Essar Steel Case: Supreme Decodes Section 29A of the IBC


In its ruling in ArcelorMittal India Private Limited v. Satish Kumar Gupta, the Supreme Court has laid down the much-needed jurisprudence involving section 29A of the Insolvency and Bankruptcy Code, 2016. Section 29A was inserted in the Code with effect from 23 November 2017 and has been the subject matter of at least two rounds of amendments thereafter. The provision makes ineligible several categories of persons from bidding for companies and their businesses that are the subject matter of insolvency under the Code. Not only has it been a controversial provision but it has also been riddled with considerable complexity that the Court was called upon to unpack.

The facts are rather too detailed, but the crux of the matter is that there was a bidding war for the insolvent company Essar Steel India Limited between ArcerolMittal India Private Limited and Numetal Limited. At the resolution stage, the resolution professional disqualified both ArcelorMittal and Numetal. ArcelorMittal was found to have been the promoter or exercised control over two companies, Uttam Galva Steels Limited and KSS Petron Limited, which owed dues to banks and financial institutions that remain unpaid. In the case of Numetal, it was found that the company was established in the lead up to the resolution of Essar Steel and that it was essentially controlled by Rewant Ruia, who is the son of Ravi Ruia (one of the promoters of Essar Steel). The National Company Law Tribunal (NCLT) affirmed the resolution professional’s disqualification of both bidders. On appeal, however, the National Company Law Appellate Tribunal (NCLAT) agreed with ArcelorMittal’s disqualification, but came to a different conclusion regarding Numetal because Rewant Ruia had by then divested his Numetal interests in favour of VTB, a Russian entity. It was against this decision that ArcelorMittal approached the Supreme Court.

In its elaborate ruling that addresses various aspects of section 29A and extends to broader areas of the law such as lifting the corporate veil and defining corporate control, the Supreme Court found that both bidders were ensnared within the confines of the disqualification in the provision. Exercising its powers under Article 142 of the Constitution of India, the Supreme Court ordered that both bidders need to clear the dues owed in respect of other companies forming part of their group if they wish to submit fresh resolution plans, which they must do  within two weeks.

More important for our purposes are the principles of law laid down by the Supreme Court, which this post will focus on.

Corporate Veil

In a somewhat curious manner, the Supreme Court invoked the principle of lifting the corporate veil in interpreting section 29A. The provision begins with the wording that a “person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person” is subject to the various disqualifications set out later in the provision. The Court begins by clarifying that a purposive interpretation (based on the Heydon rule) must inform the outcome of application of the statutory provision. It observes:

29. The opening lines of Section 29A of the Amendment Act refer to a de factoas opposed to a de jureposition of the persons mentioned therein. This is a typical instance of a “see through provision”, so that one is able to arrive at persons who are actually in “control”, whether jointly, or in concert, with other persons. A wooden, literal, interpretation would obviously not permit a tearing of the corporate veil when it comes to the “person” whose eligibility is to be gone into. However, a purposeful and contextual interpretation, such as is the felt necessity of interpretation of such a provision as Section 29A, alone governs. For example, it is well settled that a shareholder is a separate legal entity from the company in which he holds shares. This may be true generally speaking, but when it comes to a corporate vehicle that is set up for the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Salomon v. A Salomon and Co. Ltd.[1897] AC 22 will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan. as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Salomon v. A Salomon and Co. Ltd. [1897] AC 22 will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan.

The Court then goes on to discuss the jurisprudence regarding lifting of the corporate veil, and concludes on the point:

34. It is thus clear that, where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the law, the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole.

While it would be hard to argue against the conclusion of the Supreme Court, the reasoning is, with respect, questionable. It is understandable that the Court supplied a purposive and rather expansive interpretation of section 29A, but it could have arrived at the same conclusion without relying on the principles of lifting the corporate veil. Section 29A, by its very text, refers not just to the resolution applicant but to also include “any other person acting jointly or in concert with” the resolution applicant. This is even clearer when one reads the definition of “persons acting in concert”, for which one has to rely on regulation 2(1)(q) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. To that extent, this decision ought not be taken as influencing the Indian jurisprudence on lifting the corporate veil despite the space the topic has occupied in the Supreme Court’s judgment.

