TaxTMI 
TaxTMI 
2019 (11) TMI 731
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....F 2019 WRIT PETITION (CIVIL) NO.1121 OF 2019 CIVIL APPEAL NO._8768_OF 2019 DIARY NO.31409 OF 2019 CIVIL APPEAL NO.7266 OF 2019 CIVIL APPEAL NO.7260 OF 2019 WRIT PETITION (CIVIL) NO.1246 OF 2019CIVIL APPEAL NO._8769_OF 2019 DIARY NO.36838 OF 2019 WRIT PETITION (CIVIL) NO.1296 OF 2019 Justice R. F. Nariman, Justice Surya Kant And Justice V. Ramasubramanian For the Parties : Mr. K.K.Venugopal, Attorney General for India Mr. Tushar Mehta, SG Mr. Arvind Kr. Sharma, AOR Mr. Tushar Mehta, SG Mr. Niraj Kumar, Adv. Mr. Kirat Singh Nagra, Adv. Mr. Satyender Rai, Adv. Mr. Chander Prakash, AOR Mr. Aniruddha P. Mayee, AOR Mr. A. Rajarajan, Adv. Mr. Sanjeev Kr. Choudhary, Adv. Mr. A. Selvin Raja, Adv. Mr. Sapan Gupta, Adv. Ms. Misha, Adv. Mr. Siddhant Kant, Adv. Ms. Mrida Lakhmani, Adv. Ms. Jasveen Kaur, Adv. Ms. Moushmi Mehta, Adv. Mr. S. S. Shroff, AOR Ms. Anannya Ghosh, AOR Mr. Dushyant Manocha, Adv. Mr. Hitesh Saini, Adv. Mr. Brian Moses, Adv. Mr. Pavan Bhushan, Adv. Ms. Ujjwala, Adv. Mr. Pranav, Adv. Ms. Anindita Mitra, AOR Mr. Neeraj Kishan Kaul, Sr. Adv. Ms. Ruby Singh Ahuja, Adv. Mr. Sudhir Sharma, Adv. Mr. Vishal Gehrana, Adv. Mr. Anupam Prakash, Adv. Mr. Utkarsh Ma....
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....he least, the jurisdiction of the National Company Law Tribunal (hereinafter referred to as "NCLT"/"Adjudicating Authority") and the National Company Law Appellate Tribunal (hereinafter referred to as "NCLAT"/"Appellate Tribunal"), qua resolution plans that have been approved by the Committee of Creditors. The constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (hereinafter referred to as the "Amending Act of 2019") have also been challenged. These appeals and writ petitions are an aftermath of this Court's judgment dated 04.10.2018, reported as ArcelorMittal India Private Limited v. Satish Kumar Gupta (2019) 2 SCC 1. 2. On 02.08.2017, the NCLT, Ahmedabad admitted Company Petition (I.B.) No. 39 of 2017 filed by Standard Chartered Bank together with a Petition filed by the State Bank of India under Section 7 of the Code. One Satish Kumar Gupta was appointed as the interim resolution professional, who was later confirmed as resolution professional. On 06.10.2017, the resolution professional by way of an advertisement in the Economic Times, invited expressions of interest from all interested resolution applicants to present resolu....
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.... Section 29-A of the Code. However, an order was passed under Article 142 of the Constitution, stating that one more opportunity be granted to both ArcelorMittal and Numetal to pay off the NPAs of their related corporate debtors within two weeks of the Supreme Court judgment, failing which the corporate debtor would go into liquidation. On 18.10.2018, ArcelorMittal informed the resolution professional and the Committee of Creditors that it had made payments as per the Supreme Court's judgment dated 04.10.2018. However, Numetal did not make any such payment. As a result, on 19.10.2018, ArcelorMittal resubmitted its resolution plan of 02.04.2018, which was then evaluated by the Committee of Creditors on the same date - ArcelorMittal being declared as the highest evaluated resolution applicant vis-a-vis Vedanta. On 25.10.2018, the final negotiated resolution plan of ArcelorMittal was approved by the Committee of Creditors by a 92.24% majority. After several proceedings before the NCLT and the NCLAT, the NCLT, by its judgment dated 08.03.2019 disposed of the application to allow the resolution plan filed by ArcelorMittal as follows: "...we are of the view that the dues of the ....
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....ng having concluded on 30.03.2019 - to appeal against the NCLAT's order, and, by a majority of 70.73% approved making an ex gratia payment of INR 1,000 crores to operational creditors above INR 1 crore. Appeals filed against the interlocutory orders of the NCLAT were then heard by this Court, which by its order dated 12.04.2019, inter alia, directed non-implementation of the judgment dated 08.03.2019 of the NCLT and expeditious disposal of the appeal before the NCLAT. 5. By its final judgment dated 04.07.2019, the NCLAT held that: (i) In a resolution plan there can be no difference between a financial creditor and an operational creditor in the matter of payment of dues, and that therefore, financial creditors and operational creditors deserve equal treatment under a resolution plan. Accordingly, the NCLAT has re-distributed the proceeds payable under the approved resolution plan as per the method of calculation adopted by it so that all financial creditors and operational creditors be paid 60.7% of their admitted claims; (ii) Securities and security interest is irrelevant at the stage of resolution for the purposes of allocation of payments, thereby directing that each fi....
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....rd detailed arguments made by Shri Gopal Subramanium and Shri Rakesh Dwivedi, learned senior counsel, on behalf of the Committee of Creditors of Essar Steel India Limited. They have argued that the provisions of the Code provide for a broad classification of creditors as financial creditors and operational creditors on the basis of the nature of the transaction between creditors and a corporate debtor. They have further argued that the Code does not mandate identical treatment of differently situated creditors either inter se within financial creditors, who may be secured or unsecured, and/or financial creditors vis-a-vis operational creditors. The Code only posits equitable treatment of different classes of creditors recognising that different classes deserve differential treatment. According to them, financial creditors as a class have a superior status as against operational creditors, the same being the case with secured creditors vis-a-vis unsecured creditors. For this purpose, they relied upon certain provisions of the Code. They further argued that the general law of the land as contained in Section 48 of the Transfer of the Property Act, 1882 and Section 77 of the Companies....
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....mission, as well as the UNCITRAL Legislative Guide. They then submitted that a resolution plan is a consent-based plan proposed by the resolution applicant for a corporate debtor. The counterparty to such a plan is the Committee of Creditors, which is required to give a minimum consent of 66% voting share, which consent then becomes the basis for the Adjudicating Authority to approve a resolution plan for the corporate debtor. Once approved by the Adjudicating Authority, such plan becomes binding on all stakeholders as is mentioned by Section 31 of the Code. Therefore, any modification, as has been done by the NCLAT, of such plan is illegal. They then argued that the Committee of Creditors has both the power and the jurisdiction to deal with all commercial aspects of a resolution plan, including distribution of proceeds under such plan, and also referred to and relied upon the recent amendments made to Section 30 of the Code. They stated that the ArcelorMittal plan, as amended, looked after all stakeholders including operational creditors, and stated that a staggering amount of INR 55,000 crores qua operational creditors was paid during the 600 odd days of CIRP being carried out, o....
