De-coding section 29 of the Insolvency and Bankruptcy Code, 2016
[Dushyant Kishan Kaul is a fourth-year student at Jindal Global Law School.]
In the recently decided case of ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ors., the Supreme Court has interpreted section 29 of the Insolvency and Bankruptcy Code, 2016 (Code) to determine the conditions of eligibility of resolution applicants under the Code. The section helps serve an important object of the Code, which is to disallow those who do not meet the specified criteria from submitting a resolution plan. This is crucial to ensure that such unfit applicants do not take charge of the concerned corporate debtor and its assets. A bench comprising of Justice R.F. Nariman and Justice Indu Malhotra allowed ArcelorMittal India Private Limited (AMIPL) to clear off its dues within two weeks and resubmit the resolution plan.
The case revolved around the revival of Essar Oil Private Limited, the corporate debtor. The resolution professional (RP) found both the resolution applicants to be ineligible under section 29A on account of their connection with non-performing assets (NPA). Hence, their proposals were rejected by the committee of creditors (CoC). On a call for fresh applications, Vedanta Resources Limited (Vedanta) joined in as a fresh applicant.
Both the applications, including the respective shareholding patterns, were scrutinized by the court from the date of submission and not of acceptance, as clarified in the judgment. In the case of AMIPL, one of its promoters was seen to be indirectly controlling two companies that were NPAs, namely, Uttam Galva Steel and KSS Petron. Numetal, on the other hand, was an SPV specially created to bid for the plan. However, it could be traced back to the promoters of Essar. On this basis, they were declared ineligible. The latter entity had even gone to the National Company Law Tribunal (NCLT) to declare itself as an eligible party, anticipating this very opinion of the RP. Nonetheless, the NCLT agreed with the RP. On appeal to the National Company Law Appellate Tribunal (NCLAT), the adjudicating authority held Numetal to be eligible since at the time of submission of the second bid, the shareholding of Rewant Ruia (son of Ravi Ruia, the erstwhile owner of Essar Steel) was close to zero. However, it did not clear AMIPL. Hence, the instant appeal was filed before the Supreme Court of India.
The court went into the background of section 29A in the Insolvency and Bankruptcy (Amendment) Ordinance, 2017 and the Insolvency and Bankruptcy (Amendment) Act, 2017 and then came to its consequent second Amendment Act of 2018. The court referred to the statements of Shri Arun Jaitley, the Union Minister of Finance and Corporate Affairs, who opined that companies who have NPAs and are not operationalizing their accounts cannot be allowed to bid to resolve such debts. The spirit of the Code was also sought to be brought forth by reiterating the Statement of Objects and Reasons of the bill. It had stated that though the aim is to ensure that a lack of prohibition may be misused to the detriment of the debtor, the CoC must nonetheless provide a reasonable time period to repay arrears and become eligible again. The court went specifically into section 29(A)(c), which specifically bars promoters (and persons ‘jointly acting in concert’ with them) of companies with NPAs from bidding for resolution plans until the corporate debtor is repaid.
Employing the tool of purposive interpretation, the court opined that it is pivotal to find out who was responsible for the affairs and governance of the company, when piercing the corporate veil. It interpreted ‘management’ to mean de jure management by a company ‘officer’, ‘manager’ or the ‘Managing Director’. Similarly, ‘control’, in cases of ‘jointly acting in concert’, would include indirect cooperation to control a target company and would attract regulation 2(1)(q) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Any shared common objective established upon the facts of the case would warrant that conclusion unless a situation to the contrary could be established However, this would only entail positive control under section 29(A)(c). Accordingly, any relation with a person related to submitting a resolution plan would be included. Since this was a case pertaining to NPAs, the standard would be a de jure one to impose liability upon either those named in the company prospectus or those identified as promoters.
The reason this judgment is of immense relevance is because it sets the tone for submission of resolution plans under the Code. To be eligible to submit resolution plans, the applicants must show that they intended to pay off the debts of the concerned NPAs at a time before submitting the plan that was reasonably proximate. In addition, the Apex Court delineated the ambit of the RP. The court rejected the averment of patent illegality in the decision of the RP to reject the resolution plans. The RP was clarified to be an entity who has to form an informed legal opinion based on a common man’s view of what is just and proper and arrive at a prudent decision accordingly. The RP must see that the plan does not infringe the law and, if so, is to present his prima facie opinion, preferably with reasons, to the CoC. If the plan does not attain the 66% approval of the CoC, no claim before the NCLT lies. Encouragingly, the court was reluctant to intervene and substitute its wisdom for that of a statutorily appointed entity in the absence of patent illegality or arbitrariness. Thus, an applicant had no vested right of appeal as there is no danger to a serious legal right, let alone a fundamental right. The same would only arise once the CoC had reviewed the decision, and even in those situations, a writ petition to High Courts under Article 226 of the Constitution could be turned down if no serious right is affected at that stage. Only a pure rejection by the CoC on the grounds of ineligibility would warrant an appeal before the NCLAT and the Supreme Court. Secondly, the time period in litigation is excluded from the moratorium period once the resolution plan is upheld by the NCLAT (either by allowing or dismissing the appeal before it). However, this is inapplicable where the NCLT-approved plan is upheld by the same tribunal or any of the appellate authorities but is then challenged by an entity. The litigation period after that date of approval is excluded from the insolvency timeline process. Thus, a balanced and reasonable construction was adopted by the court with regard to the timeline.
The bench was of the opinion that irrespective of the resolution plan, the presence of Rewant Ruia could not be discounted throughout the timeline of events that unfolded till the second resolution plan was submitted. Hence, Numetal would become eligible only if it paid off the debts of Essar Steel as well as other debtors related to the Ruia group. ArcelorMittal was directed to clear its overdue amounts after the exposure of the two companies that were NPAs. The court ultimately gave both the parties a last chance to submit their resolution plans, provided they cleared off their NPAs within two weeks. Excluding the time spent in litigation from this extended 270-day period, the proponents were given a two-week window to clear their respective debts owed. It is worth noting that if Essar Steel manages to clear its debt, this entire court process would eventually matter very little.