Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others

Citation – (2020) 8 SCC 531

Bench – R.F. Nariman, J.

Date – November 15, 2019

Facts of the Case

Reserve Bank of India identified 12 accounts for resolution under IBC. Essar Steel was one of them with outstanding dues of Rs. 55,000 crores. Hence, this matter was brought before NCLAT by Standard Charter Bank and SBI and resolution professional was appointed.

Resolution plan for Essar Steels was submitted by ArcelorMittal and Numetal. But the resolution professional declared them ineligible as per section 29A of IBC. ArcelorMittal and Numetal challenges disqualification in NCLT. During this period fresh bids were invited and Vedanta ltd also submitted its resolution plan. However, the resolution professional was instructed by NCLT to re-examine the first bid since the provisions of IBC were not clearly followed. But the ArcelorMittal and Numetal challenged their disqualification in first bid by appealing in NCLAT. NCLAT held that the Numetal Second Bid is qualified but still gave two days’ time to ArcelorMittal to clear dues to become qualified. But ArcelorMittal appealed to Supreme Court. The Supreme Court held that both are ineligible, but the court by using its powers under Article 142 gave 2 weeks’ time to pay dues to become eligible. CoC was also given 6 weeks’ time to reconsider resolution plan. ArcelorMittal filed the resolution plan again, but Numetal didn’t.

ArcelorMittal’s plan was approved CoC and by NCLT. But NCLT said that “…we are of the view that the dues of the operational creditors must get at least similar treatment as compared to the dues of the financial creditors on the principle of equity and fair play as well as the Wednesbury Principle of Unreasonableness and the Doctrine of Proportionality, so as to avoid disparity in making payments to the operational creditors having debt value of Rs.1 crore and above (a token of Re.1) and the allegation of discriminatory practice could be ruled out…”. ArcelorMittal plan was challenged and appeals were filed in NCLAT. The final judgement of NCLAT admitted ArcelorMittal plan but also stated that “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”.

Challenging the order of NCLAT, several appeals and writ petitions were filed in Supreme Court which were clubbed together by the court. Along with several issues, the issue of equal treatment of financial and operational creditors was also raised. But during the pendency of this case, the IBC amendment act was instituted. The amendment included various changes which also included amendment to section 30, mandatory completion of corporate insolvency resolution process in 330 days, distribution of funds to operational creditor etc. This amendment act was also challenged before the Supreme Court. The Supreme Court clarified all issues in its judgement dated 15th November, 2019.

Issues

The main question in the case was whether both Resolution Applicants should be barred from submitting resolution plans because they violated Section 29A of the Code.

Laws

1. Insolvency and Bankruptcy Code, 2016
2. Section 4, Insolvency and Bankruptcy Code (Amendment) Act, 2019
3. Section 6, Insolvency and Bankruptcy Code (Amendment) Act, 2019
4. Section 29A, Insolvency and Bankruptcy Code (Amendment) Act, 2019
5. Section 30(2)(b), Insolvency and Bankruptcy Code (Amendment) Act, 2019
6. Section 53,Insolvency and Bankruptcy Code (Amendment) Act, 2019 Judgement

The Supreme Court in its judgement held that:

The Supreme Court ruled that negotiating and approving a resolution plan, which may include discriminatory payments to different classes of creditors, is the business wisdom of the majority (66 percent) of the Committee of Creditors under the Insolvency and Bankruptcy Code (IBC).

The Supreme Court overturned the required 330-day timeframe for resolving insolvency and bankruptcy proceedings. When the resolution plan was about to be finalised, the bench provided for flexibility by accepting exceptions. The Supreme Court has granted the adjudicating authority the right to determine whether it requires additional time to decide on a specific resolution method.

Tribunals do not have any “residual equity jurisdiction” to interfere in the merits of a Committee of Creditors judgement. This means that the tribunals cannot interfere with the Committee of Creditors’ commercial judgments.

The Supreme Court ruled that the equality principle cannot be used in the context of treating unequals alike since it would defeat the IBC’s goal of resolving burdened assets. Each creditor can receive equitable treatment based on the class to which it belongs: financial or operational, secured or unsecured.

In the disbursement of funds received under the insolvency process, the Court affirmed the precedence of financial creditors over operational creditors.