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....am Divan, learned senior advocate appearing on behalf of the State Bank of India, has supported the submission made on behalf of the Committee of Creditors of Essar Steel India Limited. According to the learned senior advocate, whereas his client and other secured creditors are secured to the extent of 99.66% of their outstanding dues, the only security of Standard Chartered Bank is a pledge of the shares held by the corporate debtor in an offshore Mauritian subsidiary, namely Essar Steel Offshore Limited (hereinafter referred to as "ESOL"), and the fair value of ESOL pledged shares has been determined at only INR 24.86 crores as against the total outstanding admitted dues of INR 3487.10 crores (being 0.7% of the total admitted debt of Standard Chartered Bank). Thus, according to him, Standard Chartered Bank is an unsecured creditor to the extent of INR 3462.14 crores, and as against a sum of INR 60.71 crores which was payable under the resolution plan as approved by the Committee of Creditors, the NCLAT has now upped this figure to approximately INR 2160 crores completely beyond its limited jurisdiction under the Code. Apart from the above, he also argued that Standard Chartered B....
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....that guaranteed as upfront payment by ArcelorMittal. Shri Sibal then trained his guns against the very formation of a Core Committee/Sub-Committee, stating that it is against the provisions of the Code, and that as originally conceived, it was only to facilitate representation before the Adjudicating Authority, which was over, in any case, by 31.05.2018. The Core Committee however went on conducting secret negotiations with ArcelorMittal by which it buried Standard Chartered Bank's debt almost completely. This was done by reducing Standard Chartered Bank's entitlement of INR 2585 crores (INR 2646 crores minus INR 61 crores), if it were to have outstanding payments made on the basis of value of debt instead of value of security. In any case, it was further argued that the resolution plan of ArcelorMittal was itself flawed in that it would be contrary to Regulation 38(1A) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as the "2016 Regulations"), as it did not deal with the interests of all stakeholders. It would also be contrary to the RFP that was issued on 24.12.2017, clause 4.6.1(d) o....
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....her argued that the Committee of Creditors could not possibly decide the manner of distribution as it would give rise to a serious conflict of interest, as the majority may get together to ride roughshod over the minority. He further argued that no categorisation can be made based on the security interest of financial creditors, which security interest may itself vary from first charge holders to second charge holders and then to subservient and residual charge holders. The fact that Standard Chartered Bank has been recognised, albeit only on 10.09.2018, as a secured financial creditor by the resolution applicant, is not challenged by any of the other financial creditors. Further, the valuation of pledged shares at INR 24.86 crores is itself a flawed evaluation, the actual value of the shares being in excess of US $600 million. 9. Shri Sibal then took us to the Amending Act of 2019 and Section 6 of the Amending Act of 2019 in particular, which amended Section 30 of the Code, shortly after the judgment of NCLAT in the present case. This amendment was made in the Code with effect from 16.08.2019. Shri Sibal's first argument is that the aforesaid amendment would not apply to the fa....
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....ions, arguing that the power to make modifications does not include the power to discriminate among creditors who are equally situated. Also, the Committee of Creditors cannot make rankings among financial creditors or otherwise create a class within a class. He reiterated that the status of Standard Chartered Bank as a secured financial creditor has not been disputed by any member of the Committee of Creditors. 12. Shri Ranjit Kumar, learned senior advocate appearing on behalf of Ideal Movers Limited, an operational creditor of the corporate debtor, stated that the admitted claim by the resolution professional was INR 178,50,51,792, and the original resolution plan contained nothing by way of repayment to his client. It is only after the NCLT judgment when INR 1,000 crores extra was paid by ArcelorMittal for operational creditors generally, that his client would now receive 20.5% of the admitted claim. Of course under the NCLAT judgment, he would stand to gain much more. He argued from a reading of the preamble of the Code and some of its provisions that a key objective of the Code is to ensure that the corporate debtor goes on doing its business as a going concern during the C....
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....the arguments made by Shri Sibal and Shri Ranjit Kumar, he also argued that the amendments made in Section 30 would be contrary to the rationale and design of the BLRC Report, 2015. He also added that the Amending Act of 2019, insofar as it applied retrospectively, would be constitutionally infirm as it cannot be said that the amendments made thereto are in any manner clarificatory but are new substantive amendments. 14. Shri A.K. Gupta, learned advocate appearing for L&T Infrastructure Finance Co. Limited in Civil Appeal No.6409 of 2019, assailed the classification of his client as an operational creditor and stated that, on facts, the appellant had entered into a facility agreement, sanctioning a term loan of INR 75 crores to Essar Power Gujarat Limited, a subsidiary of the corporate debtor. The borrower then entered into a Promoter Obligation Agreement by which one Essar Power Limited undertook an obligation to arrange for cheques from the corporate debtor. INR 62 crores of such post-dated cheques were issued in favour of this appellant, as a result of which this appellant is also entitled to be classified as a financial creditor and not an operational creditor. He thus assai....
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....uld be an upfront payment. He read to us certain documents which would show that the guaranteed upfront payment INR 42,000 crores which his client had committed very much continued and that INR 2,500 crores which formed part of this figure was allowed by the Committee of Creditors while negotiating with his client for very good reason. 17. Shri Neeraj Kishan Kaul, learned senior counsel also appearing on behalf of ArcelorMittal, stressed the fact that the importance of the insolvency resolution process is that not only is the corporate debtor to be put back on its feet, but that the resolution applicant whose plan is accepted must be able to start on a fresh slate. This being the case, obviously Shri Rohatgi's argument, that the personal guarantees of the erstwhile promoters do not stand extinguished and that, at the very least, the right of subrogation cannot be taken away, would boomerang upon the successful resolution applicant if such right of subrogation were to be allowed to continue. Shri Salman Khurshid and Shri P. Tripathi, learned senior advocates appearing on behalf of Deutsche Bank, stressed that it was important to recognise separate classes of creditors and reitera....
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....the corporate debtor as a going concern so that 90 days over and above 330 days are also available to dispose of the corporate debtor as a going concern. So far as the challenge to Section 6 of the Amending Act of 2019 is concerned, she argued that there is a symbiotic relationship between a resolution applicant and the Committee of Creditors, who alone are to take a commercial decision by the requisite majority whether or not to put the corporate debtor back on its feet. The reason for Explanation 1 to Section 30(2)(b) is that, what is fair and equitable must be determined within the framework of the Code, which is the commercial wisdom of the Committee of Creditors, subject to certain minimum guidelines to be observed. Thus, operational creditors who were originally to be paid only a minimum calculated on the basis of what they would be paid in the event of liquidation of a corporate debtor, are now to be paid the higher of two amounts, thereby raising the threshold of what is to be paid by a resolution applicant by way of a minimum to operational creditors, being enhanced under the amended provision. Further, even dissentient financial creditors are now to be paid a minimum guar....
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....cial decision without directly interfering with the judgment of the Court, and has cited several decisions to buttress this point. He also argued that Shri Sibal's assault on the constitutional validity of Sections 4 and 6 of the Amending Act of 2019 on the ground that the Amendment was tailor-made to do away with the judgment in this very matter, so that his client may walk away without anything, is answered by the well settled principle that an Act of the legislature cannot be attacked on the ground of improper or bad motive, and cited certain judgments of this Court in support of the same. Role of the resolution professional 20. The role of the resolution professional in the revival of the corporate debtor is stated in detail in several Sections of the Code read with the 2016 Regulations. 21. The ball starts rolling with the Adjudicating Authority, after admitting an application under either Sections 7, 9 or 10, ordering that a public announcement of the initiation of the CIRP together with calling for the submission of claims under Section 15 shall be made -see Section 13(1)(b) of the Code. For this purpose, the Adjudicating Authority appoints an interim resolution pro....
