August 12, 2019

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The Aftermath Of Essar Steel Judgment

- Kunal Tandon, Founder [ Tandon & Co. ]


A look at the purport of the judgment passed by the NCLAT…

The recent Essar Steel Judgment has created quite a stir with questions like – “Has the NCLAT gone wrong in the Judgment, in order to bring the Insolvency Code to work better or in an attempt to be fair? Has the NCLAT over-interpreted the provisions of the IBC?” - doing the rounds.

Hopefully, the Supreme Court will soon set all these inhibitions to rest. In the meanwhile, this is an attempt to take a close look and dissect the purport of the Judgment passed by the NCLAT.

The core findings of the Judgment are:

Firstly, that the-
(i) financial creditors are a single class, and

(ii) financial creditors and operational creditors must be treated at par and cannot be discriminated.

While analyzing the first ratio, the judgment should have dwelled upon the reason as to why a financial creditor agrees to grant financial assistance with or without security. The reasons are simple – firstly, an unsecured creditor charges a much higher interest than a secured creditor (gets benefited more while the company is hale and hearty as compared to secured creditors). Considering this, the question arises as to why secured creditors, shouldn’t be given a better share of the revival plan?

In so far as the Second ratio is concerned, it is submitted that there is an inherent distinction between financial and operational creditors; and unsecured and secured financial creditors. Being distinct and unequal, they cannot be treated equally in the light of Article 14 of the Constitution of India. The obvious result of the findings of the judgment would therefore mean, that the financial creditors may not approve any revival plan of the company and could simply allow the company to be liquidated, and then stand outside the process of liquidation under IBC and liquidate the mortgaged assets (in cases where the secured financial creditors are beyond 34% of the CoC). Thus, this would result in complete failure of the intent and purpose of IBC.

Secondly, the CoC (Committee of Creditors) does not have the power to seek redistribution of the amounts mentioned in the resolution plan and pay itself a higher amount than other creditors who are not a part of the CoC. Section 30(2) read with Section 30(4) clearly enunciates that after considering the feasibility and viability of the plan, the CoC may approve the resolution plan, which is then presented to the Adjudicating Authority through the Resolution Professional (“RP”).

It must also be noted that “The RP cannot present a plan, unless approved by the CoC by not less than 66% of the CoC voting in favor of the plan”. Hence, does it mean that the CoC cannot seek re-distribution to its favor?

If it can, the question arises as to whether the CoC will act fairly if it seeks re-distribution to its favor? Is the intent of having a CoC comprised of only the financial creditors and operational creditors of more than 10% of the total debt only to provide benefit to itself?

Of course, the machinery of IBC provides for a RP to keep the Corporate Debtor as a going concern and creates a CoC to oversee the entire process. CoC surely acts as a watchdog over the Resolution Professional and at the same time, is collectively given the role of reviving the Corporate Debtor. Thus, the words ‘…feasibility and viability of the plan…’ used in Section 30(4) IBC does not mean that the CoC must check the feasibility and viability of the plan for itself and not the entire class of operational creditors. The ratio thus, held by the Judgment on the above context is in accordance with the objectives of the IBC.

The legislature has created different classes of creditors of the Corporate Debtor which cannot be equated, and therefore, the role of the CoC is to keep all classes of creditors in mind. Hence, it is safe to say that the CoC must consider the plan proposing revival of the corporate debtor and not just maximizing recoveries, for the benefit of all.

This brings me to the next aspect touching upon the role of the CoC as discussed in the Judgment – The role emanates from the preamble and is described as to look at all aspects of the plan, not for itself, but for the revival, restructuring and reorganization of the Corporate Debtor. It must accept the most viable plan.


The Preamble

“An Act to consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

The preamble read with Section 30, 31, and 33 of the IBC answers all questions. If the CoC’s role is not to revive the company as a whole and solely for its recovery, then how does it maximize the value of assets of the corporate debtor, how does it promote entrepreneurship, how does it ensure availability of credit, how does it balance the interests of all the stakeholders, how does a CoC ensure that the objects of the IBC are carried forward in its true sense.

I would like to close the debate on the role of CoC by stating that though equalizing the financial creditors with the operations creditors, or equalizing within the larger class of financial creditors may not be feasible and borne out of the IBC, however, the role of CoC, surely, is not restricted to giving to itself the largest share of the pie, but to play a larger than life role by reviving/rehabilitating the corporate debtor, if it is possible to rehabilitate. Whether a corporate debtor can be rehabilitated or not is a question left for the CoC to decide.

Thirdly, the judgment says that the guarantors of the corporate debtor are absolved of all liabilities, once the Resolution Plan stands approved in respect of the Corporate Debtor. This leads to some pertinent questions–

• Upon approval of the Resolution Plan, does the complete debt for the Corporate Debtor get extinguished?

• Does the liability of the personal guarantors get completely absolved?

• Can a guarantee agreement be considered as a guarantee independent of the liability of the borrower?

• Does Section 128 of the Indian Contract Act allow parties to execute a guarantee independent of the principal transaction?

• Is it possible to carve out an exclusion from the plan for the personal guarantee and properties mortgaged as are not owned by the Corporate Debtor?

All these unanswered questions, require some serious thought.

Fourthly, the last question that needs to be answered in the context of the ESSAR Judgment passed by the NCLAT is – “What is the role, responsibility and power of the adjudicating authority (and hence, the Appellate Authority) to re-distribute the amount amongst creditors presented under the Resolution Plan?”.

Though not raised yet, this question is surely to be raised before the Supreme Court of India. Section 31 of the IBC uses the words, ‘If the adjudicating authority is satisfied that the resolution plan as approved by the committee of creditors…’. The word ‘satisfied’ means that something has happened in the manner contemplated in contrast to the word ‘adjudicate’, which means to make a judgment, decide a dispute.

Further, satisfaction is circumscribed by the words ‘as approved by the committee of creditors’. We may not forget the Judgments of the Supreme Court in the K. Sashidhar v Indian Overseas Bank & Ors, AIR 2019 SC 1329; and Swiss Ribbons (2019) 4 SCC 17, whereby sanctity to the evaluation of the plan, either acceptance or rejection, by the CoC has been considered paramount.

I would like to leave this article with the thought, that this is probably the time to define the jurisdiction of the Adjudicating Authority.

(Note: This article is based on the recent judgment passed by the NCLAT)
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.


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