The Supreme Court on 4-10-2018 allowed yet another opportunity to mining major ArcelorMittal and Russia’s VTB Capital-backed NuMetal to bid for Essar Steel provided they clear their Non-Performing Asset (NPA) dues in two weeks. The bench comprising Justice R. F. Nariman and Justice Indu Malhotra, has also taken this opportunity to interpret and clarify Section 29A of the Insolvency and Bankruptcy Code, 2016. However, the Essar saga is far from over.
The insolvency of Essar Steel has garnered sufficient attention, from both the law makers and stake holders alike. Dotted with multiple litigation, the battle for Essar’s assets can be held accountable for the coming of age of the nascent law with the Supreme Court going into some depth as to the scope of Section 29A of the Insolvency and Bankruptcy Code.
Brief Facts of the Case:
Essar was one of the first 12 cases which the RBI referred to insolvency under the Banking Regulation (Amendment) Ordinance of 2017. After an unsuccessful attempt at challenging the RBI Circular, the corporate insolvency resolution process (CIRP) for Essar commenced on 2-8-2017.
During the course of the CIRP, Section 29A, as it stands today, was brought in. Since the very beginning, many applied as Resolution Applicants. Of the many applicants, ArcelorMittal India Private Limited (AMIPL) and Numetal submitted their resolution plans for the debt stricken Essar Steel. Initially, both applicants were held to be ineligible by the Resolution Professional. As per the resolution professional, both Resolution Applicants were persons connected to NPAs and hence, under Section 29A, were disqualified. More specifically, the origins of Numetal, which is essentially an SPV created for the sole purposes of bidding for Essar Steel, could be traced back to the promoters of Essar. Numetal’s complex corporate structure effectively gave control of Numetal to Mr. Rewant Ruia, son of the promoter of Essar Steel – Mr. Ravi Ruia.
In the case of AMIPL, the Resolution Professional noted that Mr. Laxmi Mittal, who is the promoter of AMIPL indirectly held control over two companies namely Uttam Galva Steels and KSS Petron. Both Uttam Galva steels and KSS Petron had been declared NPAs.
Interestingly, Numetal apprehending that the Resolution Professional would recommend that it be declared ineligible, had already moved an application before the NCLT seeking a declaration as an eligible resolution applicant.
Predictably, the decision of the Resolution Professional to disqualify Numetal and AMIPL was challenged before the NCLT. The NCLT based on facts pertaining to the two applicants, upheld the view of the Resolution Professional. However, the NCLT also recognized that the apparent deficiency impacting their eligibility as resolution applicants was curable. To that end, the Tribunal granted both Numetal and AMIPL time to cure ineligibility. The decision of the NCLT was appealed before the Appellate Tribunal. While the matter was pending before the NCLAT, Numetal was quick to act, and submitted a revised Resolution Plan and completely dropped Mr. Ruia from the Numetal structure.
The NCLAT, taking note of the revised Resolution plan submitted by Numetal held that Numetal was now eligible. However, the troubles from AMIPL did not end there. The NCLAT also noted the association of AMIPL with the Uttam Galva Steels and KSS Petrons and ordered that AMIPL pay their dues, even for companies from which it had divested shareholdings. Resultantly, AMIPL stood eliminated from the bidding war for Essar Steel.
It is at this stage, AMIPL appealed before the Supreme Court, leading to the present judgment.
Supreme Court on eligibility of Numetal and AMIPL
The questions before the Supreme Court revolved around the eligibility / ineligibility of AMIPL and Numetal, and the application of Section 29A of the Code.
To begin with, the Court observed that the eligibility of a Resolution Applicant has to be tested on the date when the Resolution Plan is submitted and not on the date when the Resolution Plan is accepted.
The Court noted the evolution of Section 29A, from the stage of its introduction by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 to its final structure, as it presently stands. Giving a purposive interpretation to Section 29A, the Court held that it is not only permissible but also imperative for the competent authority to lift the corporate veil especially when it comes to a corporate vehicle that is set up for the purpose of submission of a resolution plan.
These observations, proved fatal for Numetal. Since Numetal was incorporated for the sole purpose of bidding for Essar, with no financial or experience credentials of its own, their eligibility required the Court to base their assessment entirely on the credentials of each of its constituent shareholders. As part of this assessment, about Rs. 500 crores that has been deposited towards submission of earnest money was yet again traceable back to Mr. Rewant Ruia even after submission of the second resolution plan.
