Essar Steel Takeaway from the Judgment – Issues and reply

In the matter of Standard Chartered Bank Appellant Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors. Respondents Date of the Judgment : 4th July, 2019.

Takeaway From the Judgment

(i) Whether the distribution as shown in the ‘Resolution Plan is discriminatory or not?

Reply – (Para 149 and 157 of the Judgment) – We have noticed a huge discrimination made by the ‘Committee of Creditors’ in distribution of proposed amount to the ‘Operational Creditors’ qua ‘Financial Creditors’. Majority of the ‘Financial Creditors’ have been allowed 99.19% of their claim amount, whereas ‘NIL’ i.e. 0% in favour of the ‘Operational Creditors’. Such distribution is not only discriminatory but also arbitrary. They have also discriminated amongst themselves on the ground that one ‘Financial Creditor’ is ‘Secured Creditor’ (‘Standard Chartered Bank’) having no charge on project assets of the ‘Corporate Debtor’ and other has no charge on the project of the ‘Corporate Debtor’, though it is accepted that the ‘Standard Chartered Bank’ is also a ‘Secured Financial Creditor’. The selection and approval of the best ‘Resolution Plan’ requires two abilities, namely, the ability to restructure the liabilities and the ability to take commercial decisions. They have also the ability to determine if a ‘Resolution Plan’ will achieve the objectives of the ‘I&B Code’. In view of their abilities, the ‘Committee of Creditors’ comprises ‘Financial Creditors’. The ‘Committee of Creditors’, therefore, has a duty to take commercial decisions which further the objectives of the ‘I&B Code’ and do not allow the interests of ‘Financial Creditors’ overshadow the interests of the ‘Corporate Debtor’ or the other Creditors, such as ‘Operational Creditors’.

(ii) Whether the ‘Financial Creditors’ can be classified on the ground of a ‘Secured Financial Creditor’ having charge on project assets of the ‘Corporate Debtor’ and ‘Secured Financial Creditor’ having no charge on the project asset of the ‘Corporate Debtor’ or on the ground that the ‘Financial Creditor’ is an ‘Unsecured Financial Creditor’?

Reply – (Para 153, 164, 172 of the Judgment) – The inter se distribution amongst the ‘Financial Creditors’ cannot be held to be purely commercial in nature. The same cannot, by any stretch of imagination, come within the purview of the ‘Committee of Creditors’ who is supposed to look into viability and feasibility under the ‘I&B Code’ and other prescription as made by the Insolvency and Bankruptcy Board of India. The commercial aspect is one and manner of distribution of the upfront amount is different than that of the commercial aspect. If both Section 5(7) and Section 5(8) are read together, it is evident that there is no distinction made between one or other ‘Financial Creditor’. All persons to whom a financial debt is owed by the ‘Corporate Debtor’, which debt is disbursed against the consideration for time value of money, whether they come within one or other clause of Section 5(8), all of such person form one class i.e. ‘Financial Creditor’ they cannot be sub-classified as ‘Secured’ or ‘Unsecured Financial Creditor’ for the purpose of preparation of the ‘Resolution Plan’ by the ‘Resolution Applicant’. We hold that the ‘Financial Creditors’ cannot be discriminated on the ground of ‘Secured’ or ‘Unsecured Financial Creditors’ for the purpose of distribution of proposed amount amongst stakeholders in the ‘Resolution Plan’ by the ‘Resolution Applicant’. (Para 172)

(iii) Whether the ‘Operational Creditors’ can be validly classified on the ground of (a) employees of the ‘Corporate Debtor’ or (b) those who have ‘supplied goods’ and ‘rendered services’ to the ‘Corporate Debtor’ and (c) the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the Local Authorities?

Reply – (Para 174, 175 and 176 of the Judgment) – ‘Operational Creditor’ is defined in sub- Section (20) of Section 5 which is to be read with ‘Operational Debt’ as defined in subsection (21) of Section 5. From the definition of ‘Operational Debt’, we find the following classification has been made by the Parliament:

(i) Those who have ‘supplied goods’ and ‘rendered services’ and thereby entitled for payment.

