The National Company Law Appellate Tribunal ("NCLAT") approved the resolution plan submitted by ArcelorMittal India Pvt. Ltd. ("ArcelorMittal") in the resolution proceedings involving Essar Steel India Limited ("Corporate Debtor") while changing the distribution of funds to the financial and operational creditors in the case of Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited and Others (decided on July 4, 2019). The committee of creditors (COC) in the corporate insolvency resolution process (CIRP) launched against the corporate debtor and approved the resolution plan provided by ArcelorMittal. The resolution plan was subsequently authorised by the National Company Law Tribunal, Ahmedabad ("NCLT") by its order dated March 8, 2019, subject to a few adjustments. Operational creditors and financial creditors both filed a number of applications challenging the said order in relation to the distribution of assets to various financial creditors and operational creditors on the basis of discrimination or the modification of the resolution plan as recommended by the NCLT. The promoter of the Corporate Debtor Mr Prashant Ruia (the "Promoter") further contested the NCLT's ruling on the grounds that the Resolution Applicant was disqualified under Section 29A of the 2016 Insolvency and Bankruptcy Code (the "Code"). When NCLAT combined the aforementioned applications and appeals, the following issues arose for resolution.
In the instant case titled Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited and Others the issues raised for clarification before the NCLAT was:
Does ArcelorMittal meet the requirements of Section 29A of the Code to file the resolution plan?
When it comes to the Contract Act, 1872 (the "Contract Act"), does the Promoter have the right of subrogation under Section 140 and the right to be compensated under Section 145?
Is it possible for COC to transfer its authority to a core committee or subcommittee in order to negotiate with the applicant for a resolution about the revision of the plan and allocation of funds between financial and operational creditors?
Does the resolution applicant or the committee of creditors have the authority to distribute the funds to the lenders, i.e., the financial creditors, operational creditors, and other stakeholders?
Is it discriminatory to divide the funds among financial creditors, operational creditors, and other stakeholders as per the NCLT ruling from March 8, 2019?
Whether the financial creditors can be categorised as "Secured Financial Creditors" with a charge on the corporate debtor's project assets, "Secured Financial Creditors" without a charge on the corporate debtor's project assets, or "Unsecured Financial Creditors"?
Can one class of creditors receive payment in priority over another under the resolution plan?
Should workers of the corporate debtor, those who have "provided goods" and "delivered services" to the corporate debtor, and those who owe statutory dues to the central, state, or local governments be considered operational creditors in order to properly classify them as such?
With regard to the first issue, Promoter asserted that Section 29A(c) read with Section 29A(j) of the Code rendered ArcelorMittal ineligible. It claimed that Mr. L.N. Mittal owned 10 shares in "Navoday Consultants Ltd." and that, according to the statutory documents, he was a promoter and a member of the promoter group. Additionally, "Navoday Consultants Limited" promoted "GPI Textiles Limited" and "Gontermann Piepers India Limited" (together, "GPIL" and "GPI Textiles"). Since Mr. L.N. Mittal is a member of the promoter group for GPI Textiles and GPIL, ArcelorMittal was not permitted to file the resolution plan required by Section 29A of the Code.
With regard to the second issue, Promoter claimed that ArcelorMittal violated Section 30(2)(e) of the Code by severing its right to subrogation under Section 140 of the Contract Act and its right to indemnification under Section 145 of the Contract Act in the resolution plan. The NCLAT noted that a "Deed of Guarantee" had been signed by the Promoter between the lenders and the Corporate Debtor. Such a guarantee is related to debt repayment. The effect of the "Deed of Guarantee" terminates once the debt owed by the Corporate Debtor has been settled in order to ensure plan approval by making a payment to the lenders.
With regard to the third issue, In this instance, the NCLAT noted that the COC gave the authority to a subcommittee/core committee rather than putting the resolution plan to a vote for approval. The NCLAT ruled that a subcommittee or core committee is unidentified and in violation of the Code's restrictions. The Code does not contain any language allowing the formation of a core committee or subcommittee, nor does it or the regulations enacted under it give the committee of creditors the authority to assign tasks to such a committee. The NCLAT ruled that the committee of creditors lacks the power to assume the role of the resolution applicant, including how the money would be distributed among the various stakeholders; this responsibility belongs solely to the resolution applicant.
