to vote by the Committee of Creditors. Given these facts, we find, therefore, that it is only when Standard Chartered Bank found that things were going against it that it started raising objections on the technical plea that sub-committees cannot be constituted under the Code. This is not a bonafide plea. For all these reasons, this objection of Standard Chartered Bank is also rejectedExtinguishment of Personal Guarantees and Undecided ClaimsFollowing this judgment, it is difficult to accept Shri Rohatgis argument that that 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. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, the NCLAT judgment being contrary to Section 31(1) of the Code and this Courts judgment in State Bank of India (supra), is set aside67. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this countUtilisation of profits of the corporate debtor during CIRP to pay off creditors68. The RFP issued in terms of Section 25 of the Code and consented to by ArcelorMittal and the Committee of Creditors had provided that distribution of profits made during the corporate insolvency process will not go towards payment of debts of any creditor – see Clause 7 of the first addendum to the RFP dated 08.02.2018. On this short ground, this part of the judgment of the NCLAT is also incorrectConstitutional Validity of Section 4 and 6 of the Amending Act, 201973. There is no doubt that the Amending Act of 2019 consists of several Sections which have been enacted/amended as difficulties have arisen in the working of the Code. 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. There can be no doubt whatsoever that apart from the present case the amendments made by the Amending Act of 2019 apply down the board to all persons who are affected by its provisions. Also, it is settled law that bad faith, in the sense of improper motives, cannot be ascribed to a legislature making lawsIt is clear therefore for all these reasons that Sections 4 and 6 of the Amending Act of 2019 cannot be struck down on this score74. So far as Section 4 is concerned, it is clear that the original timelines in which a CIRP must be completed have now been extended to 330 days, which is 60 days more than 180 plus 90 days (which is equal to 270 days). But this 330-day period includes the time taken in legal proceedings in relation to such resolution process of the corporate debtor. This provision is to get over what is stated in the judgment in ArcelorMittal India (supra) at paragraph 86, that the time taken in legal proceedings in relation to the corporate resolution process must be excluded from the timeline mentioned in Section 12. Secondly, the third proviso added to the Section also mandates that where the period of 330 days is over on the date of commencement of the Amending Act of 2019, a further grace period of 90 days from such date is given, within which such process shall either be completed or the corporate debtor be sent into liquidationAs the speech of the Honble Minister on the floor of the House only indicates the object for which the amendment was made and as it contains certain data which it is useful to advert to, we take aid from the speech not in order to construe the amended Section 12, but only in order to explain why the Amending Act of 2019 was brought aboutThis being the case, we would ordinarily have struck down the provision in its entirety. However, that would then throw the baby out with the bath water, inasmuch as the time taken in legal proceedings is certainly an important factor which causes delay, and which has made previous statutory experiments fail as we have seen from Madras Petrochem (supra). Thus, while leaving the provision otherwise intact, we strike down the word mandatorily as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigants 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. Likewise, even under the newly added proviso to Section 12, if by reason of all the 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 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 within which resolution of the stressed assets of the corporate debtor must take place beyond which the corporate debtor is to be driven into liquidation80. When it comes to the validity of the substitution of Section 30(2) (b) by Section 6 of the Amending Act of 2019, it is clear that the substituted 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 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 financialMrs. Madhavi Divan is correct in her argument that Section 30(2)(b) is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a certain minimum amount, the minimum in the case of operational creditors being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable.As a matter of fact, pre-amendment, secured financial creditors may cramdown unsecured financial creditors who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors are now to be paid the minimum amount mentioned in sub-section (2).Mrs. Madhavi Divan is also correct in stating that the order of priority of payment of creditors mentioned in Section 53 is not engrafted in sub-section (2)(b) as amended.Section 53 is only referred to in order that a certain minimum figure be paid to different classes of operational and financial creditors. It is only for this purpose that Section 53(1) is to be looked at as it is clear that it is the commercial wisdom of the Committee of Creditors that is free to determine what amounts be paid to different classes and sub-classes of creditors in accordance with the provisions of the Code and the Regulations made thereunder82. Equally, 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. As has been held in Swiss Ribbons (supra) and ArcelorMittal India (supra) (see paragraph 97 of Swiss Ribbons (supra) and paragraph 82, 84 of ArcelorMittal India (supra)), no vested right inheres in any resolution applicant to have its plan approved under the Code. Also, the Federal Court in Lachmeshwar Prasad Shukul v. Keshwar Lal Chaudhuri AIR 1941 FC 5 and later, this Court in Shiv Shakti Coop. Housing Society, Nagpur v. Swaraj Developers & Ors. (2003) 6 SCC 659 ( at paragraphs 16 and 17) have held that an appellate proceeding is a continuation of an original proceeding. This being so, a change in law can always be applied to an original or appellate proceeding. For this reason also, Explanation 2 is constitutionally valid, not having any retrospective operation so as to impair vested rights83. The challenge to sub-clause (b) of Section 6 of the Amending Act of 2019, again goes to the flexibility that the Code gives to the Committee of Creditors to approve or not to approve a resolution plan and which may take into account different classes of creditors as is mentioned in Section 53, and different