Supreme Court Judgment- THE ESSAR STEELS CASE
BACKGROUND OF THE ESSAR STEELS CASE-
This landmark Supreme Court judgment- The Essar Steels case is between ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ors. The facts of the Essar Steels case stem from the fact that since the introduction of Section 29A into the Insolvency and Bankruptcy Code, 2016 on the 23rd of November, 2017, resolution applicants were ineligible to submit their resolution plans.
After Section 29A was introduced, the Insolvency and Bankruptcy Code, 2016 was subsequently amended by the legislature on the 6th of June, 2018. Section 29A of the Act has been a subject of litigation and intense scrutiny, thus the Supreme Court judgment on this case is the first judgement on the ambit of Section 29A.
Before we delve into the fact properly, it is expedient to explain the content of Section 29A. Simply put, Section 29A prescribes several criteria which disqualify resolution applicants, persons acting in concert or jointly with resolution applicants or persons connected with them. The term “connected persons” as defined under section 29A cover a lot of persons such as those who promote, control or manage the resolution applicants.
Inter alia, section 29A rendered resolution applicants ineligible if they have an account or they have an account of a corporate debtor which falls under their control and the account has been classified as a non-performing asset in line with relevant guidelines issued by the Reserve Bank of India and a period of period of one year has lapsed from the date the account was classified as a non-performing asset.
FACTS OF THE CASE-
The Adjudicating Authority (the Ahmedabad Bench of the NCLT) on the 2nd of August, 2017 passed an order admitting the petition filed by financial creditors (the Standard Chartered Bank and the State Bank of India) under Section 7 of the Insolvency and Bankruptcy Code, 2016.
According to the petition submitted before the NCLT, a corporate debtor, Essar Steel India Limited owed the financial creditors an amount totaling about Rs.45,000,00,00,000. On the 4th of September, 2017, Shri Satish Kumar Gupta was appointed in acting capacity as the Resolution Professional.
On the 6th of October, 2017, Gupta placed an advertisement of several National dailies seeking for expression of interest (EOI) from prospective resolution applicants who wished to revival Essar Steel India Limited.
The deadline for the submission of EOI was on the 23rd of October, 2017. In line with the advertisement, on the 11th of October, 2017, ArcelorMittal India Private Limited submitted its EOI. Consequently, on the 20th of October, 2017, another entity, Numetal Limited submitted her EOI.
Then on the 24th of December, 2017, Gupta (Resolution Professional) published another advert tagged “request for proposal” which sought resolution plans to be submitted. The Committee of Creditors pleaded with NCLT to extend the duration of the resolution of insolvency to at least 180 days.
NCLT thus heeded to their plea and extended the duration up to the 29th of April 2018. The Resolution Professional acting on the extended date issued an addendum with respect to the “request for proposal” it earlier published, thus, extending the deadline to submit resolution plans to the 12th of February, 2018.
In view of the above, the duo of ArcelorMittal India Private Limited and Numetal Limited submitted their resolution plans on the 12th of February, 2018.
Suspecting that the Resolution Professional would declare it ineligible, Numetal Limited approached the NCLT and filed LA. No. 98 of 2018, asking the NCLT to declare it eligible as a resolution applicant. However, the Resolution Profession on the 23rd of March, 2018 leveraged Section 29A to declare the duo of ArcelorMittal India Private Limited and Numetal Limited ineligible as resolution applicants.
On the 4th of October, 2018, the Supreme Court delivered a judgement interpreting Section 29A of the Insolvency and Bankruptcy Code, 2016.
SUPREME COURT OF INDIA FINDINGS-
Meaning of ‘Management’ and ‘Control’: The Supreme Court held that the term “management” which appeared in Section 29A refers to de jure management which is vested on managing directors, managers, and board of directors as defined under the Companies Act, 2013.
The Supreme Court also held that the term ‘control’ refers to de facto proactive or de jure or positive control. For instance, the power to appoint a company’s direction is considered as ‘control’ since it is a positive power. However, the power to veto certain decisions of the board of directors of a company would not.
Meaning of ‘jointly’ and ‘in concert’: The Supreme Court held that whether a person is acting in concert or jointly with a resolution applicant is to be considered from the fact of each case. The court also added that any understanding will be included even if it is to remotely control a company.
Stage of ineligibility: The Supreme Court held that a resolution applicant’s eligibility under Section 29A of the code is to be tested at the time the resolution applicant submitted her resolution plan.
Roles of the committee of creditors and the resolution professional: The Supreme Court held that in line with the provisions of the Insolvency and Bankruptcy Code, 2016, the Resolution Professional’s duty is to ensure that the resolution plan submitted by the resolution applicant is in compliance with Section 29A.
The court also asserted that the committee of creditors’ duty is to disapprove a resolution plan on the grounds it violates the provisions of section 29A. The decision of the committee of creditors is not final. It can be appealed at the NCLT and NCLAT.
Exclusion of the period of litigation and the prescribed timelines: The Insolvency and Bankruptcy Code, 2016, prescribes a timeline of 180 days with an extension of 90 days for the Insolvency Resolution process to be concluded.
The Supreme Court held that the timeline is mandatory when answering the question of whether a suit can be filed in various stages of the Insolvency resolution process.
The Supreme Court also upheld the position of NCLAT that the litigation time should not be included in such period as actus curiae neminem gravabit.
The apex court also directed relevant authorities to follow the timeline stipulated under Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016