Management and Control

One of the specific disqualifications is contained in section 29A(c). It provides that a person is ineligible to bid for an insolvent company if it has an account, or is in management or control, of a corporate debtor whose account has been classified as a non-performing asset (NPA) for a period of at least one year from the date of such classification until the date of commencement of the corporate insolvency resolution process. Here, it is necessary to establish that the bidder is either in “management” or “control” of such a corporate debtor whose account has been classified an NPA. The Supreme Court was called upon the interpret the scope of both these expressions.

As regards “management”, the judgment cursorily states that the expression “would refer to the de juremanagement of a corporate debtor. The de jure management of a corporate debtor would ordinarily vest in a Board of Directors”. It is on the element of “control” that the Court engaged in a detailed analysis after examining section 2(27) of the Companies Act, 2013. It noted:

47. The expression “control” is therefore defined in two parts. The first part refers to de jure control, which includes the right to appoint a majority of the directors of a company. The second part refers to de facto control. So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be “in control”. A management decision is a decision to be taken as to how the corporate body is to be run in its day to day affairs. A policy decision would be a decision that would be beyond running day to day affairs, i.e., long term decisions. So long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist.

While the distinction between de jureand de factocontrol is understandable, the dichotomy between management decision relating to the day-to-day affairs of the company and policy decision being long-term in nature remains unsubstantiated and somewhat artificial.

The more helpful analysis of the Court relates to whether “control” refers to positive control or whether it also includes the power to block special resolutions of a company. Readers will recall this debate that first emanated in the Securities and Appellate Tribunal (SAT) ruling in Subhkam Ventures (I) Private Limited v. Securities and Exchange Board of India where SAT held that the expression “control” for the purpose of SEBI’s takeover regulations covers only a proactive power and not a reactive power. The weight of this ruling has been in doubt, an aspect that has since not been clarified by SEBI. In the present decision, the Supreme Court, referring to Subhkam Ventures, observed that the SAT’s “observations are apposite and apply to the expression ‘control’ in Section 29A(c)”. It also applied a similar analysis to section 29A and noted:

50. Section 29A(c) speaks of a corporate debtor “under the management or control of such person”. The expression “under” would seem to suggest positive or proactive control, as opposed to mere negative or reactive control. This becomes even clearer when sub-clause (g) of Section 29A is read, wherein the expression used is “in the management or control of a corporate debtor”. Under sub-clause (g), only a person who is in proactive or positive control of a corporate debtor can take the proactive decisions mentioned in sub-clause (g), such as, entering into preferential, undervalued, extortionate credit, or fraudulent transactions. It is thus clear that in the expression “management or control”, the two words take colour from each other, in which case the principle of noscitur a sociis must also be held to apply. Thus viewed, what is referred to in sub-clauses (c) and (g) is de jure or de facto proactive or positive control, and not mere negative control which may flow from an expansive reading of the definition of the word “control” contained in Section 2(27) of the Companies Act, 2013, which is inclusive and not exhaustive in nature.

In arriving at its conclusion, the Court examined the specific usage of the expressions “management” and “control” in sections 29A(c) and (g), which were found to be narrower (and applicable only to positive control). However, one aspect in the Court’s reasoning is confounding, as it states that the usage in these specific sections of the Code are narrowed than section 2(27) of the Companies Act, 2013, which is inclusive and may cover negative control as well. The reasoning is contradictory because on the one hand the Court affirms SAT’s ruling in Subhkam Ventures limiting the definition of “control” under SEBI’s takeover regulations to positive control, but on the other hand notes (in the passage extracted above) that the definition of the expression in the Companies Act is wider to include negative control. The difficulty arises because of the identical nature of the definition of “control” under the SEBI takeover regulations and the Companies Act. Given these outstanding issues, it remains to be seen whether the Supreme Court’s ruling in any way at all resolves the “control” debate from a SEBI perspective.

