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Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors.

KEY ISSUES RESOLVED BY HON’BLE SUPREME COURT

in the matter of

Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67/2019 and other petitions]

dated 15th November 2019

Maximum Period of 330 days for CIRP – extendable under some circumstances

  • Time taken in legal proceedings should not harm a litigant if the Tribunal itself cannot take up the litigant’s case within the requisite period for no fault of the litigant. The word ‘mandatorily’ in the amended section is struck down as it is considered as unreasonable restriction on litigant’s right to carry business and may push companies to liquidation on account of judicial delay.
  • Therefore, ordinarily the time taken in relation to the CIRP must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. If the delay or a large part thereof is attributable to the tardy process of the AA and/or the NCLAT itself, it may be open in such cases for the AA and/or NCLAT to extend time beyond 330 days

Claim Verification by Resolution Professional

  • It is the responsibility of the resolution professional to collect, collate and finally admit claims of all creditors, which must be examined for payment, in full or in part or not at all, by the resolution applicant.
  • 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 take over and run the business of the CD.
  • 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 the successful resolution applicant.
  • Resolution Professional to examine the payment being made by the Resolution Applicant to each claimant and the same will be negotiated by Committee of Creditors

(* ‘hydra’ is believed to be a water monster in Greek and Roman mythology, who is having capacity to regenerate lost heads)

Right of Prospective Resolution Applicants

  • The prospective resolution applicant has a right to receive complete information as to the CD, debts owed by it, and its activities as a going concern, prior to the commencement of CIRP.

Commercial Wisdom of CoC is Supreme

  • It is the commercial wisdom of the CoC to decide as to whether or not to rehabilitate the Corporate Debtor by accepting a particular resolution plan
  • What is left to the majority decision of the CoC, 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

Obligations on CoC while considering a Resolution Plan for approval.

  • The resolution plan must provide that the amount due to operational creditors (OCs) shall be given priority in payment over FCs which would be equivalent to the liquidation value due to OCs or higher as proposed by Resolution Applicant
  • The Resolution Plan must demonstrate that it is ‘feasible and viable’, and that the resolution applicant has the capability to implement the said plan.
  • That the decision of such Committee must reflect the fact that it has taken into account maximising the value
  • While approving a Resolution Plan, the COC has adequately balanced the interests of all stakeholders including Operational Creditors
  • Corporate Debtor needs to be kept as a going concern during the insolvency resolution process
  • COC need to give reasons for acceptance or rejection of Resolution Plan

Limited Judicial Review by NCLT

  • The limited judicial review available to NCLT has to be within the four corners of section 30(2) of the Code. Such review can in no circumstance trespass upon a business decision of the majority of the CoC.
  • The judicial review of NCLAT has to be within parameters of section 32 read with section 61(3) of the Code. Such review can in no circumstance trespass upon a business decision of the majority of the CoC.
  • The NCLT must examine, if the COC has fulfilled its obligations, otherwise, it may send a resolution plan back to the CoC to re-submit such plan after satisfying the aforesaid parameters
  • The NCLT must examine if all the parameters u/s 30(2) are fulfilled or not.

Secured, unsecured or operational creditors – Equality for all or not

  • The amended Regulation 38 does not lead to a conclusion that FCs and OCs, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan
  • ‘Equality for All’ is not the objective of the Code. ‘Fair & Equitable’ does not suggest ‘equality for all’ (this comes out of reading of para 47 to 58 of the order)
  • Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.
  • There is no residual jurisdiction with NCLT whereby it can reject 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 based on waterfall mechanism under section 53 of the Code and also the value of security interest of each creditor.
  • The amendment in section 30 with regard to minimum amount payable to OCs and dissenting FCs is upheld as constitutional. The minimum amount payable is the amount payable to the creditor u/s 53 in case the CD is liquidated.
  • Protecting creditors in general is, no doubt, an important objective.
  • Protecting creditors from each other is also an important objective.

Rights of creditors against guarantors & extinguishment of claim of guarantor on account of subrogation

  • Creditors have a right to proceed against the guarantor even after resolution plan is approved
  • Resolution plan is binding on the guarantors as well and their claim of subrogation on the Corporate Debtor can be extinguished
  • Successful Resolution Applicant need to takeover the business of the Corporate Debtor on a fresh slate and he cannot suddenly face undecided claims from the guarantors or any other claimants.

Utilisation of profits of the CD during CIRP

  • Distribution of profits made during the CIRP will not go towards payment of debts of any creditor.

Resolution Plan of Arcelor Mittal in the CIRP of Essar Steel Limited

Resolution Plan as approved by Committee of Creditors is approved for implementation and the order of NCLAT is quashed.