Supreme Court Upholds Committee of Creditors’ Commercial Wisdom in Essar Steel Insolvency Resolution (15 November 2019)

Date of the Judgment: 15 November 2019
Citation: (2019) INSC 1067
Judges: R.F. Nariman, J., Surya Kant, J., V. Ramasubramanian, J.

Can a resolution plan approved by a Committee of Creditors be overturned by the National Company Law Appellate Tribunal (NCLAT)? The Supreme Court addressed this critical question in the Essar Steel insolvency case, clarifying the extent of judicial review in such matters. The court emphasized the importance of respecting the commercial wisdom of the Committee of Creditors (CoC) in insolvency resolution processes. This judgment is a landmark decision for insolvency law in India.

Case Background

The case began on 02 August 2017, when the National Company Law Tribunal (NCLT), Ahmedabad, admitted a petition filed by Standard Chartered Bank and State Bank of India under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code). Satish Kumar Gupta was appointed as the interim resolution professional, later confirmed as the resolution professional.

On 06 October 2017, the resolution professional invited expressions of interest from resolution applicants. By 12 February 2018, two resolution plans were submitted by ArcelorMittal India Private Limited and Numetal Limited, both of which were initially found ineligible under Section 29-A of the Code.

Subsequently, on 02 April 2018, ArcelorMittal, Numetal, and Vedanta Limited submitted revised resolution plans. ArcelorMittal’s plan included an upfront payment of INR 35,000 crores to resolve debts of INR 49,213 crores, with specific provisions for unsecured financial creditors and operational creditors.

On 19 April 2018, the Adjudicating Authority directed the Committee of Creditors to consider the eligibility of the resolution applicants. Standard Chartered Bank was classified as a secured financial creditor on 10 September 2018.

On 04 October 2018, the Supreme Court declared ArcelorMittal and Numetal ineligible under Section 29-A of the Code, but granted them an opportunity to pay off NPAs of related corporate debtors. ArcelorMittal complied, resubmitting its plan on 19 October 2018, which was approved by the Committee of Creditors on 25 October 2018 with a 92.24% majority.

The NCLT, on 08 March 2019, directed that operational creditors receive similar treatment as financial creditors, and the NCLAT, on 04 July 2019, ordered equal treatment between financial and operational creditors, leading to the appeals before the Supreme Court.

Timeline

Course of Proceedings

The NCLT, after reviewing the resolution plans, directed that operational creditors receive similar treatment as financial creditors, emphasizing equity and fair play. The NCLT also suggested a formula for apportioning 85% of the resolution amount to financial creditors and 15% to operational creditors.

The NCLAT, in its final judgment, held that there should be no difference between financial and operational creditors in terms of payment. It redistributed the proceeds to ensure all creditors received 60.7% of their admitted claims, irrespective of their security interest. The NCLAT also admitted additional claims of operational creditors, significantly increasing the admitted operational debt.

The NCLAT further ruled that profits generated during the CIRP should be distributed equally among all creditors. It also stated that the Committee of Creditors could not delegate decisions to a sub-committee. These decisions led to the appeals before the Supreme Court.

Legal Framework

The judgment extensively discusses the provisions of the Insolvency and Bankruptcy Code, 2016 (the Code), particularly Sections 5, 7, 9, 10, 12, 13, 15, 16, 17, 18, 20, 21, 22, 23, 24, 25, 28, 29, 30, 31, 33, 53 and 60. Key definitions such as “financial creditor” under Section 5(7), “financial debt” under Section 5(8), “secured creditor” under Section 3(30), and “security interest” under Section 3(31) were examined.

The Court also referred to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, specifically Regulations 7 to 13, 18 to 26, 35, 36, 36A, 36B, 38 and 39.

Additionally, the Transfer of Property Act, 1882, and the Companies Act, 2013, were mentioned in relation to the general law of the land and security interests. The UNCITRAL Legislative Guide on Insolvency Law was also cited as a reference point for international best practices in insolvency law.

Arguments

Committee of Creditors (CoC):

• Argued that the Code distinguishes between financial and operational creditors based on the nature of their transactions.
• Stated that financial creditors have a superior status compared to operational creditors, and secured creditors have a superior status compared to unsecured creditors.
• Emphasized that the Code allows for equitable treatment, not necessarily equal treatment, of different classes of creditors.
• Cited Section 48 of the Transfer of Property Act, 1882, and Section 77 of the Companies Act, 2013, to support the recognition of security interests.
• Relied on the UNCITRAL Legislative Guide and IMF reports to highlight the importance of classifying creditors based on the nature of debt and security interest.
• Argued that the commercial wisdom of the CoC should not be interfered with by the NCLT or NCLAT.
• Asserted that the Committee of Creditors has the power to decide on the distribution of proceeds under a resolution plan.
• Maintained that the ArcelorMittal plan, as amended, addresses the interests of all stakeholders, including operational creditors.
• Stated that the setting up of a sub-committee by the CoC is permissible under the Code.
• Challenged the NCLAT’s admission of rejected/disputed claims and the extinguishment of rights against individual guarantees.
• Argued that profits made during CIRP should not be used for debt repayment.

