2018 (10) TMI 312 - SC - IBC

Resolution applicants barred under Section 29A(c) due to related corporate debtors' unpaid NPAs

The SC held that both resolution applicants were ineligible under Section 29A(c) of the Insolvency and Bankruptcy Code, 2016, as their related corporate ... Disqualification under Section 29A(c) attaches at the time of submission of the resolution plan - see-through / piercing the corporate veil for persons acting jointly or in concert - meaning of 'control', 'management' and 'promoter' for Section 29A - scope of persons acting jointly or in concert (including SEBI Takeover Regulations deeming provisions) - proviso to Section 29A(c) - cure only by payment of all overdue amounts before submission of resolution plan - effect of foreign restrictions vis-a -vis Section 29A(f)/(i) - role and function of the resolution professional and Committee of Creditors under Section 30 - remand to Resolution Professional / Committee of Creditors for procedural complianceDisqualification under Section 29A(c) attaches at the time of submission of the resolution plan - proviso to Section 29A(c) - cure only by payment of all overdue amounts before submission of resolution plan - Temporal point for application of Section 29A(c) and scope of the proviso to cure ineligibility - HELD THAT: - The Court held that the disqualification in Section 29A(c) attaches when a person 'submits a resolution plan' and not at an earlier procedural stage; the date of submission of the resolution plan is therefore the relevant time for determining eligibility under clause (c). The amendment in 2018 inserting the words 'at the time of submission of the resolution plan' is clarificatory of this pre-existing correct interpretation. The ingredients of clause (c) are disjunctive: the person (or any person acting jointly/in concert with him) must (i) have an account, or (ii) have an account of a corporate debtor under his management or control, or (iii) be a promoter of such corporate debtor, whose account was classified as NPA for at least one year prior to the insolvency commencement date. The proviso permits removal of ineligibility only by actual payment of all overdue amounts with interest and charges before submission of the resolution plan; the Court refused to read into the proviso any commercial alternative that would allow payment after submission or contingent payment as part of an accepted plan. The Court emphasized that antecedent facts proximate to submission may be examined to determine whether transactions were arranged to avoid the proviso. [Paras 43, 44, 54, 55]Section 29A(c) operates as on the date of submission of the resolution plan; the proviso is strictly complied with only by payment of all overdue amounts before submission, and the 2018 amendment is clarificatory.See-through / piercing the corporate veil for persons acting jointly or in concert - meaning of 'control', 'management' and 'promoter' for Section 29A - scope of persons acting jointly or in concert (including SEBI Takeover Regulations deeming provisions) - Scope of 'persons acting jointly or in concert', and the meaning of 'control', 'management' and 'promoter' for Section 29A - HELD THAT: - Section 29A is a see-through provision; the opening words and the Explanation concentrate on substantive (de facto) relationships so as to capture persons who in reality control, manage or act in concert with the resolution applicant. 'Management' refers to de jure management (board/officers); 'control' denotes positive, proactive control (de jure or de facto influence over management or policy decisions), not mere negative or blocking rights; and 'promoter' may be de jure (named in prospectus/annual return) or de facto (having control or directing the board). The Court held that the definitions and the SEBI Takeover Regulations (Regulation 2(1)(q)) inform the concept of persons acting in concert; deeming presumptions in those regulations are relevant and rebuttable. Where a corporate vehicle is used as a platform to submit a resolution plan, the veil may be pierced to discover the real persons acting jointly or in concert, particularly where the corporate structure or contemporaneous transactions are reasonably proximate and arranged to avoid Section 29A. Persons who, on facts, act jointly or in concert with the applicant must satisfy Section 29A. [Paras 30, 35, 36, 46, 50]The Court construes Section 29A to reach persons who, in substance, are promoters, in management or in positive control, and permits looking through corporate structures to identify persons acting jointly or in concert.Effect of foreign restrictions vis-a -vis Section 29A(f)/(i) - Whether political or foreign sanctions correspond to SEBI prohibition for disqualification under Section 29A(f)/(i) - HELD THAT: - The Court held that disabilities abroad corresponding to SEBI prohibition on trading or accessing securities markets must correspond to regulatory prohibitions grounded in securities-market misconduct; political sanctions imposed by foreign authorities for geopolitical reasons do not, without more, constitute a 'corresponding' disability under clause (i). In the facts, (a) EU and US sanctions imposed for geopolitical reasons did not amount to a foreign regulator prohibiting the bank from accessing securities markets for the kind of securities-market misconduct contemplated by Section 29A(f); and (b) the US CFTC consent/settlement order (cease-and-desist and a monetary penalty with certain transactional undertakings) did not equate to a prohibition from trading or accessing securities markets that would trigger Section 29A. Consequently, Crinium Bay / VTB were not held disqualified under Section 29A(f)/(i) on the basis of the foreign measures discussed. [Paras 101, 105, 106]Foreign political sanctions do not automatically correspond to SEBI prohibition for Section 29A(f)/(i); on the facts the alleged foreign measures did not disqualify the entity under those clauses.Role and function of the resolution professional and Committee of Creditors under Section 30 - remand to Resolution Professional / Committee of Creditors for procedural compliance - Procedural obligations of the Resolution Professional (RP) and Committee of