In one of the first high profile
cases under the Insolvency and Bankruptcy Code, 2016 (the “Code”), the
Ahmedabad Bench of the National Company Law Tribunal (“NCLT”) yesterday issued
its order
admitting the insolvency petition brought by the State Bank of India (“SBI”)
and Standard Chartered Bank (“SCB”) as financial creditors of Essar Steel
Limited. The insolvency of Essar Steel had earlier attracted significant
judicial attention when the debtor company had challenged the insolvency
proceeding before the Gujarat High Court, albeit unsuccessfully (as discussed
earlier on this Blog).
cases under the Insolvency and Bankruptcy Code, 2016 (the “Code”), the
Ahmedabad Bench of the National Company Law Tribunal (“NCLT”) yesterday issued
its order
admitting the insolvency petition brought by the State Bank of India (“SBI”)
and Standard Chartered Bank (“SCB”) as financial creditors of Essar Steel
Limited. The insolvency of Essar Steel had earlier attracted significant
judicial attention when the debtor company had challenged the insolvency
proceeding before the Gujarat High Court, albeit unsuccessfully (as discussed
earlier on this Blog).
Although the NCLT’s order issued in
the case pertains only to the admission stage, it is an important one as it
clarifies some of the key principles involved at that stage. Moreover, the
order is a clear and categorical one. The purpose of this post is largely to
outline some of the key principles laid down by the NCLT.
the case pertains only to the admission stage, it is an important one as it
clarifies some of the key principles involved at that stage. Moreover, the
order is a clear and categorical one. The purpose of this post is largely to
outline some of the key principles laid down by the NCLT.
The factual details relevant for
this post are rather straightforward. The fact that Essar Steel owes monies to
both SBI and SCB, who are financial creditors, is not in doubt. At the same
time, Essar Steel had already commenced a debt restructuring exercise that was
pending when the financial creditors initiated insolvency proceedings against the
debtor company pursuant to the notification
dated 13 June 2017 issued by the Reserve Bank of India (“RBI”). Essar Steel
initially resisted the insolvency proceedings by petitioning the Gujarat High
Court, whose order disposing of the writ petition resulted in the matter being
resumed before the NCLT.
this post are rather straightforward. The fact that Essar Steel owes monies to
both SBI and SCB, who are financial creditors, is not in doubt. At the same
time, Essar Steel had already commenced a debt restructuring exercise that was
pending when the financial creditors initiated insolvency proceedings against the
debtor company pursuant to the notification
dated 13 June 2017 issued by the Reserve Bank of India (“RBI”). Essar Steel
initially resisted the insolvency proceedings by petitioning the Gujarat High
Court, whose order disposing of the writ petition resulted in the matter being
resumed before the NCLT.
Essar Steel raised several
objections to the admission of the proceedings by the NCLT, which ruled against
the company on most counts. The following are some of the key issues that
arose:
objections to the admission of the proceedings by the NCLT, which ruled against
the company on most counts. The following are some of the key issues that
arose:
Authority for Signing the Insolvency Application
The first objection raised by Essar
Steel was that the official of SBI who had signed the application filed before
the NCLT was not competent to do so. However, the NCLT found that the relevant
officers of SBI had the power to sign the application by virtue of Regulations
76 and 77 of the State Bank of India General Regulations, 1955, and that such
officers were of the requisite grade as prescribed under those regulations.
Steel was that the official of SBI who had signed the application filed before
the NCLT was not competent to do so. However, the NCLT found that the relevant
officers of SBI had the power to sign the application by virtue of Regulations
76 and 77 of the State Bank of India General Regulations, 1955, and that such
officers were of the requisite grade as prescribed under those regulations.
