29 May, 2018
Factual Background
The principle bench of National Company Law Tribunal, New Delhi (“Tribunal”) vide order dated May 15, 2018 has approved the resolution plan of Tata Steel Limited (“TSL”).
The State Bank of India had filed an insolvency suit against Bhushan Steel Limited (“BSL”) under Section 7 of the Insolvency and Bankruptcy Code, 2016(“Code”) as a consequence of which Corporate Insolvency Resolution process (“CIRP”) had commenced on July 26, 2017.
Pursuant to invitations to resolution applicants the Resolution Professional (“RP”) had received three resolution plans from (i) employees of BSL, (ii) JSW Living Private Limited (“JSW”), and (iii) TSL.
Resolution plans of JSW and TSL were found to be compliant with the requirements of the Code and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”).
Since, TSL was the highest scoring Resolution Applicant (“RA”), the Committee of Creditors (“CoC”) approved the resolution plan submitted by TSL.
This resolution plan was placed before the Tribunal to seek its approval and acceptance in accordance with the terms of the Code and CIRP Regulations. However certain issues where raised before the Tribunal while considering the same.
Issues dealt by the Tribunal
1. Whether TSL is ineligible to be a RA u/s 29A of the Code by virtue of the following:
A. Mr. C Sivasankaran being a 'connected person’ of TSL and undischarged insolvent;
B. Conviction of Tata Steel UK, a wholly owned subsidiary of TSL for non-compliance of the Health and Safety at Work Act, 1974 (“HSW Act”).
2. Whether the rights of the employees of the BSL has been protected by the RA vide its Resolution Plan.
3. Whether the Resolution Plan is tenable or not as the consent of Bhushan Energy Limited (BEL), an operational creditor, has not been sought prior to termination of power purchase agreement.
4. Whether Larsen & Turbo (L&T) can be considered as a secured creditor u/s 30(2) and 31 of the Code.
5. Whether Tribunal can approve/direct the grant of certain statutory reliefs and concessions, including waving of taxes and duties to RA in relation to resolution plan.
Order of the Tribunal
1. (A) Whether TSL is ineligible to be a RA u/s 29A of the Code by virtue of Mr. C Sivasankaran being a connected person of TSL and undischarged insolvent
The Tribunal held that Mr. C Sivasankaran cannot be said to be a Connected Person for the following reasons:
a) Mr. C Sivasankaran had through his company, Sterling Infotech Private Limited (SIPL), pledged his shares with Standard Chartered Bank (SCB) in lieu of a loan of worth Rs. 6billion.
b) TSL had only agreed to buy the shares from SCB in the event of default by SIPL at a pre-determined price to prevent the shares from being purchased by an undesirable third party and that it was in a nature of pre-emptory right and not of guarantee.
c) The undertaking furnished by TSL to SCB to that effect had expired in March 2009 and had not been acted upon by SCB.
d) There was no imputation that SIPL and TSL acted in concert.
(B) Whether TSL is ineligible to be a RA u/s 29A of the Code by virtue of Conviction of Tata Steel UK, a wholly owned subsidiary of TSL, for for non-compliance of the HSW Act.
It was held by the Tribunal that TSL is eligible and not barred u/s 29A of the Code for the following reasons:
a) Tata Steel UK was convicted for non-compliance of certain provisions of the HWA Act, which prescribes a punishment of imprisonment not exceeding ‘two years’ or ‘fine’ or ‘both’. Tata Steel UK was imposed with a punishment of fine. Whereas bar on the eligibility to be a RA as provided u/s 29A(d) of the Code requires that the RA must have been convicted with a punishment of imprisonment of two years or more. The section does not consider imposition of fine as criterion to render a RA as ineligible. Since, only fine was imposed on Tata Steel UK, it doesn’t attract the ineligibility u/s 29A(d), and therefore, TSL is eligible to be a RA. Hence the two punishments are not analogous to each other and cannot be used interchangeably.
b) Section 29A(d) is not applicable to juristic persons, i.e. on companies and corporate entities, and is applicable only on natural person. Reliance was placed upon Standard Chartered v. Directorate of Enforcement and Ors.1 wherein it was held that a corporate entity cannot be kept in judicial custody or imprisoned. Accordingly, corporate entities cannot be imprisoned.
2. Whether the rights of the employees of BSL has been protected by the RA vide its Resolution Plan.
The Tribunal held that the Resolution Plan does protects the interests of the employees owing to the reasons mentioned hereafter:
a) It provides for continuing the employment of the employees of BSL and for the payment of back wages of the employees of the BSL.
b) Once a Resolution Plan has been approved by the Tribunal u/s 31(1) of the Code, it becomes binding on all the stakeholders which includes the employees as well. Post approval by Tribunal, such a Resolution Plan cannot be objected to by the stakeholders.
c) Objection to the resolution plan was raised by Mr. Rahul Sengupta, Former Executive Director, on behalf of all the employees of BSL. However, it was held by the Tribunal that the objection fails to sustain as he did not possess a letter of authority to raise objections on behalf of all the employees and he failed to provide for a list of all the employees on roll of BSL.
3. Whether the Resolution Plan is tenable or not as the consent of BEL, an operational creditor, has not been sought prior to termination of power purchase agreement.
The Tribunal held that the Resolution Plan is tenable owing to the following reasons:
a) Regulation 39(6) of the CIRP Regulations makes it clear that a Resolution Plan which would otherwise require consent of members of the Corporate Debtor under the terms of the constitutional document, shareholders’ agreement, joint venture agreement or other document of a similar nature shall take effect notwithstanding such consent has not been obtained.
b) TSL had envisaged termination of two Power Purchase Agreements (“PPA”) entered into between BEL and the BSL/corporate debtor in the resolution plan submitted. The same was objected to by BEL contending that such a termination of PPA would necessarily require consent of BEL and corporate debtor. The Tribunal held that the objection of BEL fails to sustain as regulation 39(6) of the CIRP Regulations takes care for the provisions of termination of the PPA which were entered into between the Corporate Debtor and BEL.
4. Whether L&T can be considered as a secured creditor u/s 30(2) and 31 of the Code.
The Tribunal held that L&T cannot be treated as a secured creditor owing to the following reasons:
a) The claim made on behalf of L&T was unsustainable, since there was no document placed on record showing any creation of security warranting a view that L&T should be regarded as a secured creditor and not as the operational creditor.
b) Section 55(4)(b) of the Transfer of Property, 1882 is only applicable on immovable properties. It provides that the seller is entitled for the amount of the purchase-money, or any part thereof remaining unpaid, and for interest on such amount or part where the ownership of the property has passed to the buyer before payment of the whole of the purchase-money, to a charge upon the property in the hands of the buyer.
c) However, plants and machineries do not qualify as an immovable property as u/s 55(4)(b) of the Transfer of Property, 1882. Therefore, there can be no creation of charge on such plants and machineries by way of their supplies, erection and installation.
d) Charge can only be said to be created upon execution of a document as under Section 132 of the Companies Act, 2013.Hence, L&T remains to be an operational creditor.
5. Whether Tribunal can approve/direct the grant of certain statutory reliefs and concessions, including waving of taxes and duties to RA in relation to resolution plan
The Tribunal inter alia held that, it would not be possible for it to issue any directions with respect to the certain statutory reliefs and concessions, including waving of taxes and duties that has been sought by TSL under its resolution plan. The RP had already clarified that none of the reliefs and concessions sought by TSL were condition precedent to the resolution plan.
The Tribunal also provided an observation that, if such reliefs and concessions are treated as ‘condition precedent’ to the resolution plan, the same would render the resolution plan ‘incomplete’.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