State Bank of India (SBI):

• Supported the CoC’s submissions, highlighting that Standard Chartered Bank was an unsecured creditor to a large extent.
• Argued that Standard Chartered Bank should not be allowed to challenge the sub-committee’s constitution as it had participated in meetings without objection.

Standard Chartered Bank:

• Argued that ArcelorMittal’s offer was to pay INR 42,000 crores upfront, including Standard Chartered Bank’s dues.
• Contested the formation of the sub-committee, alleging it conducted secret negotiations that disadvantaged Standard Chartered Bank.
• Claimed that the resolution plan was flawed and did not address the interests of all stakeholders.
• Maintained that the CoC’s role is limited to considering the feasibility and viability of the plan, not distribution of funds.
• Argued that the Code does not differentiate between financial creditors based on security interests during resolution.
• Stated that Section 53 of the Code applies only during liquidation.
• Challenged the amendments made to Section 30 of the Code by the Amending Act of 2019.

Operational Creditors:

• Argued that a key objective of the Code is to ensure the corporate debtor continues as a going concern.
• Stated that the process of revival and liquidation are distinct and have different payment priorities.
• Maintained that the Amending Act of 2019 was made in a hurry to neutralize the NCLAT judgment.
• Challenged the imposition of timelines for adjudication of disputes by courts.

ArcelorMittal:

• Stated that the remedy sought by Standard Chartered Bank was restricted to quashing a particular paragraph of the NCLAT judgment.
• Maintained that the upfront payment of INR 42,000 crores was guaranteed.
• Argued that the resolution applicant must start on a fresh slate.

Other Parties:

• Other parties also argued for the recognition of separate classes of creditors.
• The State of Gujarat supported the NCLAT’s judgment regarding sales tax dues.
• A promoter of the corporate debtor argued that personal guarantees should become ineffective after debt payment.

Government of India:

• Argued that the amendments further the objectives of the Code, which is to maximize the value of the assets of the corporate debtor in a time-bound frame.
• Stated that the value of assets and the passage of time within which insolvency resolution takes place are in inverse proportion.
• Maintained that the amendments were made to reinstate the law as it originally stood.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. The role of resolution applicants, resolution professionals, and the Committee of Creditors under the Code.
2. The jurisdiction of the NCLT and NCLAT regarding resolution plans approved by the CoC.
3. The constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• ArcelorMittal India Private Limited v. Satish Kumar Gupta (2019) 2 SCC 1 – Discussed the ineligibility criteria for resolution applicants.
• Swiss Ribbons Private Limited v. Union of India (2019) 4 SCC 17 – Explained the objectives of the Code and the distinction between financial and operational creditors.
• K. Sashidhar v. Indian Overseas Bank 2019 SCCOnline SC 257 – Clarified the limited scope of judicial review over the CoC’s decisions.
• Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 – Discussed the admission of applications under the Code.
• Macquarie Bank Ltd v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 – Discussed the admission of applications under the Code.
• State Bank of India v. V. Ramakrishnan, 2018 (9) SCALE 597 – Established that a resolution plan is binding on guarantors.
• Mihir R. Mafatlal v. Mafatlal Industries Ltd. (1997) 1 SCC 579 – Discussed the role of the Company Court in sanctioning schemes.
• Pradyat Kumar Bhose v. The Hon’ble the Chief Justice of Calcutta High Court (1955) 2 SCR 1331 – Discussed the delegation of administrative powers.
• High Court of Judicature at Bombay through its Registrar v. Shirishkumar Rangrao Patil & Anr. (1997) 6 SCC 339 – Discussed the constitution of committees for administration.
• K.C. Gajapati Narayan Deo and Others v. State of Orissa 1954 SCR 1 – Discussed the doctrine of colourable legislation.
• STO v. Ajit Mills Ltd. (1977) 4 SCC 98 – Discussed the doctrine of colourable legislation.
• Madras Petrochem Limited v. BIFR (2016) 4 SCC 1 – Discussed the failures of previous insolvency acts.
• K.P. Varghese v. ITO (1982) 1 SCR 629 – Discussed the use of legislative speeches in interpretation.
• K.S. Paripoornan v. State of Kerala (1994) 5 SCC 593 – Discussed the use of legislative speeches in interpretation.
• Atma Ram Mittal v. Ishwar Singh Punia (1988) 4 SCC 284 – Discussed the maxim “actus curiae neminem gravabit”.
• Sarah Mathew v. Institute of Cardio Vascular Diseases, (2014) 2 SCC 62 – Discussed the maxim “actus curiae neminem gravabit”.
• Neeraj Kumar Sainy v. State of Uttar Pradesh (2017) 14 SCC 136 – Discussed the maxim “actus curiae neminem gravabit”.
• Lachmeshwar Prasad Shukul v. Keshwar Lal Chaudhuri AIR 1941 FC 5 – Discussed that an appellate proceeding is a continuation of an original proceeding.
• Shiv Shakti Coop. Housing Society, Nagpur v. Swaraj Developers & Ors. (2003) 6 SCC 659 – Discussed that an appellate proceeding is a continuation of an original proceeding.
• State Bank of India v. Orissa Manganese and Minerals Ltd. CA(IB) No. 391/KB/2018 – Discussed the distribution of debt based on security interest.