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....or - see Section 25(1) of the Code. For this purpose, he is to maintain an updated list of claims; convene and attend all meetings of the Committee of Creditors; prepare the information memorandum in accordance with Section 29 of the Code; invite prospective resolution applicants; and present all resolution plans at the meetings of the Committee of Creditors - see Section 25(2)(e) to (i) of the Code. Under Section 29(1) of the Code, the resolution professional shall prepare an information memorandum containing all relevant information, as may be specified, so that a resolution plan may then be formulated by a prospective resolution applicant. Under Section 30 of the Code, the resolution applicant must then submit a resolution plan to the resolution professional, prepared on the basis of the information memorandum. After this, the resolution professional must present to the Committee of Creditors, for its approval, such resolution plans which conform to the conditions referred to in Section 30(2) of the Code - see Section 30(3) of the Code. If the resolution plan is approved by the requisite majority of the Committee of Creditors, it is then the duty of the resolution professional t....
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....ed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims; (e) particulars of a debt due from or to the corporate debtor with respect to related parties; (f) details of guarantees that have been given in relation to the debts of the corporate debtor by other persons, specifying which of the guarantors is a related party; (g) the names and addresses of the members or partners holding at least one per cent stake in the corporate debtor along with the size of stake; (h) details of all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities; (i) the number of workers and employees and liabilities of the corporate debtor towards them; (j) *** (k) *** (l) other information, which the resolution professional deems relevant to the committee." 26. Under Regulation 36-A, the resolution professional shall then publish brief particulars of the invitation for expression of interest in Form G of the Schedule. This document must also, inter alia, provide for such basic information about the corporate debtor as may be....
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.... be finally negotiated and decided by the Committee of Creditors. In fact, in ArcelorMital India (supra), this Court referred to the role of the resolution professional under the Code and the aforesaid Regulations, making it clear that the said role is not adjudicatory but administrative, in the following terms: "80. However, it must not be forgotten that a Resolution Professional is only to "examine" and "confirm" that each resolution plan conforms to what is provided by Section 30(2). Under Section 25(2)(i), the Resolution Professional shall undertake to present all resolution plans at the meetings of the Committee of Creditors. This is followed by Section 30(3), which states that the Resolution Professional shall present to the Committee of Creditors, for its approval, such resolution plans which confirm the conditions referred to in sub-section (2). This provision has to be read in conjunction with Section 25(2)(i), and with the second proviso to Section 30(4), which provides that where a resolution applicant is found to be ineligible under Section 29-A(c), the resolution applicant shall be allowed by the Committee of Creditors such period, not exceeding 30 days, to ma....
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.... issue the final list of prospective resolution applicants within ten days of the last date for receipt of objections, to the committee." 81. Thus, the importance of the Resolution Professional is to ensure that a resolution plan 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. Even though it is not necessary for the Resolution Professional to give reasons while submitting a resolution plan to the Committee of Creditors, it would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration, and to state briefly as to why it does or does not conform to the law." Role of the prospective resolution applicant 28. The UNCITRAL Legislative Guide discusses what ought to be the contents of a resolution plan in an Insolvency Code in the following terms: "4. The plan xxx xxx xxx 18. The question of what is to be included in the plan is closely related to the procedure for approval of the plan, that is, which creditors are required to approve the plan and the level of suppo....
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....for future management of the debtor's business; the settlement of claims and how the amount that creditors will receive will be more than they would have received in liquidation; payment of interest on claims; distribution of all or any part of the assets of the estate among those having an interest in those assets; possible changes to the instrument or organic document constituting the debtor (e.g. changes to by-laws or articles of association) or the capital structure of the debtor or merger or consolidation of the debtor with one or more persons; the basis upon which the business will be able to keep trading and can be successfully reorganized; supervision of the implementation of the plan; and the period of implementation of the plan, including in some cases a statutory maximum period. 20. Rather than specifying a wide range of detailed information to be included in a plan, it may be desirable for the insolvency law to identify the minimum content of a plan, focusing upon the key objectives of the plan and procedures for implementation. For example, the insolvency law may require the plan to detail the classes of creditors and the treatment each is to be accorded in th....
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....ts under sub-section (2) of section 29" Thereafter, the resolution plan submitted by the prospective resolution applicant must provide for measures as may be necessary for the insolvency resolution of the corporate debtor for maximisation of the value of its assets, which may include transfer or sale of assets or part thereof, whether subject to security interests or not. The plan may provide for either satisfaction or modification of any security interest of a secured creditor and may also provide for reduction in the amount payable to different classes of creditors - see Regulation 37. 30. Accordingly, Regulation 38 then deals with the mandatory contents of a resolution plan, making it clear that such plan must contain a provision that the amount due to operational creditors shall be given priority in payment over financial creditors - see Regulation 38(1). Such plan must also include provisions as to how to deal with the interests of all stakeholders including financial creditors and operational creditors of the corporate debtor - Regulation 38 (1A). It must then provide for the term of the plan, management and control of the business of the corporate debtor during such te....
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....itor in favour of whom a security interest is created and "security interest" is defined by Section 3(31) as follows: "3. Definitions. - In this Code, unless the context otherwise requires. - xxx xxx xxx (31) "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee;" 32. It is settled by several judgments of this Court that in order to trigger application of the Code, a neat division has been made between financial creditors and operational creditors. It has also been noticed in some of our judgments that most financial creditors are secured creditors and most operational creditors are unsecured creditors. The rationale for only financial creditors handling the affairs of the corporate debtor and resolving them is for reasons that have been deliberated up....
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....aws governing the actions of the entity while implementing the solutions. xxx xxx xxx 5.3.1 Steps at the start of the IRP 4. Creation of the creditors committee The creditors committee will have the power to decide the final solution by majority vote in the negotiations. The majority vote requires more than or equal to 75 percent of the creditors committee by weight of the total financial liabilities. The majority vote will also involve a cram down option on any dissenting creditors once the majority vote is obtained...The Committee deliberated on who should be on the creditors committee, given the power of the creditors committee to ultimately keep the entity as a going concern or liquidate it. The Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the pr....
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....ans to those designed only to fully rehabilitate the debtor; prohibit debt from being written off; restrict the amount that must eventually be paid to creditors by specifying a minimum percentage; or prohibit exchange of debt for equity. A non- intrusive approach that does not prescribe such limitations is likely to provide sufficient flexibility to allow the most suitable of a range of possibilities to be chosen for a particular debtor. xxx xxx xxx 20. Rather than specifying a wide range of detailed information to be included in a plan, it may be desirable for the insolvency law to identify the minimum content of a plan, focusing upon the key objectives of the plan and procedures for implementation. For example, the insolvency law may require the plan to detail the classes of creditors and the treatment each is to be accorded in the plan; the terms and conditions of the plan (such as treatment of contracts and the ongoing role of the debtor); and what is required for implementation of the plan (such as sale of assets or parts of the business, extension of maturity dates, changes to capital structure of the business and supervision of implementation)." (e....