Discretion of the NCLT to Admit Insolvency Proceedings
The next question related to
whether the process for admission of insolvency proceedings were mechanical in
nature, or whether they conferred discretion on the NCLT and, if so, to what
extent. The relevant provision in question is section 7(5)(a) of the Code,
which states:
whether the process for admission of insolvency proceedings were mechanical in
nature, or whether they conferred discretion on the NCLT and, if so, to what
extent. The relevant provision in question is section 7(5)(a) of the Code,
which states:
(5) Where the
Adjudicating Authority is satisfied that—
Adjudicating Authority is satisfied that—
(a) a default has
occurred and the application under sub-section (2) is complete, and there is no
disciplinary proceedings pending against the proposed resolution professional,
it may, by order, admit such
application;
occurred and the application under sub-section (2) is complete, and there is no
disciplinary proceedings pending against the proposed resolution professional,
it may, by order, admit such
application;
[Emphasis added]
SBI and SCB argued that the word “may”
above ought to be read as “shall”. However, this argument was not accepted by
the NCLT, which ruled in favour of Essar Steel (on this point). The NCLT
observed:
above ought to be read as “shall”. However, this argument was not accepted by
the NCLT, which ruled in favour of Essar Steel (on this point). The NCLT
observed:
18. There is no dispute about the proposition
of law that in order to give appropriate meaning to the words “may” and “shall”
used by the Legislature, the intent of the particular enactment and the
attendant circumstances must be taken into consideration. The Hon’ble High
Court of Gujarat, vide Judgment in the matter of Essar Steel India Limited and
Another vs. Reserve Bank of India and Others, in Special Civil Application No.
12434 of 2017, held that admission of an Insolvency Application filed by
Financial Creditor is not a routine order and the Adjudicating Authority shall
apply its mind to all the factual details and then pass an order. This Adjudicating
Authority is of the view that the order of admission of an Application for
initiation of Corporate Insolvency Resolution Process is a judicial order which
should be according to the provisions of the Code, principles of natural
justice, and taking the consequences of the order into consideration.
Therefore, there this Adjudicating Authority shall exercise its discretion in either
admitting or rejecting the Insolvency Resolution Applications. It is needless
to say that discretionary power has to be exercised in a judicious manner
taking into consideration all the facts and circumstances of the case, the
provisions of the applicable laws and the object of the Insolvency and
Bankruptcy Code. This Adjudicating Authority shall look into the aspect of the occurrence
of the default, and, while doing so, shall take into consideration various
factual and legal pleas raised by both the parties in order to record its
satisfaction. …
of law that in order to give appropriate meaning to the words “may” and “shall”
used by the Legislature, the intent of the particular enactment and the
attendant circumstances must be taken into consideration. The Hon’ble High
Court of Gujarat, vide Judgment in the matter of Essar Steel India Limited and
Another vs. Reserve Bank of India and Others, in Special Civil Application No.
12434 of 2017, held that admission of an Insolvency Application filed by
Financial Creditor is not a routine order and the Adjudicating Authority shall
apply its mind to all the factual details and then pass an order. This Adjudicating
Authority is of the view that the order of admission of an Application for
initiation of Corporate Insolvency Resolution Process is a judicial order which
should be according to the provisions of the Code, principles of natural
justice, and taking the consequences of the order into consideration.
Therefore, there this Adjudicating Authority shall exercise its discretion in either
admitting or rejecting the Insolvency Resolution Applications. It is needless
to say that discretionary power has to be exercised in a judicious manner
taking into consideration all the facts and circumstances of the case, the
provisions of the applicable laws and the object of the Insolvency and
Bankruptcy Code. This Adjudicating Authority shall look into the aspect of the occurrence
of the default, and, while doing so, shall take into consideration various
factual and legal pleas raised by both the parties in order to record its
satisfaction. …
In addressing the issue, the NCLT
also relied upon the judgement of the National Company Law Appellate Tribunal (“NCLAT”)
in Innoventive
Industries Ltd. v. ICICI Bank.
also relied upon the judgement of the National Company Law Appellate Tribunal (“NCLAT”)
in Innoventive
Industries Ltd. v. ICICI Bank.
On facts, the NCLT found that from
the material placed on record the existence of a default was clear and that the
applications of SBI and SCB were complete. Hence, there were no other
extraneous factors to be considered.
the material placed on record the existence of a default was clear and that the
applications of SBI and SCB were complete. Hence, there were no other
extraneous factors to be considered.
Pre-existence of Debt Resolution Plan
One question related to whether
Essar Steel’s efforts to restructure their debts through a prior plan would be
set at naught by the NCLT admitting the insolvency application. Here, the NCLT
found that the debt restructuring plan proposed by Essar Steel with its lenders
was pending for about two years, and substantial progress was yet to be made.