Books and Reports:

• UNCITRAL Legislative Guide on Insolvency Law – Provided international standards for insolvency law.
• Bankruptcy Law Reforms Committee Report, 2015 (BLRC Report) – Formed the basis for the enactment of the Insolvency Code.
• Insolvency Committee Report, 2018 – Discussed objections to Section 30(2)(b) of the Code.
• IMF paper on “Development of Standards for Security Interest” by Pascale De Boeck and Thomas Laryea – Discussed the value of security interests.
• World Bank Report of 2015 titled “Principles for Effective Insolvency and Creditor/Debtor Regimes” – Discussed the rights of creditors.
• World Bank Report of 2010, titled “A Global View of Business Insolvency Systems” – Discussed the classification of creditors.
• Philip R. Wood’s book titled “Principles of International Insolvency” – Discussed the nature of security interests.
• American Jurisprudence, 2d, Volume 9 – Discussed the principle of equality of distribution among creditors.

Statutes:

• The Insolvency and Bankruptcy Code, 2016 – The primary statute under consideration.
• The Transfer of Property Act, 1882 – Discussed in relation to security interests.
• The Companies Act, 2013 – Discussed in relation to security interests.
• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) – Discussed as a failed experiment.
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 – Discussed as a failed experiment.
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) – Discussed as a failed experiment.
• The Indian Stamp Act – Discussed in relation to the validity of agreements.
• The Code of Criminal Procedure, 1973 – Discussed in relation to limitation.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

Reasoning of the Court:

The Supreme Court emphasized that the Committee of Creditors (CoC) is the primary decision-making body in the insolvency resolution process. The court stated that the CoC’s commercial wisdom should be respected and that judicial intervention should be minimal. The court clarified that the Insolvency and Bankruptcy Code, 2016 (the Code), differentiates between financial and operational creditors, as well as between secured and unsecured creditors, based on the nature of their debts and the security interests they hold. The court upheld the validity of the amendments made to the Code in 2019, with a minor exception related to timelines.

The Court also clarified that Section 53 of the Code, which deals with the distribution of assets in liquidation, should not be applied to resolution plans. Instead, it should be used only for calculating the minimum payments to different classes of creditors. The Court emphasized that the resolution plan must be approved by the CoC and that the NCLT and NCLAT cannot interfere with the CoC’s decision unless there is a clear violation of the law.

The Court also clarified that a sub-committee can be formed by the CoC to carry out its functions. The Court said that the NCLAT was wrong in ordering equal treatment for financial and operational creditors.

The Court further held that the profits made during the Corporate Insolvency Resolution Process (CIRP) should not be used for debt repayment.

Conclusion

The Supreme Court’s judgment in the Essar Steel case is a landmark decision that clarifies the extent of judicial review in insolvency resolution processes. The court emphasized the importance of respecting the commercial wisdom of the Committee of Creditors (CoC) and held that the CoC’s decisions should not be interfered with unless there is a clear violation of law. The judgment also clarified the distinction between financial and operational creditors and upheld the validity of the amendments made to the Insolvency and Bankruptcy Code, 2016.

The court’s decision reinforces the principle that the Code is designed to resolve insolvency in a time-bound manner, with the CoC playing the central role in decision-making. The judgment also confirms that the Code allows for differential treatment of creditors based on the nature of their debts and security interests, and that equitable treatment does not mean equal treatment.

This judgment has significant implications for insolvency law in India, as it provides clarity on the roles of various stakeholders and the extent of judicial review in insolvency resolution processes. It also reinforces the importance of the CoC’s commercial wisdom in achieving successful resolution plans.