(ii) The employees who have ‘rendered services’ for which they are entitled for payment. (iii) The Central Government, the State Government or the Local Authority who has not rendered any services but derive the advantage of operation of the ‘Corporate Debtor’ pursuant to existing law (statutory dues). From the aforesaid definition, the ‘Operational Creditors’ can be classified in three different classes for determining the manner in which the amount is to be distributed to them. However, they are to be given the same treatment, if similarly situated.

(iv) Whether the power of distribution of amount to the lenders, i.e. ‘Financial Creditors’, ‘Operational Creditors’ and other stakeholders is to be made by the ‘Resolution Applicant’ or the ‘Committee of Creditors’?

Reply – Para 138, 139, 140, 141, 143, 153 of the Judgment – The ‘Committee of Creditors’ have not been empowered to decide the manner in which the distribution is to be made between one or other creditors. The ‘Committee of Creditors’ has no role to play in the matter of distribution of amount amongst the Creditors including the ‘Financial Creditors’ or the Operational Creditors’. The ‘Committee of Creditors’ is only required to notice the viability, feasibility of the ‘Resolution Plan’, apart from other requirements as specified by the Board and ineligibility of the ‘Resolution Applicant’ in terms of Section 29A. The ‘Committee of Creditors’ do not enjoy any authority to delegate to itself the role of the ‘Resolution Applicant’ including the manner of distribution of amount amongst the stakeholders, which is exclusively within the domain of the ‘Resolution Applicant’ and thereafter before the Adjudicating Authority, if found discriminatory. The ‘Committee of Creditors’ cannot delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiating with the ‘Resolution Applicant(s)’. The final ‘Resolution Plan’ delegating the power of ‘Arcelor Mittal India Pvt. Ltd.’ to ‘Committee of Creditors’ being against the provision of sub-section (2) of Section 30 and Regulation 38 (1A). The inter se distribution amongst the ‘Financial Creditors’ cannot be held to be purely commercial in nature. The same cannot, by any stretch of imagination, come within the purview of the ‘Committee of Creditors’ who is supposed to look into viability and feasibility under the ‘I&B Code’ and other prescription as made by the Insolvency and Bankruptcy Board of India. The ‘I&B Code’ and Regulations framed thereunder empowers the ‘Resolution Applicant’ to decide the manner in which the distribution is to be made and not to the ‘Committee of Creditors’.

(v) The question arises for consideration in this appeal is whether the ‘Committee of Creditors’ can delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiation with the ‘Resolution Applicant’ for revision of plan?

Reply –Para 138, 139 of the Judgment -The ‘Committee of Creditors’ have not been empowered to decide the manner in which the distribution is to be made between one or other creditors. (Para 138) We hold that the ‘Committee of Creditors’ has no role to play in the matter of distribution of amount amongst the Creditors including the ‘Financial Creditors’ or the ‘Operational Creditors’. The ‘Committee of Creditors’ is only required to notice the viability, feasibility of the ‘Resolution Plan’, apart from other requirements as specified by the Board and ineligibility of the ‘Resolution Applicant’ in terms of Section 29A. (Para 139)

(vi) Whether the ‘Sub Committee’ or the ‘Committee of Creditors’ are empowered to distribute the amount amongst the ‘Financial Creditors’ and the ‘Operational Creditors’ and other Creditors.

Reply – Para 140 and 141 of the Judgment – The ‘Committee of Creditors’ do not enjoy any authority to delegate to itself the role of the ‘Resolution Applicant’ including the manner of distribution of amount amongst the stakeholders, which is exclusively within the domain of the ‘Resolution Applicant’ and thereafter before the Adjudicating Authority, if found discriminatory.

The ‘Committee of Creditors’ cannot delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiating with the ‘Resolution Applicant(s)’.

Prepared by:
Satish Bijarniya
Senior manager-Law
SAM & Recovery Department
Central Bank of India, Mumbai

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