[Jubin Jay is a 5th year BBA.LLB student at National Law University Odisha]
The National Company Law Appellate Tribunal (NCLAT) on 4 July, 2019 passed an order in the Essar Steel insolvency case (Standard Chartered Bank v. Satish Kumar Gupta). Extending to more than a hundred pages, the appellate body heard appeals from various operational creditors, banks and the state after the committee of creditors and the National Company Law Tribunal (NCLT) approved the resolution plan.
In doing so, the NCLAT laid down various principles throughout the order which raises more questions than answers. It held that a ‘guarantee’ becomes ineffective because of the payment of debt by way of resolution. Accordingly, right of subrogation under the Contract Act, 1872 does not arise any further. With regard to the treatment of claims of creditors which are under dispute or arising post the completion of the corporate insolvency resolution process (CIRP), the NCLAT clarified that a party can raise the issue in an appropriate forum under section 60(6) of the Insolvency and Bankruptcy Code, 2016 if the matter was still pending for adjudication before any arbitral tribunal or court. However, if the NCLT or NCLAT has adjudicated upon such a claim, it stands satisfied and cannot be re-agitated.
Modifying the insolvency plan, the NCLAT made some major changes as to the manner of distribution among creditors. It held that ‘financial creditors’ being claimants at par with claimants like other ‘financial creditors’ and the ‘operational creditors’, having conflict of interest cannot distribute the amount amongst themselves. Distinguishing ‘distribution of assets from the proceeds of liquidation’ from ‘upfront payment by the proposed amount under resolution’ the NCLAT observed that the resolution applicant cannot take advantage of section 53 of the Code, which provides for the hierarchy between creditors for determining the manner of distribution. Thereby, on a revised calculation, it offered 60.7% to both financial as well as operational creditors. As a result, this reduced the share percentage of the financial creditors from 89.80% which had been previously approved in the resolution plan.
The NCLAT further went on to note that financial creditors cannot be sub-classified as ‘secured’ or ‘unsecured’ in accordance with section 5(7) of the Code and hence cannot be discriminated on this ground. Standard Chartered Bank, who was a financial creditor in Essar Steel was discriminated in the resolution plan for being an unsecured financial creditor.
One of the paramount disputable points of the whole order is as to the role of committee of creditors during the CIRP. The NCLAT first pointed out that the committee of creditors cannot constitute a ‘core’ or a ‘sub’ committee and delegate powers and duties, as there is no such provision under the Code which permits this. However, the most controversial observation made among them was that the committee of creditors did not have any power or role to play in the manner of distribution amongst creditors. Placing reliance on section 30 of the Code, the NCLAT noted that only a resolution professional has the power to determine the manner of distribution and the committee of creditors is only required to comment on the viability and feasibility of the resolution plan. Further, it was noted that the inter se distribution among the financial creditors cannot be held a ‘commercial activity’. So, the question remains, if deciding the manner of distribution among creditors under a resolution is not a ‘commercial activity’ then what is?
The Insolvency and Bankruptcy Code (Amendment) Bill, 2019
The answer to whether the manner of the distribution proposed in a resolution plan was a commercial activity and within the powers of the committee of Creditors is found to be in the affirmative according to the recent proposed Amendment bill, 2019 passed by the Cabinet on 17 July 2019 and by the Lok Sabha on 1 August 2019. The press release accompanying the Bill states that, “Inclusion of commercial consideration in the manner of distribution proposed in resolution plan, is within the powers of the Committee of Creditors.”
Further, in the proposed Bill the deadline for the completion of CIRP has been increased to 330 days from 270 days. These 330 days will be inclusive of all the litigation and judicial proceedings. Earlier, it was often argued that 270 days do not comprise the time spent in litigation. The NCLAT in its order has stated that a party may approach an appropriate forum under section 60(6) of the Code, even if the party had not filed such claim before the resolution professional during the CIRP. Given this, the 330 days limit seems unachievable because, with that liberty, it will be very difficult for the plethora of applications filed by the interested parties to be resolved within the proposed time frame.
The most significant amendment proposed is the application of section 53 of the Code to the resolution process which is not necessarily a ‘liquidation’. The Bill provides that:
financial creditors who have not voted in favour of the resolution plan and operational creditors shall receive at least the amount that would have been received by them if the amount to be distributed under the resolution plan had been distributed in accordance with section 53 of the Code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with section 53 of the Code, whichever is higher.
The NCLAT had rejected outright the application of section 53, which lays down the hierarchy of payment, citing the absence of liquidation in the present case.
The Bill further mentions that the resolution plan shall be binding on all stakeholders, including employees and government and provides clarity that the committee of creditors may take the decision to liquidate the corporate debtor any time after constitution of the committee of creditors and before preparation of information memorandum along with other general suggestions to expediate the whole process of insolvency.
The Road Ahead
The NCLAT’s order gives rise to oddities in many aspects. The appellate body has appeared to re-examine the superiority of financial creditors over operational creditors. While it may be in the interest of the operational creditors, with the NCLAT arguing that no operational creditor would make supplies without taking an advance payment and how this would hamper the economy, the duty of such tribunals must only be restricted to what the legislation has provided and not to indulge in interpretation and policy making. This ignores the Supreme Court’s ruling in the Swiss Ribbons case, which upheld the subordination of operational creditors under the Code. Further, by restricting the powers of the committee of creditors and holding that the manner of distribution was not a ‘commercial activity’, the NCLAT has ignored the recommendation of the Insolvency Law Committee which had mandated greater respect to the committee of creditors’ commercial wisdom.
The precedence set by the NCLAT can lead to a very dangerous situation, where the financial creditors will not only refrain from providing funds but also enforce security as soon as they perceive some distress. The reason behind this is that if the company goes into insolvency they will not be able to recover any substantial amount because of the equitable distribution among all kinds of creditors. This goes right against of the objective of the Code. It was a conscious policy choice that the banking sector, which comprises the major financial creditors will be prioritised.
The Supreme Court in K Shashidhar v. Indian Overseas Bank had pointed out that there should not be any interference by NCLT in the commercial decisions made by the creditors. However, with the proposed Amendments going largely against the judicial activism of the NCLAT in this case, one can heave a sigh of relief, as this is an affirmative step towards making the Code’s process more reliable and time bound. With the anguished committee of Creditors moving the Supreme Court, and the apex court already issuing status quo in the case, it will be very interesting to see how the Court will deal with the NCLAT’s order in light of the recent Amendments proposed, which starkly distinguishes the present order.
– Jubin Jay