Introduction

In what could be one of the most prominent judgments under the Insolvency and Bankruptcy Code, 2016 (‘the Code’), several interesting points have been adjudged by the National Company Law Appellate Tribunal (NCLAT) in its order in the case of Standard Chartered Bank vs. Satish Kumar Gupta, RP of Essar Steel Ltd. & Ors. with regards to multiple appeals, dated 4th July 2019, which can potentially set precedents for ongoing and upcoming insolvency resolution processes under the Code.

The Resolution Plan as was submitted by Arcelor Mittal, for Essar Steel Limited (Corporate Debtor) was originally admitted by NCLT, Ahmedabad on 8th March 2019. The same was challenged on multiple grounds before NCLAT.

Through this article, I have endeavoured to throw some light on several of these highlighted issues and provide the readers a gist of the relevance that the order holds.

Adjudged issues of importancen

In its 116 pager order, NCLAT has addressed the contentions of several parties and has provided clarity on the following aspects:

1. All Financial Creditors to be treated at par – On the question of whether the distribution of amount proposed in the Resolution Plan is discriminatory, it was held that that the distribution of amount cannot differ on the basis of varied classification of Financial Creditors under sub-heads such as ‘secured’ and ‘unsecured’. No such discrimination shall be acceptable and the amount of distribution shall be solely based on the proportion of debt due. Post this order, this is the main controversial issue as to who decides on allocation of Resolution amount, Financial creditors or Resolution Applicant and the distinction between Secured/unsecured/financial and operational creditors. (various stake holders).

2. Eligibility of the Resolution Applicant – Eligibility of ArcelorMittal was challenged by the Promoter of Corporate Debtor, MR. Prashant Ruia. Arcelor Mittal India Pvt. Ltd. is a ‘Successful Resolution Applicant’ and the question of its eligibility in terms of section 29A of the Code has been sufficiently resolved in light of the order passed by the Hon’ble Supreme Court and could not be reopened before the NCLAT. Bringing an already addressed and well settled issue before the NCLAT is a sheer waste of time of the judiciary.

3. Resolution Plan vis-à-vis authority of CoC – Interestingly, NCLAT held that the role of deciding the manner of distribution of amount to the creditors is that of the Resolution Applicant alone, or the Adjudication Authority, if found discriminatory, and shall not rest with the Committee of Creditors, ( being interested party ) which is only responsible to check the feasibility and viability of the Resolution Plan. This issue is proposed to be reconsidered in the hearing before Supreme Court on 22nd July 2019, in response to multiple appeals which have been filed against the order of NCLAT by several stakeholders.

4. Validity of Sub-Committee – In the given case, the formation of a Sub-Committee by CoC was challenged by Standard Chartered Bank. The CoC delegated its powers and formed a Sub-Committee comprising of some of the Financial Creditors for the purpose of negotiation with the Resolution Applicant for revision of plan. It was clarified and held that, formation of such a committee has not been provided for under any provision of the Code. In the absence of any specific provision, the CoC is not empowered to delegate any of its duties to such committee.

5. Right of subrogation and indemnification – Mr. Prashant Ruia, Promoter of Essar Steel raised the contention in respect of his right of subrogation and indemnification in terms of section 140 and section 145, respectively of the Indian Contract Act, 1872. He is a Personal Guarantor for debts taken by the Corporate Debtor for clearance of the dues in case of any default. It was held by NCLAT that, once the dues of Financial Creditors are settled in accordance with the approved Resolution Plan, the lenders would not require to approach the guarantor as recourse. In absence of any recourse from guarantor, the rights of guarantor shall not become exercisable.

6. Rights of RP vis-à-vis claims – Various claimants challenged the role of Resolution Professional in admission of claims. NCLAT held that the Resolution Professional has no jurisdiction to decide and/ or reject the claim.( to Adjudicate ) He is only authorised to collate and verify the claims received based on the proof and additional documents submitted by the claimant, and submit the data to CoC.

7. Distribution of profit on pro-rata basis – In case of generation of any profits during the period of the resolution process by the Corporate Debtor, NCLAT held that the same shall be distributed amongst all the Financial Creditors and Operational Creditors on ‘pro-rata basis’ of their claims, subject to the fact that the respective amounts do not exceed the admitted amount of claims.

Inference

The judgement appears to be contradictory at multiple levels and the view to treat all the Financial and Operational creditors alike is being criticised for lack of commercial wisdom.

In light of the issues dealt with in the aforesaid case, it is pertinent for the stakeholders involved in the process of resolution, particularly, the Resolution Professional, CoC and the Resolution Applicant, to understand the implications of such issues on their rights and duties. Though clarity has been provided, various stakeholders have appealed against the order of NCLAT before the Hon’ble Supreme Court and several matters may be reconsidered in the hearing scheduled on 22nd July 2019. Further, the Cabinet has approved various amendments to the Code in its meeting dated 17th July 20191.