Essar Steel IBC Case: Important Precedents Laid Down By The Supreme Court

Supreme Court’s order in the Essar Steel case -The 3 key precedents that will impact pending and future insolvency cases.

File photo of the Supreme Court of India. 
File photo of the Supreme Court of India. 

On Thursday the Supreme Court in its order in the Essar Steel case not only put to rest the eligibility question of bidders Numetal Ltd. and ArcelorMittal India Pvt. Ltd. but also laid down important precedents for pending and future insolvency cases, specifically:

  • At what stages in an insolvency process can resolution applicants litigate before the National Company Law Tribunal (NCLT)
  • When should the litigation period be included or excluded from the timelines specified under the Insolvency and Bankruptcy Code (IBC); and
  • What would amount to control while applying the ineligibility criteria on resolution applicants.

Advantage, Arcelor?

The apex court held that both Numetal and ArcelorMittal must pay the outstanding dues before they can bid for insolvent steel company Essar Steel. This outcome is different from what the National Company Law Appellate Tribunal (NCLAT) had held. The appellate tribunal had concluded that since the shareholding of Rewant Ruia (son of erstwhile Essar Steel promoter Ravi Ruia) in Numetal was reduced to zero before the second bid was submitted, Numetal was an eligible resolution applicant.

But the Supreme Court concluded otherwise. It pointed out that Numetal’s initial corporate structure and changes made to it while the resolution process was underway were all done with the intent of avoiding the ineligibility criterion under Section 29A(c) of IBC. Under this section, promoters of companies classified as non-performing assets for over a year cannot participate in the resolution process of any company unless the dues of that corporate debtor are repaid. Persons acting in concert with such promoters are also ineligible to submit a resolution plan.

Whether the first or second resolution plan is taken into account, both would clearly be hit by Section 29A(c), as the looming presence of Shri Rewant Ruia has been found all along, from the date of incorporation of Numetal, till the date of submission of the second resolution plan.
Supreme Court - Essar Steel Case

To become an eligible bidder for Essar Steel, Numetal now has to pay the overdue amount of Essar Steel. The company owes over Rs 49,000 crore to its financial creditors, according to the claims admitted by resolution professional Satish Kumar Gupta.

The order also indicated that Numetal may have to clear overdue amounts of any other Essar Group company that is a declared non-performing asset.

The only manner in which Numetal could successfully present a resolution plan would be to first pay off the debts of ESIL (Essar Steel), as well as those of such other corporate debtors of the Ruia group of companies, which were declared as NPAs prior to the aforesaid period of one year, before submitting its resolution plan.
Supreme Court - Essar Steel Case

As far as Arcelor is concerned, it has neither gained nor lost from where it was after the NCLAT ruling. The Supreme Court directed it to clear the overdue amounts as a result of its promotership and exposure to Uttam Galva Steels Ltd. and KSS Petron Ltd.

The global steel major had transferred Rs 7,000 crore to an escrow account controlled by State Bank of India to cover these dues and confirm its eligibility earlier in the race.

In reaching this outcome in Numetal and Arcelor’s case, the Supreme Court made an important point – one that would impact bidders in pending and future insolvency cases.

It laid down that corporate arrangements - done around the time of submission of a resolution plan – that defeat the purpose of ineligibility conditions laid down under Section 29A of the IBC, will be ineligible.

If it is shown, on facts, that, at a reasonably proximate point of time before the submission of the resolution plan, the affairs of the persons referred to in Section 29A are so arranged, as to avoid paying off the debts of the non-performing asset concerned, such persons must be held to be ineligible to submit a resolution plan…
Supreme Court - Essar Steel Case
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Speed Is Of Essence

Taking note of the endless litigation that threatens the efficacy of the IBC, the apex court order also identified the stages at which decisions can be challenged by resolution applicants.

It can’t be at the stage where a resolution plan is turned down at the threshold by a resolution professional. The IBC requires a resolution professional to examine the plan, to ensure it is “complete in all respects, and to conduct a due diligence in order to report to the Committee of Creditors whether or not it is in order”. If a plan is rejected at this stage, the applicant doesn’t have any vested right to challenge the decision of the resolution professional before the NCLT or through a writ before a High Court.

If a resolution plan does not receive the requisite 66 percent approval of the CoC the applicant cannot knock at NCLT’s doors, the Supreme Court has concluded.

It is clear that at this stage again no application before the Adjudicating Authority could be entertained as there is no vested right or fundamental right in the resolution applicant to have its resolution plan approved, and as no adjudication has yet taken place.  
Supreme Court - Essar Steel Case

The CoC’s rejection of a resolution plan, on the ground that it violates the provisions of any law, including the ground that it is ineligible under Section 29A, can be challenged before the NCLT and NCLAT, said the apex court.

A plan approved by the CoC and the NCLT can be challenged before the NCLAT and the Supreme Court, the order has noted.

Chopper Falling = Corporate Death

The Supreme Court has stated that a balance must be struck between adhering to the timelines provided under the IBC and the possibility of an insolvent company’s liquidation if the process is carried out in haste.

And so, it has concluded that if a resolution plan is upheld by the NCLAT - either by way of allowing or dismissing an appeal before it - the time taken in litigation ought to be excluded from the 270-day deadline laid down in law.

As per the law, if the insolvency process is not complete ie: a resolution plan approved, within 180 days, extendable to 270 days, then liquidation is triggered. In earlier judgments, the NLCAT and even the Supreme Court had excluded litigation period from these timelines.

A reasonable and balanced construction of this statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in litigation ought to be excluded.   
Supreme Court - Essar Steel Case

But this principle won’t be applicable in cases where a resolution plan is approved by the NCLT or NCLAT and then it is challenged by an entity. the event of the NCLT, or the NCLAT, or this Court taking time to decide an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be excluded, as otherwise a good resolution plan may have to be shelved, resulting in corporate death, and the consequent displacement of employees and workers.
Supreme Court - Essar Steel Case

This means that where an NCLT-approved resolution plan becomes a subject matter of challenge either at the NCLT, NCLAT or Supreme Court by any aggrieved party, then the plan will be deemed to be effective from the day it was approved by the NCLT, Ajay Shaw, an insolvency partner at law firm DSK Legal explained.

The utility of this interpretation is that when a resolution plan is challenged after it’s been approved by the NCLT, the litigation period after that won’t be counted as part of the insolvency process. And the date on which the NCLT has approved the plan, the successful resolution applicant would be deemed to be responsible for the corporate debtor effective that date.
Ajay Shaw, Partner, DSK Legal
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Control Clarified

While assessing the eligibility of Numetal and Arcelor, the Supreme Court also addressed what constitutes ‘control’ under Section 29A(c). To reiterate, as per this provision, the ineligibility to submit a resolution plan comes into play if any person has a non-performing asset account or is a promoter of or in management or control of a non-performing asset for more than a year before the initiation of the insolvency process.

The apex court’s order has pointed to the definition under the Companies Act, 2013 to observe that control can either be positive or negative.

control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
Companies Act, 2013

Applying this definition to section 29A(c), the apex court pointed out that as long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist.

And so, control under the IBC denotes only positive control, the order said. This means that the mere power to block special resolutions of a company cannot amount to control.

Section 29A(c) speaks of a corporate debtor “under the management or control of such person”. The expression “under” would seem to suggest positive or proactive control, as opposed to mere negative or reactive control.
Supreme Court - Essar Steel Case

These important precedents aside, Numetal and ArcelorMittal have been given two weeks to cure their ineligibility and Essar Steel’s creditors’ committee has eight weeks to accept a resolution plan. Vedanta is the third bidder who had submitted a bid.

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