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....tional documents of the corporate debtor; (h) delegate its authority to any other person; (i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties; (j) make any change in the management of the corporate debtor or its subsidiary; (k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business; (l) make changes in the appointment or terms of contract of such personnel as specified by the committee of creditors; or (m) make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor (2) The resolution professional shall convene a meeting of the committee of creditors and seek the vote of the creditors prior to taking any of the actions under sub- section (1). (3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of sixty-six per cent of the voting shares. (4) Where any action under sub-section (1) is taken by the resolution professional without seeking the ap....
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....financial creditors. The term 'financial creditor' has been defined in Section 5(7) of the I&B Code to mean any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Be it noted that the process of insolvency resolution and liquidation concerning corporate debtors has been codified in Part II of the I&B Code, comprising of seven Chapters. Chapter I predicates that Part II shall apply in matters relating to the insolvency and liquidation of corporate debtor where the minimum amount of default is Rs. 1,00,000/-. Section 5 in Chapter I is a dictionary clause specific to Part II of the Code. Chapter II deals with the gamut of procedure to be followed for the corporate insolvency resolution process. For dealing with the issue on hand, the provisions contained in Chapter II will be significant. From the scheme of the provisions, it is clear that the provisions in Part II of the Code are self- contained code, providing for the procedure for consideration of the resolution plan by the CoC. 21. The stage at which the dispute concerning the respective corporate debtors (KS&PIPL and IIL) had reached the adjudicati....
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....ssenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opin....
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....n process is to take place. Jurisdiction of the Adjudicating Authority and the Appellate Tribunal 41. As has already been seen hereinabove, it is the Adjudicating Authority which first admits an application by a financial or operational creditor, or by the corporate debtor itself under Section 7, 9 and 10 of the Code. Once this is done, within the parameters fixed by the Code, and as expounded upon by our judgments in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Macquarie Bank Ltd v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674, the Adjudicating Authority then appoints an interim resolution professional who takes administrative decisions as to the day to day running of the corporate debtor; collation of claims and their admissions; and the calling for resolution plans in the manner stated above. After a resolution plan is approved by the requisite majority of the Committee of Creditors, the aforesaid plan must then pass muster of the Adjudicating Authority under Section 31(1) of the Code. The Adjudicating Authority's jurisdiction is circumscribed by Section 30(2) of the Code. In this context, the decision of this court in K. Sashidhar (supra) is of great....
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....ovisions of the law for the time being in force, (vi) conforms to such other requirements as may be specified by the Board. The Board referred to is established under Section 188 of the I&B Code. The powers and functions of the Board have been delineated in Section 196 of the I&B Code. None of the specified functions of the Board, directly or indirectly, pertain to regulating the manner in which the financial creditors ought to or ought not to exercise their commercial wisdom during the voting on the resolution plan under Section 30(4) of the I&B Code. The subjective satisfaction of the financial creditors at the time of voting is bound to be a mixed baggage of variety of factors. To wit, the feasibility and viability of the proposed resolution plan and including their perceptions about the general capability of the resolution applicant to translate the projected plan into a reality. The resolution applicant may have given projections backed by normative data but still in the opinion of the dissenting financial creditors, it would not be free from being speculative. These aspects are completely within the domain of the financial creditors who are called upon to vote on the resoluti....
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....nforced from the limited grounds specified for instituting an appeal that too against an order "approving a resolution plan" under Section 31. First, that the approved resolution plan is in contravention of the provisions of any law for the time being in force. Second, there has been material irregularity in exercise of powers "by the resolution professional" during the corporate insolvency resolution period. Third, the debts owed to operational creditors have not been provided for in the resolution plan in the prescribed manner. Fourth, the insolvency resolution plan costs have not been provided for repayment in priority to all other debts. Fifth, the resolution plan does not comply with any other criteria specified by the Board. Significantly, the matters or grounds - be it under Section 30(2) or under Section 61(3) of the I&B Code - are regarding testing the validity of the "approved" resolution plan by the CoC; and not for approving the resolution plan which has been disapproved or deemed to have been rejected by the CoC in exercise of its business decision. 45. Indubitably, the inquiry in such an appeal would be limited to the power exercisable by the resolution profe....
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....rocess of resolution plan is necessitated in respect of corporate debtors in whom their financial creditors have lost hope of recovery and who have turned into non- performer or a chronic defaulter. The fact that the concerned corporate debtor was still able to carry on its business activities does not obligate the financial creditors to postpone the recovery of the debt due or to prolong their losses indefinitely. Be that as it may, the scope of enquiry and the grounds on which the decision of "approval" of the resolution plan by the CoC can be interfered with by the adjudicating authority (NCLT), has been set out in Section 31(1) read with Section 30(2) and by the appellate tribunal (NCLAT) under Section 32 read with Section 61(3) of the I&B Code. No corresponding provision has been envisaged by the legislature to empower the resolution professional, the adjudicating authority (NCLT) or for that matter the appellate authority (NCLAT), to reverse the "commercial decision" of the CoC muchless of the dissenting financial creditors for not supporting the proposed resolution plan. Whereas, from the legislative history there is contra indication that the commercial or business decision....
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....ners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned, the parameters of such review having been clearly laid down in K. Sashidhar (supra). 43. However, Shri Sibal exhorted us to hold that K. Sashidhar (supra) missed a very vital provision of the Code which is contained in Section 60(5) of the Code. Section 60(5) reads as follows: "60. Adjudicating Authority for corporate persons xxx xxx xxx (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of- (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate....
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.... creditors and within thirty days of approval of resolution plan by the NCLT. The BLRC Report states that the guarantee of liquidation value has been provided to operational creditors since they are not allowed to be part of the CoC which determines the fate of the corporate debtor. (BLRC Report, 2015) 18.2 However, certain public comments received by the Committee stated that, in practice, the liquidation value which is guaranteed to the operational creditors may be negligible as they fall under the residual category of creditors under section 53 of the Code. Particularly, in the case of unsecured operational creditors, it was argued that they will have no incentive to continue supplying goods or services to the corporate debtor for it to remain a 'going concern' given that their chances of recovery are abysmally low. 18.3 The Committee deliberated on the status of operational creditors and their role in the CIRP. It considered the viability of using 'fair value' as the floor to determine the value to be given to operational creditors. Fair value is defined under regulation 2(1)(hb) of the CIRP Regulations to mean "the estimated realizable value of the assets of ....
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....greed that presently, most of the resolution plans are in the process of submission and there is no empirical evidence to further the argument that operational creditors do not receive a fair share in the resolution process under the current scheme of the Code. Hence, the Committee decided to continue with the present arrangement without making any amendments to the Code." (emphasis supplied) Ultimately, the Committee decided against any amendment to be made to the existing scheme of the Code, thereby retaining the prescription as to the minimum value that was to be paid to the operational creditors under a resolution plan. 45. 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 impossibl....
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....e back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83, fn 3)." (emphasis supplied) 46. This is the reason why Regulation 38(1A) speaks of a resolution plan including a statement as to how it has dealt with the interests of all stakeholders, including operational creditors of the corporate debtor. Regulation 38(1) also states that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. If nothing is to be paid to operational creditors, the minimum, being liquidation value - which in most cases would amount to nil after secured creditors have been paid - would certainly not balance the interest ....
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....gned 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 creditors. The aforesaid judgment relies upon certain paragraphs of this Court's judgment in Swiss Ribbons (supra) to buttress the aforesaid finding. 48. The UNCITRAL Legislative Guide states:- "Designing the key objectives and structure of an effective and efficient insolvency law xxx xxx xxx 4. Ensuring equitable treatment of similarly situated creditors 7. The objective of equitable treatment is based on the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognizes that all creditors do not need to be treated identically, but in a manner....