Hence, that could not be a ground for stalling the insolvency process under the
Code. Moreover, the NCLT clarified that the debt restructuring plan could form
part of the insolvency process itself and can be taken into consideration by
the committee of creditors under the Code. In other words, “commencement of
Insolvency Resolution Process cannot be construed as putting an end to the Debt
Restructuring Process which has been commenced”.
Essar Steel’s efforts to restructure their debts through a prior plan would be
set at naught by the NCLT admitting the insolvency application. Here, the NCLT
found that the debt restructuring plan proposed by Essar Steel with its lenders
was pending for about two years, and substantial progress was yet to be made.
Hence, that could not be a ground for stalling the insolvency process under the
Code. Moreover, the NCLT clarified that the debt restructuring plan could form
part of the insolvency process itself and can be taken into consideration by
the committee of creditors under the Code. In other words, “commencement of
Insolvency Resolution Process cannot be construed as putting an end to the Debt
Restructuring Process which has been commenced”.
This approach adopted by the NCLT
is understandable. The debt restructuring process is largely a contractual
mechanism effected under the aegis of the RBI. On the other hand, the
insolvency resolution process is more comprehensive and is grounded in statute.
Although the NCLT has not really delved into the legality of potential
conflicts that could arise between the debt restructuring process (i.e. RBI
mechanism) and the insolvency resolution process (i.e. Code mechanism), it has
sought to reconcile the two by allowing for the possibility of the former to be
subsumed into the latter.
is understandable. The debt restructuring process is largely a contractual
mechanism effected under the aegis of the RBI. On the other hand, the
insolvency resolution process is more comprehensive and is grounded in statute.
Although the NCLT has not really delved into the legality of potential
conflicts that could arise between the debt restructuring process (i.e. RBI
mechanism) and the insolvency resolution process (i.e. Code mechanism), it has
sought to reconcile the two by allowing for the possibility of the former to be
subsumed into the latter.
Control of Interim Resolution
Professional Over the Business
Professional Over the Business
One of the concerns raised by Essar
Steel was that the admission of the insolvency proceedings would result in the
oversight of the business of the company being vested in the interim resolution
professional (“IRP”) which, in the case of a vast and complex business like
that of Essar Steel, would lead to tremendous difficulties. However, this
argument too was not palatable to the NCLT, which noted:
Steel was that the admission of the insolvency proceedings would result in the
oversight of the business of the company being vested in the interim resolution
professional (“IRP”) which, in the case of a vast and complex business like
that of Essar Steel, would lead to tremendous difficulties. However, this
argument too was not palatable to the NCLT, which noted:
… If Insolvency
Resolution Process is commenced by appointing Interim Resolution Professional,
no doubt the Board of Directors would be suspended. That does not mean the
entire machinery of the Company is suspended. Even after appointment of IRP,
all the employees of the Company, top to bottom, would continue to function
under the control of the IRP instead of the Board of Directors. Therefore, the
apprehension of ESSAR that suspension of Board of Directors may cause prejudice
to the interest of the Company and the stakeholders may not be correct. The
Object of the IBC is to chalk out a Resolution Plan to revive the Company, but
not to liquidate the Company straightaway. It is needless to say that a company
like ESSAR need not be liquidated and there are several other alternatives to
revive the Company. If all the eligible Creditors sit together; evolve a
Resolution Plan, it would help not only the Company, its stakeholders, Steel
Industry, and ultimately the economy of India. …
Resolution Process is commenced by appointing Interim Resolution Professional,
no doubt the Board of Directors would be suspended. That does not mean the
entire machinery of the Company is suspended. Even after appointment of IRP,
all the employees of the Company, top to bottom, would continue to function
under the control of the IRP instead of the Board of Directors. Therefore, the
apprehension of ESSAR that suspension of Board of Directors may cause prejudice
to the interest of the Company and the stakeholders may not be correct. The
Object of the IBC is to chalk out a Resolution Plan to revive the Company, but
not to liquidate the Company straightaway. It is needless to say that a company
like ESSAR need not be liquidated and there are several other alternatives to
revive the Company. If all the eligible Creditors sit together; evolve a
Resolution Plan, it would help not only the Company, its stakeholders, Steel
Industry, and ultimately the economy of India. …
This approach adopted by the NCLT
is consistent with the goal of the Code, which is to ensure that the management
of the company is vested in the hands of an insolvency professional rather than
the board of the company. This is irrespective of whether the management has
acted in good faith or whether they had been involved in self-dealing transactions
such as siphoning of funds. The NCLT’s categorical ruling is a reassertion of
the fact that debtors cannot rely upon the fact that the boards (and promoters)
of debtor companies will lose control over their business as a ground for
failing to appoint an IRP and vesting management in such a professional.
