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Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta

Supreme Court of India, 15 November 2019, 3 judges

The Court set aside the NCLAT's equal redistribution under Essar Steel's resolution plan, holding that distribution is for the Committee of Creditors' commercial wisdom, and struck down 'mandatorily' in the 330-day limit in Section 12.

Facts

Essar Steel India Limited was admitted into the corporate insolvency resolution process on 2 August 2017, with Satish Kumar Gupta as resolution professional. After rounds of bidding and earlier litigation, the Committee of Creditors approved ArcelorMittal's resolution plan, as amended, which left it to the Committee to decide how the amount offered would be shared among creditors. The NCLT approved the plan with modifications. On 4 July 2019 the NCLAT held that financial and operational creditors must be treated equally, redistributed the proceeds so that most creditors received about 60.7 per cent of admitted claims, treated security interests as irrelevant, admitted further operational claims, and allowed undecided claims to be pursued elsewhere. The Committee of Creditors and others appealed, and writ petitions challenged Sections 4 and 6 of the IBC Amendment Act, 2019.

Questions before the Court

  1. Can the Adjudicating Authority or Appellate Tribunal interfere with the Committee of Creditors' commercial decision on how proceeds are distributed among creditors?
  2. Must financial and operational creditors, or secured and unsecured creditors, receive the same percentage under a resolution plan?
  3. Can claims not decided in the resolution process be pursued after a plan is approved?
  4. Are Sections 4 and 6 of the Amending Act of 2019, including the 330-day limit in Section 12, constitutionally valid?

What the Court held

  • The feasibility and viability of a plan, including the distribution of funds among classes of creditors, is for the commercial wisdom of the requisite majority of the Committee of Creditors. The Adjudicating Authority and Appellate Tribunal have no residual equity jurisdiction to interfere with that business decision if the plan conforms to the Code and Regulations.
  • Equitable treatment means equitable treatment of similarly situated creditors. Financial and operational creditors, and secured and unsecured creditors, need not be paid the same percentage; the plan must state how it deals with operational creditors' interests and pay the statutory minimum. The NCLAT's equal redistribution was set aside.
  • All claims must be submitted to and decided in the resolution process. A successful resolution applicant takes over on a fresh slate and cannot face undecided claims afterwards, so the NCLAT's leave to pursue such claims under Section 60(6) was set aside.
  • The amended Section 30(2)(b) and Explanations to Section 30(4) are valid. In Section 12, the word 'mandatorily' was struck down as manifestly arbitrary under Article 14 and an unreasonable restriction under Article 19(1)(g); 330 days remains the general outer limit, but time may be extended in exceptional cases where delay is not the litigant's fault.
  • The appeals of the Committee of Creditors were allowed, and the resolution process was to proceed according to ArcelorMittal's plan as amended and accepted by the Committee of Creditors.

Why it matters

The judgment confirms that the commercial wisdom of the Committee of Creditors governs both acceptance of a resolution plan and distribution among creditors, and that tribunals review only legal compliance. It rejects a requirement of equal recovery for all creditors, holds that a successful resolution applicant takes over on a fresh slate, and reads down the 330-day limit in Section 12 by striking out the word 'mandatorily'.

In the Court's words

Copied from the official judgment; each passage links to its page.

“Thus, what is left to the majority decision of the Committee of Creditors is the "feasibility and viability" of a resolution plan, which obviously takes into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors.”
R.F. Nariman, J.Page 59 of the judgment
“Paragraph 76 clearly refers to the UNCITRAL Legislative Guide which makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors. This being so, the observation in paragraph 77 cannot be read to mean that financial and operational creditors must be paid the same amounts in any resolution plan before it can pass muster.”
R.F. Nariman, J.Page 95 of the judgment
“A successful resolution applicant cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor.”
R.F. Nariman, J.Page 112 of the judgment
“Thus, while leaving the provision otherwise intact, we strike down the word "mandatorily" as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant's right to carry on business under Article 19(1)(g) of the Constitution.”
R.F. Nariman, J.Page 132 of the judgment

Provisions interpreted

Related judgments

Case and bench

Parties
Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta
Case
Civil Appeal No. 8766-67 of 2019 (Diary No. 24417 of 2019), with connected civil appeals and writ petitions
Decided
15 November 2019
Bench
R.F. Nariman, Surya Kant, V. Ramasubramanian
Opinions
Unanimous. Judgment written by R.F. Nariman, J. and signed by all three Judges.

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