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....acility exists may operate to discourage majorities from making proposals that would unfairly disadvantage priority creditors. (ii) Treatment of dissenting creditors 28. As to the treatment of dissenting creditors, it will be essential to provide a way of imposing a plan agreed by the majority of a class upon the dissenting minority in order to increase the chances of success of the reorganization. It may also be necessary, depending upon the mechanism that is chosen for voting on the plan and whether creditors vote in classes, to consider whether the plan can be made binding upon dissenting classes of creditors and other affected parties. 29. To the extent that a plan can be approved and enforced upon dissenting parties, there will be a need to ensure that the content of the plan provides appropriate protection for those dissenting parties and, in particular, that their rights are not unfairly affected. The law might provide, for example, that dissenting creditors can not be bound unless assured of certain treatment. As a general principle, that treatment might be that the creditors will receive at least as much under the plan as they would have received....
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....on of the business impossible to implement. Similarly, there may be circumstances where ensuring a successful reorganization requires that priority creditors receive less than the full value of their claims upon approval of the plan. The prospects for reorganization may improve if priority creditors will accept payment over time and if secured creditors will acquiesce when the terms of the secured debt are modified over time. If these creditors are not included in the plan and entitled to vote on proposals affecting their rights, modification of those rights cannot be achieved. (ii) Classes of secured and priority creditors 36. Recognizing the need for secured and priority creditors to participate, a second approach provides for these creditors to vote as classes separate from unsecured creditors on a plan that would modify or affect the terms of their claims, or to otherwise consent to be bound by the plan. Adopting such an approach provides a minimum safeguard for the adequate protection of these creditors and recognizes that the respective rights and interests of secured and priority creditors differ from those of unsecured creditors. In many cases, however, th....
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....against the objectives of insolvency law and the benefits to an economy of successful reorganization." (emphasis supplied) The BLRC Report, 2015 is of great help in understanding what is meant by respecting the rights of all creditors equally. Paragraph 3.4.2 of the said report states: "3.4.2 Principles driving the design The Committee chose the following principles to design the new insolvency and bankruptcy resolution framework: IV. The Code will ensure a collective process. 9. The law must ensure that all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution. V. The Code will respect the rights of all creditors equally. 10. The law must be impartial to the type of creditor in counting their weight in the vote on the final solution in resolving insolvency. VI. The Code must ensure that, when the negotiations fail to est....
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....ments in American Jurisprudence, which read as follows: "Chapter 11 reorganization, specifically, has been called a collective remedy, designed to find the optimum solution for all parties connected with a business - not solely for the business itself and not solely for its creditors. xxx xxx xxx Protecting creditors in general is an important objective as is protecting creditors from each other." There is no doubt that even under our Code, reorganisation is a collective remedy designed to find an optimum solution for all parties connected with a business in the manner provided by the Code. Protecting creditors in general is, no doubt, an important objective - the observation that protecting creditors from each other is also important, which must be read with footnote 7 in the American Jurisprudence, which reads as under: "In re First Central Financial Corp., 377 F.3d 209 (2d Cir. 2004) The Bankruptcy Code generally does not imbue creditors with greater rights in a bankruptcy proceeding than they would enjoy under otherwise applicable non-bankruptcy law unless it is to serve some bankruptcy purpose. In re Vermont Elec. Generation & Tr....
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....apital markets founded on the efficient allocation of credit and effective and predictable mechanisms for realizing credit claims. xxx xxx xxx III. General Principles xxx xxx xxx * Establish clear and predictable priority rules The issue of priorities between various security interest devices and between various types of creditors is extremely complex, largely due to the myriad of possible competing interests. Whatever priority rules a legal framework establishes, they ought to be clear, predictable and transparent. They need to allow creditors to assess their position before creating a security interest and to enforce their rights in case of default in a timely, predictable and cost-efficient manner. * Facilitate the enforcement of creditor rights Enforcement is a critical factor in the law and functioning of secured credit. A security interest is of little value to a creditor unless the creditor is able to enforce it in a predictable, efficient and timely manner vis-à-vis the debtor and third parties. An effective framework needs to allow quick and predictable enforcement both within and outside insolvency proceedings."....
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....s potential conflict of interest among creditors in a particular class, the report then goes on to state: "In some cases, classification makes it easier to treat the claims of major creditors, who may be persuaded to opt to receive a different treatment from the general class of unsecured creditors, where such treatment is necessary to render the plan feasible. In such cases, the treatment for these major creditors is generally on less favorable terms than other, similarly situated creditors. Finally, classification may be a useful means of overriding the vote of a class of creditors that votes against the plan where the class is otherwise treated in a fair and equitable manner.^4" Even according to this report, therefore, a "cramdown" on dissentient creditors would pass muster under an insolvency law if such creditors will receive, under a resolution plan, an amount at least equal to what such creditors would receive in a liquidation proceeding being "liquidation value". 53. Also, Philip R. Wood's book titled "Principles of International Insolvency" states: "Secured creditors are super-priority creditors on insolvency. Security must stand up on insolvency w....
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.... in India, 2017-2018 reflects that the net interest margin of Indian banks for the financial year 2017-2018 is averaged at 2.5%. Likewise, the global trend for net interest margin was at 3.3% for banks in the USA and 1.6% for banks in the UK in the year 2016, as per the data published on the website of the bank. Thus, it is clear that financial creditors earn profit by earning interest on money lent with low margins, generally being between 1 to 4%. Also, financial creditors are capital providers for companies, who in turn are able to purchase assets and provide a working capital to enable such companies to run their business operation, whereas operational creditors are beneficiaries of amounts lent by financial creditors which are then used as working capital, and often get paid for goods and services provided by them to the corporate debtor, out of such working capital. On the other hand, market research carried out by India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry, as regards the Oil and Gas sector, has stated that the business risk of operational creditors who operate with higher profit margins and shorter cyclical repayments must ne....
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....ich dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable. 51. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recover....
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....g to holders of claims or interests that arise, for example, by operation of law, it retains its significance by UNCITRAL Legislative Guide on Insolvency Law ensuring that the priority accorded to the claims of a similar class affects all members of the class in the same manner. The policy of equitable treatment permeates many aspects of an insolvency law, including the application of the stay or suspension, provisions to set aside acts and transactions and recapture value for the insolvency estate, classification of claims, voting procedures in reorganisation and distribution mechanisms. An insolvency law should address problems of fraud and favouritism that may arise in cases of financial distress by providing, for example, that acts and transactions detrimental to equitable treatment of creditors can be avoided." 77. NCLAT has, while looking into viability and feasibility of resolution plans that are approved by the Committee of Creditors, always gone into whether operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are either rejected or modified so that the operational creditors' rights are safeguarded.....
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....ce 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 reso....
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....mount Claimed Amount Admitted Amount Provided under the Plan Amount Provided to the Amount Claimed (%) 1 Dissenting Secured Financial Creditors 2 Other Secured Financial Creditors 3 Dissenting Unsecured Financial Creditors 4 Other Unsecured Financial Creditors 5 Operational Creditors Government Workmen Employees 4 Other Debts and Dues Total Quite clearly, secured and unsecured financial creditors are differentiated when it comes to amounts to be paid under a resolution plan, together with what dissenting secured or unsecured financial creditors are to be paid. And, most importantly, operational creditors are separately viewed from these secured and unsecured financial creditors in S.No.5 of paragraph 7 of statutory Form H. Thus, it can be seen that the Code and the Regulations, read as a whole, together with the observations of expert bodies and t....