is consistent with the goal of the Code, which is to ensure that the management
of the company is vested in the hands of an insolvency professional rather than
the board of the company. This is irrespective of whether the management has
acted in good faith or whether they had been involved in self-dealing transactions
such as siphoning of funds. The NCLT’s categorical ruling is a reassertion of
the fact that debtors cannot rely upon the fact that the boards (and promoters)
of debtor companies will lose control over their business as a ground for
failing to appoint an IRP and vesting management in such a professional.
Stage of Appointing IRP
Essar Steel raised the argument
that the IRP cannot be appointed on the same day that the insolvency
application is admitted, and that such appointment must be deferred. This
argument was apparently raised to ensure that the debtor company can obtain a
chance to appeal against the admission of the insolvency proceeding before the
IRP is actual appointment (and thereby vesting the management with the IRP).
However, upon an analysis of the relevant provisions of the Code, the NCLT
found no such reason for adopting a two-stage process, and held that the IRP
can be appointed simultaneously with the admission of the insolvency
application.
that the IRP cannot be appointed on the same day that the insolvency
application is admitted, and that such appointment must be deferred. This
argument was apparently raised to ensure that the debtor company can obtain a
chance to appeal against the admission of the insolvency proceeding before the
IRP is actual appointment (and thereby vesting the management with the IRP).
However, upon an analysis of the relevant provisions of the Code, the NCLT
found no such reason for adopting a two-stage process, and held that the IRP
can be appointed simultaneously with the admission of the insolvency
application.
The tenor of NCLT’s findings on
this point suggests that any two-stage process would be against the time-bound
procedure envisaged under the Code. The NCLT member noted:
this point suggests that any two-stage process would be against the time-bound
procedure envisaged under the Code. The NCLT member noted:
… no two stages or
no two separate hearings are contemplated under the Code, namely, the first
stage is admission and the second stage is appointment of Interim Resolution
Professional. The object of the Code is to complete the entire process in a
time bound programme. When such is the object of the Code, without any
compelling circumstances, there is no need to defer the appointment of Interim
Resolution Professional only to give an opportunity to the Corporate Debtor to
agitate against the decision of this Adjudicating Authority twice in two
Appeals. The Corporate Debtor is entitled to prefer an Appeal against the order
of admission and also against the appointment of the Interim Resolution
Professional. If both the orders, namely admission order and the order
appointing Interim Resolution Professional are made separate, then the
Corporate Debtor will file two Appeals at two stages and thereby gain more
time, which is not the object of the Code. Therefore, the Code enjoins upon this
Authority to declare Moratorium; to make public announcement of initiation of
Corporate Insolvency Resolution Process; and to appoint Interim Resolution
Professional on the date of commencement of Insolvency Resolution Process as
Rule and the exception is [deferring] the appointment of Interim Resolution Professional
to some other date that [depends] upon the facts of the case.
no two separate hearings are contemplated under the Code, namely, the first
stage is admission and the second stage is appointment of Interim Resolution
Professional. The object of the Code is to complete the entire process in a
time bound programme. When such is the object of the Code, without any
compelling circumstances, there is no need to defer the appointment of Interim
Resolution Professional only to give an opportunity to the Corporate Debtor to
agitate against the decision of this Adjudicating Authority twice in two
Appeals. The Corporate Debtor is entitled to prefer an Appeal against the order
of admission and also against the appointment of the Interim Resolution
Professional. If both the orders, namely admission order and the order
appointing Interim Resolution Professional are made separate, then the
Corporate Debtor will file two Appeals at two stages and thereby gain more
time, which is not the object of the Code. Therefore, the Code enjoins upon this
Authority to declare Moratorium; to make public announcement of initiation of
Corporate Insolvency Resolution Process; and to appoint Interim Resolution
Professional on the date of commencement of Insolvency Resolution Process as
Rule and the exception is [deferring] the appointment of Interim Resolution Professional
to some other date that [depends] upon the facts of the case.