With regard to the fourth issue, The NCLAT considered several Code provisions and regulations enacted thereunder when examining the problem. According to Section 30(2)(b) of the Code, the NCLAT noted that it is obvious that the resolution professional must consider whether the resolution plan calls for paying operational creditors' debts in accordance with any guidelines established by the Insolvency and Bankruptcy Board of India ("IBBI"). The aforementioned clause specifies that the resolution applicant must include the sum it intends to pay to one or more creditors, including operational creditors and financial creditors, in its resolution plan.
With regard to the fifth issue, The NCLAT noted that ArcelorMittal's proposal to distribute the financial package it had offered only to secured financial creditors while denying operational creditors and other stakeholders their rights violated Section 30(2) of the Code and Regulation 38(1A) of the CIRP Regulations, and could not, therefore, be upheld. The NCLAT cited the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. & Another v. Union of India & Others [2019 SCC OnLine SC 73] and noted that Regulation 38 of the CIRP Regulations strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors' rights, along with priority in payment over financial creditors. The NCLAT found that the COC had significantly discriminated against the operational creditors as opposed to the financial creditors in the current case. The majority of the financial creditors received more than 90% of the number of their claims, whereas the operational creditors only received "NIL," or 0%. The NCLAT noted that this distribution was both arbitrarily chosen and discriminatory. Additionally, the financial creditors have made distinctions amongst one another based on whether they have a charge or not on the corporate debtor's project assets.
With regard to the sixth issue, The NCLAT determined that it is obvious that no distinction was made between one or more financial creditors after reading the definitions of financial creditor and financial debt under Sections 5(7) and 5(8) of the Code, respectively. Regardless of whether they fall under one of the provisions of Section 5(8) of the Code, all individuals to whom the corporate debtor owes a financial debt constitute one class, namely financial creditors. They cannot be divided into secured or unsecured financial creditors by the resolution applicant for the purpose of creating the resolution plan.
With regard to the seventh issue, It was highlighted that a resolution plan allows for upfront payments in favour of creditors, including financial creditors, operational creditors, and other creditors, with regard to the priority of payment of a financial creditor's dues. The resolution applicant cannot use Section 53 of the Code to determine how the proposed upfront amount will be distributed in favour of one or more stakeholders, namely the financial creditor, operational creditor, and other creditors, because it is not a distribution of assets from the proceeds of sale or liquidation of the corporate debtor. Therefore, the NCLAT determined that Section 53 cannot be used to distribute the money amongst distributors,
With regard to the eighth issue, The NCLAT looked at the meaning of "Operational Debt" and found that the Parliament had classified it as follows: I those who have "supplied goods" and "rendered services," for which they are entitled to payment; (ii) employees who have "rendered services," for which they are entitled to payment; and (iii) the Central Government, the State Government, or the local authority who has not rendered any services but benefits from the operation of the "Corporate Debtor" in accordance with the law in effect (statutory dues). The NCLAT said that based on the aforementioned criteria, the "Operational Creditors" can be divided into three groups to specify how the money should be dispersed to them. But if they behave similarly, they must receive the same treatment.
The NCLAT decided not to reject the resolution plan filed by ArcelorMittal in light of the aforementioned findings and adjusted the plan as stipulated in the NCLT's judgement dated March 8, 2019, in order to protect the interests of operational creditors and other financial creditors. The other requirements outlined by the NCLT and included in the resolution plan, however, were left intact.
The NCLAT categorically stated that,
“In the aforesaid background, we are of the view where the ‘Successful Resolution Applicant’ does not pay the total dues to the Creditors such as the ‘Financial Creditors’ or the ‘Operational Creditors’ but pays a lesser amount than the claim, then in such case, the profit should be distributed amongst all the Creditors including the ‘Financial Creditors’ and the ‘Operational Creditors’