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....e statutory provisions of Sections 391 and 393 of the Act the question of voidability of the scheme will have to be judged subject to the rider that a scheme sanctioned by majority will remain binding to a dissenting minority of creditors or members, as the case may be, even though they have not consented to such a scheme and to that extent absence of their consent will have no effect on the scheme. It can be postulated that even in case of such a scheme of compromise and arrangement put up for sanction of a Company Court it will have to be seen whether the proposed scheme is lawful and just and fair to the whole class of creditors or members including the dissenting minority to whom it is offered for approval and which has been approved by such class of persons with requisite majority vote." The very next paragraph, however, states as follows: "29. However further question remains whether the Court has jurisdiction like an appellate authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the s....
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....ion 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 wisdom. The constitution of a sub-committee by the Committee of Creditors 59. A large part of Shri Sibal's 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 them. 60. Under Section 21(8) of the Code, ....
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.... question in dispute between parties has been entrusted. The result of its inquiry must, as I have said, be taken, in the absence of directions in the statute to the contrary, to be intended to be reached by its ordinary procedure. In the case of the Local Government Board it is not doubtful what this procedure is. The Minister at the head of the Board is directly responsible to Parliament like other Ministers. He is responsible not only for what he himself does but for all that is done in his department. The volume of work entrusted to him is very great and he cannot do the great bulk of it himself. He is expected to obtain his materials vicariously through his officials, and he has discharged his duty if he sees that they obtain these materials for him properly. To try to extend his duty beyond this and to insist that he and other members of the Board should do everything personally would be to impair his efficiency. Unlike a Judge in a Court he is not only at liberty but is compelled to rely on the assistance of his staff." In view of the above clear statement of the law the objection to the validity of the dismissal on the ground that the delegation of the enquiry amou....
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....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 pro....
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....s." Also, under the caption "terms of settlement", the final resolution plan dated 02.04.2018, as approved on 23.10.2018, specifically provided: "Financial Creditors: Pursuant to the approval of this Resolution Plan by the Adjudicating Authority, each of the Financial Creditors shall be deemed to have agreed and acknowledged the following terms: * The payment to the Financial creditors in accordance with this Resolution Plan shall be treated as full and final payment of all outstanding dues of the Corporate Debtor to each of the Financial Creditors as of the Effective Date, and all agreements and arrangements entered into by or in favour of each of the Financial Creditors, including but not limited to loan agreements and security agreements (other than corporate or personal guarantees provided in relation to the Corporate Debtor by the Existing Promoter Group or their respective affiliates) shall be deemed to have been (i) assigned / novated to the Resolution applicant, or any Person nominated by the Resolution applicant, with effect from the effective Date, with no rights subsisting or accruing to the Financial Creditors for the period prior to such a....
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....h guarantees shall continue to be retained by the Financial Creditors and shall continue to be enforceable by them." (emphasis supplied) We were also informed by the learned senior counsel that the personal guarantees of the promoter group have been invoked and legal proceedings in respect thereof are pending. It has been pointed out to us that Shri Prashant Ruia and other members of the promoter group, who are guarantors, are not parties to the resolution plan submitted by ArcelorMittal and hence, the resolution plan cannot bind them to take away rights of subrogation, which they may have if they are ordered to pay amounts guaranteed by them in the pending legal proceedings. 66. Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. This is for the reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were. In State Bank of India v. V. Ramakrishnan, 2018 (9) SCALE 597, this Court relying upon Section 31 of the Code has held: "22. Section 31 of t....
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....fully 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 count. Utilisation of profits of the corporate debtor during CIRP to pay off creditors 68. 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 incorrect. Constitutional Validity of Section 4 and 6 of the Amending Act, 2019 69. In Swiss Ribbons (supra) this Court was at pains to point out, referring, inter alia, to various American decisions in paras 17 to 24, that the legislature mus....
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....f unsecured creditors is a core principle of banking. It allows banks to lend to companies and individuals at lower rates of interest in a secured lending because they know that their loan is secured and in the eventuality of a default, their losses would be mitigated. By virtue of this order, the borrowing rates for all classes would go up in the future because banks can't be sure of protecting their losses. The fundamental principles of credit analysis and rating no longer hold true. This would also result in unjust enrichment for some creditors who, knowing that they don't have benefit of the security, lent at a much higher rate as compared to the secured lenders. Besides earning far more money than secured creditors, due to higher interest rate during the pre insolvency stage they now have the benefit of higher share in the plan value, at the expense of secured creditors. In fact the ruling puts in question the very concept of security - what is the use of a charge/security if it is meaningless in insolvency? Even other statutes, including the Companies Act, 2013 clearly lay down a distinction between secured and unsecured creditors and if both are treated at par it will be a h....
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....time of financing (or when goods or services were provided). We therefore strongly suggest that the Government may consider amendment of the Code to expressly clarify the distinction between secured and unsecured creditors and between financial and operational creditors. Also, decisions of resolution applicant, as accepted by the committee of creditors should be considered final unless they are found to be contrary to law. This would avoid any confusion; be in line with the global practices and held India retain its status of preferred investment destination." 71. Pursuant to this and representations from Banks and industry, the Amending Act of 2019 was then made. Sections 4 and 6 of the Amending Act of 2019 read as under: "4. Amendment of section 12. In section 12 of the principal Act, in sub-section (3), after the proviso, the following provisos shall be inserted, namely:-- "Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process grant....
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....ion of the Adjudicating Authority in respect of a resolution plan;" b) in sub-section (4), after the words "feasibility and viability,", the words, brackets and figures "the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub- section (1) of section 53, including the priority and value of the security interest of a secured creditor" shall be inserted." 72. The frontal attack of Shri Sibal on Sections 4 and 6 of the Amending Act of 2019 is that it was tailor-made to do away with the judgment of the NCLAT in this very matter. This being so, such legislation would be clearly outside the bounds of the legislature as the legislature cannot interfere with a particular judgment and set it aside. 73. 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....
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....sgressed the limits of its constitutional powers." Likewise, a 7-Judge Bench in STO v. Ajit Mills Ltd. (1977) 4 SCC 98, has also clearly stated as follows: "16. Before scanning the decisions to discover the principle laid down therein, we may dispose of the contention which has appealed to the High Court based on "colourable device'. Certainly, this is a malignant expression and when flung with fatal effect at a representative instrumentality like the legislature, deserves serious reflection. If, forgetting comity, the Legislative wing charges the Judicature wing with "colourable" judgments, it will be intolerably subversive of the rule of law. Therefore, we too must restrain ourselves from making this charge except in absolutely plain cases and pause to understand the import of the doctrine of colourable exercise of public power, especially legislative power. In this branch of law, "colourable" is not "tainted with bad faith or evil motive' ; it is not pejorative or crooked. Conceptually, "colourability" is bound up with incompetency. "Colour', according to Black's Legal Dictionary, is "an appearance, semblance or simulacrum, as distinguished from that ....