priorities and values of security interests of a secured creditor. This flexibility is referred to in the BLRC report, 2015 (see paragraph 33 of this judgment). Also, the discretion given to the Committee of Creditors by the word may again makes it clear that this is only a guideline which is set out by this sub-section which may be applied by the Committee of Creditors in arriving at a business decision as to acceptance or rejection of a resolution plan. For all these reasons, therefore, it is difficult to hold that any of these provisions is constitutionally infirm89. Given the aforesaid facts, Shri Sibals submissions on behalf of Standard Chartered Bank, that the offer made by ArcelorMittal of payment of INR 42,000 crores as upfront in order to pay 100% principal outstanding of secured financial creditors of the corporate debtor cannot be accepted. Given that Standard Chartered Bank was reclassified as a secured financial creditor of the corporate debtor only on 10.09.2018 and that the aforesaid upfront payment of INR 42,000 crores would include the principal amount payable to Standard Chartered Bank as well, we have seen how in the course of negotiation, the vast majority of financial creditors have ultimately decided that Standard Chartered Bank will only get an amount based on its security interest, which was accepted by ArcelorMittal. Shri Sibal also argued that the final resolution plan ultimately offered a sum of INR 39,500 crores instead of INR 42,000 crores, being a minimum upfront payment from which it was possible to negotiate upwards but not downwards. We cannot arrive at the conclusion that the acceptance of the resolution plan by the majority of the Committee of Creditors should be set aside on this score, inter alia, for the reason that Shri Sibal assured us that he was not attacking the acceptance of the revised plan but only distribution of amounts payable under the said plan. This being so, it is also not possible to accept the submission of Shri Sibal, that feasibility and viability of a resolution plan will not include distribution of the amount of debt under the said plan. It is also not possible to accept Shri Sibals submission that the resolution plan must itself provide for distribution inter se between secured financial creditors. It is enough that under the Code and the Regulations, the resolution plan provides for distribution of amounts payable towards debts based upon a classification of various types of creditors. This both the original plan as well as the negotiated plan of ArcelorMittal have already done, as has been seen by us hereinabove, both plans containing the amount to be paid to workmen separately, operational creditors of INR 1 crore and less separately, operational creditors of INR 1 crore and over separately and financial creditors, subdivided into secured and unsecured as sub-classes, separately. All that was left for distribution by ArcelorMittal was distribution inter se between secured financial creditors which was then done by a majority of 92.24%, as has been seen above based upon the value of their respective security interests. Therefore, the allegation that the Committee of Creditors relieved ArcelorMittal from the solemn offer made before the Supreme Court by reducing the offer amount of INR 42,000 crores by INR 2,500 crores so that ArcelorMittal could acquire the debts of OSPIL, is again a matter for negotiation being a business decision taken by the Committee of Creditors with ArcelorMittal. In any case ultimately INR 35,000 crores was upped to INR 42,000 crores, it being made clear in the final resolution plan that upfront payment of INR 42,000 crores is a committed amount, even if working capital adjustment turns out to be below INR 2,500 crores91. What is important to note is that when one reads the abovementioned judgment, it is a majority of 66% of the Committee of Creditors who has exercised the discretion vested in it under the Code in this particular manner, which has then correctly not been disturbed by the NCLT and NCLAT. Far from helping Shri Sibals client, the principle that is applied in such a case is 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 in Orissa Manganese (supra). It is, therefore, not possible to accept the argument that the Adjudicatory Authority and consequently the Appellate Authority would be vested with the discretion to apply what was applied by the Committee of Creditors in the Orissa Manganese case (supra). This submission is also devoid of merit and is, therefore, rejected92. The other argument of Shri Sibal that Section 53 of the Code would be applicable only during liquidation and not at the stage of resolving insolvencyis correct. Section 30(2)(b) of the Code refers to Section 53 not in the context of priority of payment of creditors, but only to provide for a minimum payment to operational creditors. However, this again does not in any manner limit the Committee of Creditors from classifying creditors as financial or operational and as secured or unsecured. Full freedom and discretion has been given, as has been seen hereinabove, to the Committee of Creditors to so classify creditors and to pay secured creditors amounts which can be based upon the value of their security, which they would otherwise be able to realise outside the process of the Code, thereby stymying the corporate resolution process itself93. The other argument based upon serious conflict of interest between secured and unsecured financial creditors, as the majority may get together to ride roughshod over the minority, is an argument which flies in the face of the majority of financial creditors being given complete discretion over feasibility and viability of resolution plans, which includes the manner of distribution of debts that is contained in them, subject to following the provisions of the Code relating, inter alia, to dealing with the interests of all stakeholders including operational creditors. The Committee of Creditors does not act in any fiduciary capacity to any group of creditors, as is sought to be suggested by Shri Sibal. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors. It is important to note that the original threshold required by way of majority was 75%. It is during the working of the Code that this was found to be unrealistic and therefore reduced to 66% - see the amendments made to Section 28(3) and 30(4) of the Code by the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. For all these reasons therefore, it is not possible to accept Shri Sibals arguments94. The NCLAT judgment which substitutes its wisdom for the commercial wisdom of the Committee of Creditors and which also directs the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, must therefore be set aside.