India – NCLAT Essar Steel Judgment.

The Hon’ble National Company Law Appellate Tribunal ('NCLAT') in its order in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited & Ors. has dealt with various important legal issues in relation to the corporate insolvency resolution process ('CIRP'). Some of the key aspects of this judgment have been summarised below: 

 

 

While dealing with the argument on guarantor’s right to subrogation and to be indemnified under the Indian Contract Act, 1872 with reference to a personal guarantee, the NCLAT observed that a guarantee becomes ineffective in view of the payment of underlying debt in resolution. Typically, lenders preserve their rights with respect to a third-party security and the resolution applicant protects itself from claims through extinguishment of rights of the guarantor. In the Sharon Bio matter, NCLAT had upheld the extinguishment of subrogation right under a resolution plan. This will likely impact the enforcement of third-party security in all cases where a resolution plan has been approved.

 

 

On the issue of whether approval of plan extinguishes all claims against the corporate debtor, NCLAT held that where National Company Law Tribunal ('NCLT') or NCLAT has not been able to decide on a claim on merits, it is open for the party to raise the issue before the appropriate forum in terms of Section 60(6) of the Insolvency and Bankruptcy Code, 2016 ('IBC'), which extends the period of limitation after the period of moratorium is over. If NCLT or NCLAT has adjudicated on a matter, the claim is satisfied and cannot be re-agitated after the approval of the resolution plan. When a matter was pending adjudication before the Arbitral Tribunal and the High Court, and no claim was filed before the resolution professional during the CIRP, the party was allowed to pursue the matter before the Arbitral Tribunal or the High Court in terms of Section 60(6) of the IBC.

 

 

(a) A ‘Core Committee’ or ‘Sub-Committee’ of lenders is unknown and against the provisions of the IBC. IBC or insolvency regulations do not empower the CoC to delegate the duties of the CoC to such committees. Specifically, the CoC cannot delegate its powers to negotiate a resolution plan to any sub-committee. Each lender must consider the resolution plan and its viability and feasibility, which are commercial decisions of the CoC and not amenable to judicial review. 

 

(b) The key commercial decisions to be taken by the COC are: (i) to identify if the corporate debtor is viable or not and to provide for rescue of a failing viable corporate debtor and close one that is failing and unviable; (ii) to visualise the appropriate resolution plan by the resolution applicant who can reorganise the corporate debtor in terms of its complexity and scale, address the cause of failure, parameters to assess the viability and feasibility; (iii) to ensure that the corporate debtor continues as a going concern; (iv) to consider only those plans which are – (a) provided by capable resolution applicants, (b) in compliance with applicable law, (c) feasible and viable, (d) have potential to address the default, and (e) provide for effective implementation of the plan. Of such plans, the CoC must approve the one which maximises the value of the assets of the corporate debtor and balances all the stakeholders, irrespective of realisation of creditors.

 

(c) Distribution of amounts under a resolution plan is not a commercial decision. CoC may approve restructuring of realisation for financial creditors to maximise value, or sharing of realisation under the plan among various classes of creditors or exemptions from taxes and duties, for implementation of the plan. However, such decisions of CoC are not commercial and open to scrutiny by the tribunals / courts.

 

 

NCLAT held that given that the members of the CoC are interested parties, they are not supposed to decide the manner in which the distribution is to take place. Financial creditors being claimants at par with other claimants have a conflict of interest and cannot distribute the amount amongst themselves and provide minimal or nil amount to other financial creditors or operational creditors. Resolution applicant in its plan must provide the amount it proposes and its distribution among stakeholders. Resolution professional is required to notice if the plan provides for payment to operational creditors in the prescribed manner (Section 30(2)(b)). If a resolution plan does not show the distribution among creditors, it cannot be placed before the CoC.

 

5. Classification of Creditors

 

(a) Financial Creditors as one class

 

The resolution plan submitted by the resolution applicant in this case categorised the distribution of amounts amongst the financial creditors under four sub-heads i.e. (i) Secured Financial Creditors, having charge on project assets; (ii) Secured Financial Creditors, having no charge on project assets; (iii) Unsecured Financial Creditors, with admitted claims less than Rs. 1 million; and (iv) Unsecured Financial Creditors, with admitted claims equal to or above Rs. 1 million. NCLAT observed that all financial creditors form one class and they cannot be sub-classified into secured or unsecured for the purpose of resolution plan. There can be no distinction between secured or unsecured financial creditors for the purposes of distribution of monies under a resolution plan. 

 

(b) Classification of Operational Creditors

 

The resolution plan submitted by the resolution applicant in this case categorised the distribution of amounts amongst the operational creditors under three sub-heads i.e. (i) workmen and employees; (ii) operational creditors (other than workmen and employees) – where admitted claim amount was less than Rs. 10 million; and (iii) operational creditors (other than workmen and employees) – where admitted claim amount was equal to or more than Rs. 10 million ('Operational Creditors II'). The Resolution Plan proposed payment of 100% of admitted claims to the first two categories of the operational creditors and NIL amount to Operational Creditors II. NCLAT observed that, based on the definition of ‘operational debt’ in IBC, operational creditors can be classified in three classes for determining the manner of distribution (i) employees and workmen, (ii) suppliers of goods and services; and (iii) statutory dues. It was held that Operational Creditors II cannot ask for same treatment as first two categories i.e. payment of 100% of admitted claims.

 

 

(a) NCLAT held that the resolution under a CIRP involves distribution of debt out of the amount proposed to be paid by the resolution applicant. It is not distribution out of the assets of the corporate debtor pursuant to liquidation and Section 53 (Distribution of Assets) of the IBC cannot be used to determine the manner of distribution of monies among stakeholders under a resolution plan.

 

(b) The share of financial and operational creditors in amounts proposed under a resolution plan was held to be the percentage that the resolution amount bears to the total amount of admitted claim of all stakeholders. So percentage of amount payable to all financial creditors was held to be a fixed percent (60.7%) of the respective admitted claim amount.

 

(c) On the pay out to operational creditors proposed under the resolution plan, NCLAT observed that the allocation to Operational Creditors II was discriminatory (originally NIL and then revised by CoC to 20.5%). It was held that the amount proposed under a resolution plan should be shared in the same percentage between the financial creditors and operational creditors, with amounts payable to operational creditors subject to adjustment as per classification of operational creditors noted above. Hence the total amount available to operational creditors was held to be 60.7% of operational debt and Operational Creditors II were to be paid 60.268%, while the other operational creditors were allowed payment of 100% of admitted claims.

 

7. Profits during CIRP Period

 

Unless a resolution applicant pays full claimed amount to creditors, profit during CIRP period should be paid to financial and operational creditors on pro-rata basis not exceeding their admitted claim.