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....cement 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 liquidation. 75. The raison d'être for this provision comes from the experience that has been plaguing the legislature ever since SICA was promulgated. The problems of SICA and other successor enactments was stated in graphic detail in Madras Petrochem Limited v. BIFR (2016) 4 SCC 1 at paragraphs 17 to 23. It will be seen from these paragraphs that though SICA, the Recovery of Debts Act of 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (hereinafter referred to as "SARFAESI Act") all provided for expeditious determination and timely detection of sickness in industrial companies, yet, legal proceedings under the same dragged on for years as a result of which all these statutory measures proved to be abject failures in resolving stressed assets. It is for this reason that the BLRC Report of 2015 stated: "In limited circumstances, if 75 % of the creditors committee decides that the complexity of a case requires more tim....
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....d. Identifying and addressing the sources of delay Before the IRP can commence, all parties need an accurate and undisputed set of facts about existing credit, collateral that has been pledged, etc. Under the present arrangements, considerable time can be lost before all parties obtain this information. Disputes about these facts can take up years to resolve in court. The objective of an IRP that is completed in no more than 180 days can be lost owing to these problems. Hence, the Committee envisions a competitive industry of "information utilities‟ who hold an array of information about all firms at all times. When the IRP commences, within less than a day, undisputed and complete information would become available to all persons involved in the IRP and thus address this source of delay. The second important source of delays lies in the adjudicatory mechanisms. In order to address this, the Committee recommends that the National Company Law Tribunals (for corporate debtors) and Debt Recovery Tribunals (for individuals and partnership firms) be provided with all the necessary resources to help them in realising the objectives of the Code. ....
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.... cases, the Government has increased the number of benches of NCLT from 10 to 15, during just the last one year. In one year, we have increased it from 10 to 15. The number of members has also been increased in a phased manner. Recently, 26 new members have joined bringing the total number of members to 52. Sir, more than one court has been operationalised in the benches where a large number of cases are pending, such as, in Mumbai, Delhi, Chennai and Kolkata. The projects like e-governance and e-courts have also been implemented for faster and speedier disposal of the cases." 77. Shri Sibal vehemently objected to any reliance on the speech of the Minister and cited K.P. Varghese v. ITO (1982) 1 SCR 629 and K.S. Paripoornan v. State of Kerala (1994) 5 SCC 593. In Varghese (supra) this Court held, at page 645, as follows: "...Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be....
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....rabinda Bose [1953 SCR 1, 28 : AIR 1952 SC 369] ; State of W.B. v. Subodh Gopal Bose [1954 SCR 587, 628 : AIR 1954 SC 92] per Das, J.; State of W.B. v. Union of India [(1964) 1 SCR 371, 383 : AIR 1963 SC 1241] .) Similarly, with regard to speeches made by the members in the House at the time of consideration of the Bill it has been held that they are not admissible as extrinsic aids to the interpretation of the statutory provisions though the speech of the mover of the Bill may be referred to for the purpose of finding out the object intended to be achieved by the Bill. (See State of Travancore-Cochin v. Bombay Co. Ltd. [1952 SCR 1112 : AIR 1952 SC 366] and Aswini Kumar v. Arabinda Bose [1953 SCR 1, 28 : AIR 1952 SC 369] .) On a perusal of the Bills of 1982 and 1984 we find that they did not contain the provisions found in Section 23(1-A) of the principal Act and Section 30(1) of the amending Act. These provisions were inserted when the 1984 Bill was under consideration before Parliament. The Statement of Objects and Reasons does not, therefore, throw any light on the circumstances in which these provisions were introduced." As the speech of the Hon'ble Minister on the floor of ....
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....f A.P., (2003) 8 SCC 559 : 2004 SCC (Cri) 39] , Japani Sahoo [Japani Sahoo v. Chandra Sekhar Mohanty, (2007) 7 SCC 394 : (2007) 3 SCC (Cri) 388] and Vanka Radhamanohari [Vanka Radhamanohari v. Vanka Venkata Reddy, (1993) 3 SCC 4 : 1993 SCC (Cri) 571]. The object of the criminal law is to punish perpetrators of crime. This is in tune with the well-known legal maxim nullum tempus aut locus occurrit regi, which means that a crime never dies. At the same time, it is also the policy of law to assist the vigilant and not the sleepy. This is expressed in the Latin maxim vigilantibus et non dormientibus, jura subveniunt. Chapter XXXVI CrPC which provides limitation period for certain types of offences for which lesser sentence is provided draws support from this maxim. But, even certain offences such as Section 384 or 465 IPC, which have lesser punishment may have serious social consequences. The provision is, therefore, made for condonation of delay. Treating date of filing of complaint or date of initiation of proceedings as the relevant date for computing limitation under Section 468 of the Code is supported by the legal maxim actus curiae neminem gravabit which means that the act of co....
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.... 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 ....
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....ating Authority or the Appellate Tribunal to interfere in the merits of a business decision taken by the requisite majority of the Committee of Creditors, provided that it is otherwise in conformity with the provisions of the Code and the Regulations, as has been laid down by this judgment. 82. 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 consti....
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....lows:- "VIII. Treatment of Various Stakeholders" xxx xxx xxx Stakeholder Proposed Treatment Financial Creditors As per the Liquidation Value of the Corporate Debtor, the Secured Financial Creditors would realize amounts which were lower than the current outstandings on a cumulative basis. However, the Resolution Applicant recognizes the sacrifices already made by the Financial Creditors till date and the fact that debt restructuring attempts by the Financial Creditors have failed in the past. The Resolution Applicant is proposing to pay the Secured Financial Creditors, the amounts stated under Section V which is significantly higher than the reconvenes that the Secured Financial Creditors as a class would realize in case of liquidation. The payments proposed to be made by the Resolution Applicant to the unsecured Financial Creditors is also higher than the recoveries that the unsecured Financial Creditors as a class would realize in case of liquidation, since the Liquidation Value realizable by unsecured Financial Creditors is nil. The Resolution Applicant has empowered the Committee of Creditors to decide the manner in which the financial package bein....
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....he financial package to settle at least part of the Claims of the small Trade Creditors. This class of Trade Creditors are being provided such payments since the Resolution applicant understands that these Persons typically form a part of small scale/medium sector enterprises, which enterprises play a key role in the Indian economy and given their scale of operations may not be in a position to weather macroeconomic and financial shocks. The identified Trade Creditors are being paid out on the assumption that they will continue their arrangements with the Corporate Debtor and shall in no manner commit any acts or omissions which would adversely impact the business of the Corporate Debtor. Acceptance of payments by the Trade Creditors shall be considered as an acceptance of the above condition. The Resolution Applicant recognizes and understands that additional payment to certain Operational Creditors may have to be made as a part of revitalising the business and is prepared to do so, on a case by case basis. Governmental Operational Creditors The Resolution Applicant aims at establishing a good working relationship between the Governmental Authorities and the Corporate Debtor....
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....ty, being only INR 24.86 crores. The reasons given for acceptance of this amended resolution plan was stated as follows: "By majority consensus of COC (except Standard Chartered Bank and SREI), it was agreed that fairness of distribution would be reflected only if distribution be made based on underlying security value and quality of security. Based on a comparison of the two suggested options based on fair value and liquidation value, in the interest of all stake holders and with the objective of the Code it is proposed to the COC to accept the sharing ratio as per the Liquidation Valuation Report and also to Secured Financial Creditors having Charge on Project Asset of ESIL for taking a sacrifice of Rs. 37.76 Crores (for adopting the sharing ratio as per the Liquidation Valuation Report instead of fair value) which shall be allocated to Secured Financial Creditors having Charge on Pledge of Shares of ESOL. While allocation of the Resolution Amount it is pertinent to note that the Committee of creditors has the widest discretion to determine the terms of the resolution plan. A. At the outset it is important to be noted that the legislature in their wisdo....