Creditors (CoC) and the effect of failure to follow procedure - HELD THAT: - The Court explained that the RP's function is to examine and conduct due diligence to ensure resolution plans are complete and to present them to the CoC; the RP's assessment as to legal contraventions is prima facie and the RP is not the final adjudicator of eligibility. The CoC is the decision-making body to approve or reject plans within statutory parameters. Where the RP failed to place plans before the CoC along with his comments on eligibility (as required for Committee consideration and for affording applicants an opportunity in relation to Section 29A/Section 30), the Adjudicating Authority rightly found procedural infirmity and remanded the matter to the RP/CoC for reconsideration. The Court recognised the limited scope for interim judicial challenges to RP decisions at the pre-Committee stage but held that administrative/procedural non-compliance by the RP/CoC vitiates the process and may warrant remand for reconsideration. [Paras 27, 76, 77, 78]RP must present all resolution plans to the CoC after due diligence; failure to follow prescribed procedure vitiates the process and justifies remand for reconsideration.Final Conclusion: The Court interpreted Section 29A(c) to operate as on the date of submission of the resolution plan (the 2018 amendment is clarificatory); Section 29A is a see-through provision permitting piercing of corporate veils to identify persons acting jointly or in concert, and 'control', 'management' and 'promoter' include positive de facto attributes as explained. Foreign political sanctions do not automatically correspond to SEBI prohibitions for disqualification under Section 29A(f)/(i). Procedural duties of the Resolution Professional and the Committee of Creditors must be observed; where procedure was deficient the matter was remanded. Applying these principles to the facts, both ArcelorMittal India and Numetal were found to be hit by Section 29A(c) on the material before the Court; however, in the exercise of its remedial discretion the Court afforded both applicants a limited opportunity to cure ineligibility by payment of the overdue NPA amounts within a specified period and permitted resubmission for consideration by the Committee of Creditors, failing which the corporate debtor will face liquidation. Issues Involved:1. Ineligibility of resolution applicants under Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC).2. Interpretation and application of Section 29A(c) of the IBC.3. Consideration of antecedent transactions to determine eligibility under Section 29A.4. Timelines and procedural aspects of the corporate insolvency resolution process (CIRP).5. Role and responsibilities of the Resolution Professional and Committee of Creditors.Detailed Analysis:1. Ineligibility of Resolution Applicants under Section 29A of the IBC:The core issue revolves around the ineligibility of resolution applicants, specifically AMIPL and Numetal, to submit resolution plans after the introduction of Section 29A into the IBC. Section 29A disqualifies certain persons from being resolution applicants to prevent those who contributed to the financial distress of the corporate debtor from regaining control.2. Interpretation and Application of Section 29A(c) of the IBC:Section 29A(c) disqualifies a person from submitting a resolution plan if they have an account classified as a non-performing asset (NPA) for more than one year before the commencement of the CIRP, unless they clear the overdue amounts before submitting the resolution plan.- AMIPL's Ineligibility: AMIPL was found ineligible due to its connection with Uttam Galva and KSS Petron. AMNLBV, an L.N. Mittal Group company, was a promoter of Uttam Galva, which had been classified as an NPA. Despite selling its shares in Uttam Galva before submitting the resolution plan, the sale was deemed a device to avoid the ineligibility under Section 29A(c). Similarly, Fraseli, another L.N. Mittal Group company, had control over KSS Petron, which was also an NPA.- Numetal's Ineligibility: Numetal was found ineligible due to its association with Rewant Ruia, son of Ravi Ruia, a promoter of the corporate debtor ESIL. Despite changes in shareholding and the exit of AEL (Aurora Enterprises Limited), the presence of Rewant Ruia and the financial involvement of AEL indicated that Numetal was attempting to circumvent Section 29A(c).3. Consideration of Antecedent Transactions to Determine Eligibility:The court held that antecedent transactions reasonably proximate to the submission of the resolution plan must be scrutinized to prevent circumvention of Section 29A. Both AMIPL and Numetal's transactions were found to be devices to avoid ineligibility under Section 29A(c).4. Timelines and Procedural Aspects of the CIRP:The judgment emphasized the importance of adhering to the timelines prescribed under the IBC for completing the CIRP. The maximum period for the CIRP is 270 days, and any delay beyond this period should be avoided to prevent liquidation of the corporate debtor. The court also highlighted the necessity of excluding the time taken in legal proceedings from the 270-day period to avoid corporate death and displacement of employees and workers.5. Role and Responsibilities of the Resolution Professional and Committee of Creditors:The Resolution Professional (RP) is responsible for ensuring that resolution plans comply with the provisions of the IBC, including Section 29A. The RP's role is to examine and confirm the completeness of resolution plans before presenting them to the Committee of Creditors (CoC). The CoC, in turn, evaluates the feasibility and viability of the plans and approves them by a requisite majority.Conclusion:Both AMIPL and Numetal were found ineligible to submit resolution plans under Section 29A(c) due to their connections with NPAs. The court provided an additional opportunity for both applicants to clear the NPAs within two weeks and resubmit their plans. The CoC was given eight weeks to select the best plan, failing which the corporate debtor would go into liquidation. The judgment underscores the importance of adhering to statutory timelines and the roles of the RP and CoC in the CIRP.