Proposer of IRP
Although both SBI and SCB preferred
a joint insolvency application, they each proposed two different persons for appointment
as IRP. One question pertained to whether SCB’s nominee ought to be appointed as
SCB’s proposal was first in time. But, the NCLT declined to accept this
approach on the ground that the date of timing of the application cannot be
taken as the criterion for determining the appointment of the IRP. Other
factors need to be considered. In this case, the NCLT found SBI had undertaken
a detailed exercise before proposing its nominee as IRP. Furthermore, SBI had
not only been authorised by the joint lenders’ forum to initiate the insolvency
process, but that the debt due to SBI was higher than that due to SCB. For
these reasons, the NCLT decided to appoint the person nominated by SBI as the
IRP.
a joint insolvency application, they each proposed two different persons for appointment
as IRP. One question pertained to whether SCB’s nominee ought to be appointed as
SCB’s proposal was first in time. But, the NCLT declined to accept this
approach on the ground that the date of timing of the application cannot be
taken as the criterion for determining the appointment of the IRP. Other
factors need to be considered. In this case, the NCLT found SBI had undertaken
a detailed exercise before proposing its nominee as IRP. Furthermore, SBI had
not only been authorised by the joint lenders’ forum to initiate the insolvency
process, but that the debt due to SBI was higher than that due to SCB. For
these reasons, the NCLT decided to appoint the person nominated by SBI as the
IRP.
Conclusion
Although the NCLT’s order in the
Essar Steel case involved the initiation of the insolvency proceedings and
related only to the admission stage, it is nevertheless an important one as it sets
the tone for such cases, especially those involving large debtors. At a broad
level, the order seeks to stay true to the letter and spirit of the Code, and
to bring about a resolution of the debts owed by Essar Steel to its creditors. Once
it is established that the applicants are financial creditors to whom debts are
due from the corporate debtor, there appears to be very little to stand in the
way of commencement of the insolvency process. Such an approach adopted in a
much-debated case such as Essar will set an example for other cases to follow.
At the same time, the commencement
of the insolvency is only part of the story. Much will depend upon the issues
that may arise at various stages in the process. The availability of capacity
and resources will play an important role as well. The concern raised by Essar
Steel in terms of how the IRP can oversee a large and complex business concern
spanning different locations across countries is a valid one from an
implementation perspective. Of course, the Code is very clear in that it makes
a departure from the erstwhile “debtor-in-possession” approach which had its
own share of immense problems, but the oversight of the resolution process by the
IRP is not likely to be a smooth ride, as already witnessed
in other instances.
Essar Steel case involved the initiation of the insolvency proceedings and
related only to the admission stage, it is nevertheless an important one as it sets
the tone for such cases, especially those involving large debtors. At a broad
level, the order seeks to stay true to the letter and spirit of the Code, and
to bring about a resolution of the debts owed by Essar Steel to its creditors. Once
it is established that the applicants are financial creditors to whom debts are
due from the corporate debtor, there appears to be very little to stand in the
way of commencement of the insolvency process. Such an approach adopted in a
much-debated case such as Essar will set an example for other cases to follow.
At the same time, the commencement
of the insolvency is only part of the story. Much will depend upon the issues
that may arise at various stages in the process. The availability of capacity
and resources will play an important role as well. The concern raised by Essar
Steel in terms of how the IRP can oversee a large and complex business concern
spanning different locations across countries is a valid one from an
implementation perspective. Of course, the Code is very clear in that it makes
a departure from the erstwhile “debtor-in-possession” approach which had its
own share of immense problems, but the oversight of the resolution process by the
IRP is not likely to be a smooth ride, as already witnessed
in other instances.