Other Aspects of Section 29A

Payment of Overdue Amounts

The ineligibility under section 29A(c) can be removed only if the bidder submitting a resolution plan clears any overdue amounts with interests on its NPAs beforesubmitting such a plan. The Supreme Court refused to accept argument of counsel that the payments could be made before a plan is accepted and implemented, so that any hardships and difficulties may be avoided. It found that a plain, literal interpretation of the provision “is also in line with the object sought to be achieved, namely, that other corporate debtors who are declared as NPAs, whose debts may never be cleared in full, are required to be cleared as a condition precedent to submission of a resolution plan under the Code.”

Rearrangement of Affairs

The Court was concerned with a situation where parties may rearrange their affairs in the run up to submitting a resolution plan such that the revised position complies with section 29A, while the previous one does not. The Court frowned upon such a rearrangement of affairs and found it to be contrary to the objective of the provision. It noted:

56. Since Section 29A(c) is a see-through provision, great care must be taken to ensure that persons who are in charge of the corporate debtor for whom such resolution plan is made, do not come back in some other form to regain control of the company without first paying off its debts. …

57. … If it is shown, on facts, that, at a reasonably proximate point of time before the submission of the resolution plan, the affairs of the persons referred to in Section 29A are so arranged, as to avoid paying off the debts of the non-performing asset concerned, such persons must be held to be ineligible to submit a resolution plan, or otherwise both the purpose of the first proviso to sub-section (c) of Section 29A, as well as the larger objective sought to be achieved by the said sub-clause in public interest, will be defeated.

On these aspects, it is clear that the Court preferred a strict interpretation of section 29A in line with its object.

Timelines under the Code

Compliance with strict timelines is the essence of the Code. This has been the subject-matter of judicial decision-making, including by the Supreme Court (hereand here). In the present case, the situation arose because the parties had to seek extension of the stipulated timelines in the Code due to the bidding war and the consequent appeals preferred by both parties. Here, the Court examined the detailed timelines prescribed under provisions of the Code and relied upon the its own jurisprudence laid down in Innoventive Industries Limited v. ICICI Bank and the preparatory work of the Bankruptcy Law Reforms Committee. It found that the consequence of failure to adhere to the timelines was severe, namely that the corporate debtor would be liquidated.

The Court the elaborated on various steps in the insolvency process. One relates to the role of the resolution professional in examining the plans. Here, the role of the professional “is only to “examine” and “confirm” that each resolution plan conforms to what is provided in Section 30(2)”. The resolution professional is not required to take a decision but to merely place the proposals before the Committee of Creditors after providing a prima facieopinion whether the plan does not contravene the provisions of the Code, including section 29A. However, if the Committee of Creditors finds that a plan contravenes section 29A, then the NCLT (and thereafter NCLAT) can determine the question quasi-judicially.

On the question of whether the adjudicatory and appellate process will be excluded from the timelines, the Court observed:

83. … A reasonable and balanced construction of this statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in litigation ought to be excluded. This is not to say that the NCLT and NCLAT will be tardy in decision making. This is only to say that in the event of the NCLT, or the NCLAT, or this Court taking time to decide an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be excluded, as otherwise a good resolution plan may have to be shelved, resulting in corporate death, and the consequent displacement of employees and workers.


Applying the above principles to the facts of the case, the Supreme Court found that both plans submitted by ArcelorMittal and Numetal were hit by section 29A(c) and therefore both bidders were disqualified from submitting resolution plans. Although this would have normally been the end-point of this round of litigation, the Court nevertheless exercised its powers under Article 142 of the Constitution in order to do complete justice to give one more opportunity to the bidders “to pay off the NPAs of their related corporate debtors within a period of two weeks from the date of receipt of this judgment, in accordance with the proviso to Section 29A(c).” It also noted that if no plan was found worthy of acceptance by the majority of the Committee of Creditors, the company would be put into liquidation.

In all, the present judgment is important as it interprets section 29A for the first time, and provides guidance towards its implementation. As we have seen, the import of the judgment extends beyond the Code to matters such as corporate veil and the concept of control, but it also leaves some open questions. Section 29A is perhaps the most hotly debated provisions in the Code, and the present judgment is likely to pave the way for swifter corporate resolutions.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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