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....es Pvt. Ltd. and Ors. E. The Code specifically provides the COC with the power under section 30(4) of the Code, to approve a resolution with requisite majority as set out thereunder. It is an accepted position in law, and as enunciated in various pronouncements of the Supreme Court of India that where a power is conferred or a duty is imposed by a statute, and there is nothing expressly inhibiting the exercise of the power or the performance of the duty by any limitations or restrictions it is reasonable to hold that it carries with it all power of doing all such acts or employing all such means as are reasonably necessary for its execution. The below mentioned provisions of the Code and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons). Regulation 2016 (CIR Regulations) set out the powers of the COC in this regard: Section 31 of the Code (Approval of Resolution Plan): "(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order a....
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....onclusion, since the Code provides the COC with the power to approve a resolution for the Corporate Debtor, the manner in which such resolution shall be executed including but not limited to the decision as to the methodology of distribution or the amount a money to be paid to individual stakeholders would also be a decision which the COC would be permitted to take, especially in the absence of any express provision in the Code prohibiting such a decision by the COC. As long as such decisions are not contrary to the provisions of the Code." 86. The final resolution plan as approved on 23.10.2018 was as follows - in the place of INR 35,000 crores to be paid on the effective date as an upfront amount, INR 39,500 crores and INR 2500 crores, aggregating INR 42,000 crores was to be paid. The resolution applicant agreed that the Committee of Creditors will decide the manner in which the financial package being offered by the resolution applicant to financial creditors will be distributed to secured financial creditors. The payment of INR 17.4 crore was to be made to unsecured financial creditors with a claim amount of more than INR 10 lakhs, and INR 30.55 lakhs to such creditors with ....
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....hich the FRP has put forward before the COC for its approval. In my view, therefore, the Approved Resolution Plan would be fully justified in classifying between secured and unsecured financial creditor, and also according to the value of their securities and apportioning the amounts payable to them in the best manner which is considered reasonable. I might add here that irrespective of what the RP considers as reasonable, it is always open to the COC to adjudge the commercial wisdom of the resolution plan while approving it. As pointed out by the Supreme Court in K. Sashidhar vs Indian Overseas Bank & Ors. (Civil Appeal No. 10673 of 2018) such commercial decision of the COC is not subject to appeal under the Code. In the premises, I am of the opinion that SCB was differently placed than other financial creditors in view of the fact it did not have any charge or security on the project assets but had advanced a large amount of loan amounting to Rs. 3000 crores on the basis of the pledge over the shares of an offshore company and a corporate guarantee extended by the Corporate Debtor. The resolution plan as finally approved by COC was fully justified in treating SCB as diff....
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....orporate guarantee from the Corporate Debtor." 88. The aforesaid opinion was shared with all Committee of Creditors members including Standard Chartered Bank. Importantly, the minutes record: "At this point, the representative from Canara Bank stated that he requires clarity on the following questions before he can consider the revised apportionment to SCB: (a) Whether any NOCs were taken from the lenders before taking corporate guarantee, as it is a financial covenant in the sanctions of the lenders? (b) When SCB had funded Essar Steel Offshore Ltd. (ESOL), whether SCB had not taken security of Trinity coal mines as collateral, and the cash flows and credentials from the assets as security? (c) What is the end-use of the loan and was that end-use ensured? At what stage is the project? Were the funds really invested in the project? xxx xxx xxx The representatives of SCB raised issue of valuation and mentioned that value of above INR 24 crores of ESOL shares has not been estimated appropriately and is erroneous. The value has been estimated based on desktop valuation and the valuer has not considered valuation of underlying assets. A valuation report of....
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....lso 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 Sibal's 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 al....
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....ce to be distributed pro- rata amongst all financial creditors irrespective of their security. The sum of INR 42,000 crores offered by ArcelorMittal would therefore, according to him, be a sum of INR 15,838 crores paid over to the secured financial creditors according to the value of their security and the balance amount of INR 26,162 crores would then have to be distributed amongst all financial creditors on a pro-rata basis. 91. 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 Sibal's 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 d....
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....isdom 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. 95. So far as Civil Appeal No. 6409 of 2019 is concerned, we have perused paragraphs 70 to 76 of the impugned NCLAT judgment to the effect that the cheques issued by the corporate debtor due to its payment obligation towards Bhandar Power Limited were not issued with a view to secure any payment obligation of the principal borrower i.e. EPGL, is a finding of fact which dislodges the claim of this appellant to be regarded as a financial creditor. We find no infirmity in the aforesaid finding. This appeal is consequently dismissed. 96. So far as Civil Appeal Diary No. 36838 is concerned, we have perused the relevant documents and paragraphs 63 and 64 of the impugned NCLAT judgment and find that the NCLAT has erred inasmuch as it has added the claim of this Appellant to the tune of INR 861.19 crore despite the fact that the claim had already been admitted by the resolution professional thereby resulting in a double counting of the debt of ....
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.... of requisite stamp duty as per the Indian Stamp Act despite repeated reminders having been sent by the resolution professional. The application filed by the Appellants before the NCLT came to be dismissed by an order dated 14.02.2019 on the ground of non-prosecution. The subsequent restoration application filed by the appellants then came to be rejected by the NCLT through judgment dated 08.03.2019 on two grounds: one, that the applications could not be entertained at such a belated stage; and two, that notwithstanding the aforementioned reason, the claim had no merit in view of the failure to produce duly stamped agreements. The impugned NCLAT judgment, at paragraphs 93 and 94, upheld the finding of the NCLT and the resolution professional. In view of these concurrent findings, the claim of the Appellants therefore requires no interference. Further, the submission of the Appellants that they have now paid the requisite stamp duty, after the impugned NCLAT judgment, would not assist the case of the Appellants at this belated stage. These appeals are therefore dismissed. 100. So far as Writ Petition (Civil) No. 1064 of 2019 is concerned, we have perused the relevant documents an....
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.... professional was correct in only admitting the claim at a notional value of INR 1 due to the pendency of disputes with regard to these claims. 103. The appeals filed by the Committee of Creditors of Essar Steel Limited and other Civil Appeals are allowed. The impugned NCLAT judgment is set aside, except insofar as Civil Appeal No. 6409 of 2019, Civil Appeal No. 7266 of 2019, Civil Appeal No. 7260 of 2019 are concerned, which are dismissed. Insofar as Civil Appeal No. 6266 of 2019 and Civil Appeal No. 6269 of 2019 is concerned, the Appeals are partly allowed in terms of this judgment. The Writ Petitions are disposed of in terms of the judgment. It is made clear that the CIRP of the corporate debtor in this case will take place in accordance with the resolution plan of ArcelorMittal dated 23.10.2018, as amended and accepted by the Committee of Creditors on 27.03.2019, as it has provided for amounts to be paid to different classes of creditors by following Section 30(2) and Regulation 38 of the Code. Notes: 1 Under Regulation 2(hb), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 - "fair v....