The Court further continued and assessed the eligibility of AMIPL. With respect to the case of AMIPL, the Court looked into the manner in which the shareholdings in Uttam Galva and KSS Petron were divested. Shares in Uttam Galva were sold far below market value, at ‘distress’ prices to overcome the 29A hurdle. In the case of KSS Petron, the sale of shares along with the resignation of directors was done with the sole objective of avoiding 29A ineligibility.
Resultantly, both Numetal and AMIPL, were held ineligible as Resolution Applicants.
Supreme Court on Section 29A:
The Court, taking this opportunity to clarify the law on Section 29A, delved into the meaning of the terms ‘management’, ‘control’ and ‘promoter’ while referring to the Companies Act to define the scope of Section 29A. The Court found that the expression ‘management’, would refer to the de jure management of a corporate debtor and that the de jure management of a corporate debtor, would ordinarily vest in a Board of Directors, and would include, “manager”, “managing director” and “officer” as defined under the Companies Act, 2013. The Court also explored the scope of ‘control’, holding that as long as a person or persons acting in concert, directly or indirectly, are in a position to positively influence, in any manner, management or policy decisions, they could be said to be “in control”. Thus, the expression ‘control’, in Section 29A(c) of the Code, denotes only positive control, which means that the mere power to block special resolutions (negative control) of a company cannot amount to control under the Code.
As for ‘promoter’, the Court found that it was a mix of de jure and de facto depending on which sub-section of Section 29A was being referred to. The Court however particularly held in relation to dealing with NPAs, it refers to a de jure position, namely, where a person is expressly named in a prospectus or identified by the company in an annual return as a promoter. The Court then crystallised its understanding of Section 29A(c) ineligibility which are described best in the following words,
“Any person who wishes to submit a resolution plan, if he or it does so acting jointly, or in concert with other persons, which person or other persons happen to either manage or control or be promoters of a corporate debtor, who is classified as a non-performing asset and whose debts have not been paid off for a period of at least one year before commencement of the corporate insolvency resolution process, becomes ineligible to submit a resolution plan.”
Right of appeal for resolution applicants:
The Court categorically held that a resolution applicant has no right to appeal a rejection of its resolution plan by the Resolution Professional. To that end, the Court noted that a resolution applicant, as such, has no vested right that his resolution plan be considered. Therefore, no challenge can be preferred to the NCLT at that stage. The appropriate stage for a Resolution Applicant to raise a concern is after the Committee of Creditors has reviewed the Resolution Plans submitted to it by the Resolution Professional and passed a resolution thereafter. The Court further held that even a writ petition under Article 226 filed before a High Court is also liable to be turned down on the ground that no right, much less a fundamental right, is affected at this stage. The intention behind this is to prevent the CIRP from getting hampered due to multiple litigations.
Powers exercisable by Resolution Professional:
The Court noted that the Resolution Professional is to confirm that a resolution plan does not contravene any of the provisions of law for the time-being in force. The Court held that this would also include Section 29A of the Code. To this end, the resolution professional is to present his prima facie opinion before the Committee of Creditors conveying that the resolution plan contravenes a law. The Court also held that Section 30(2)(e), however, does not empower the Resolution Professional to adjudicate whether the resolution plan does or does not contravene the provisions of law.
The Court further opined that while it is not a mandate under the law that the Resolution Professional must give reasons while submitting a resolution plan to the Committee of Creditors, it would be in the fitness of things if a 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.
The Court, excluded the time taken in litigation from the timeline of 270 days and while exercising its powers under Article 142 of the Constitution, granted another 2 weeks for both resolution applicants to pay off their debts. While ArcelorMittal may do so, the interesting development will be if the debts of Essar Steel are cleared. If so, all that has happened in the last one year would be futile. And while the next two weeks will tell us what happens with Numetal and Mittal, a third resolution applicant, Vedanta, may prefer that the two weeks turn out to be too short a period for AMIPL and Numetal to cure their defects. If that happens, the field will be once again wide open in favour of Vedanta and new applicants!
[The author is an Associate in Commercial Dispute Resolution practice, Lakshmikumaran & Sridharan, New Delhi]