Fate of Numetal and ArcelorMittal, ability of bidders to challenge decisions during the insolvency process, exclusion or inclusion of litigation period from insolvency timelines, and “control check”—the Supreme Court’s decision in Essar Steel’s insolvency case is significant for all these reasons.
To understand how these precedents impact pending and future insolvency cases, BloombergQuint’s weekly law and policy show—The Fineprint—spoke with Suharsh Sinha, an insolvency law partner at AZB, and Shardul Shroff, executive chairman at Shardul Amarchand Mangaldas.
Shroff and his team are advising Essar Steel’s committee of creditors.
Below here is the edited transcript of the discussion:
Fate Of Numetal & Arcelor
The Supreme Court said that to be eligible resolution applicants, both bidders need to pay the overdue amounts. Arcelor on account of KSS Petron and Uttam Galva, and Numetal on account of Revant Ruia. The order has also indicated that Numetal may have to clear overdue amounts of any other Essar Group company that is a declared non-performing asset.
Who will come up with this number that Numetal needs to pay to become eligible and should we brace ourselves for another round of litigation on this front?
Shroff: I don’t think there should be another round of litigation because the Supreme Court judgment is perfectly clear. It’s a question of ascertaining what is the amount that Numetal would have to pay to become eligible. The members of the committee of creditors had indicated Rs 38,000 crore outstanding dues in relation to Essar Steel. The committee of creditors will now have to meet and find out from other creditors of other Essar companies as to what are the overdue amounts in relation to their other non-performing asset companies and indicate that such amount needs to be paid by Numetal for all the Ruia companies. These amounts are certified under the Bankers’ Books Evidence Act, 1891. Unless and until Numetal has got very cogent reasons or if there are errors then those have to be resolved mutually. I don’t think a dispute is something which is contemplated because a clear timeline of two weeks has been given for payment and eight weeks to come up with complete solution. Again, if this gets into disputes, then the company will go into liquidation.
Numetal has issued a statement that they are still interested in Essar Steel. But given that they have to repay the overdue amount of all Essar group companies that have been classified as NPA, does it make commercial sense for them to be in the race?
Sinha: It is difficult for us to quantify whether commercially Numetal will be able to put out that cash and does it make sense for them to pay the NPAs for not only Essar Steel but also other Essar group companies which are in bankruptcy or have been in NPA for more than one year. You are looking at a figure which is could be in excess of Rs 50,000-60,000 crore because you are looking at Essar Steel, Essar Projects, Essar Jharkhand and Essar Power. These are group companies which have been in NPAs for more than one year. It is a commercial call for Numetal to take. ArcelorMittal has to pay Rs 7,000 crore but Numetal is looking at a significantly higher number. I’m not sure if Numetal is agreeable to pay that much cash.
Bidders’ Ability To Litigate
In the Essar order, the Supreme Court has spelt out at what stages in the insolvency process decisions can be contested. No decisions or opinions of the resolution professional can be challenged before the National Company Law Tribunal. The point where bidders can go to court is when the committee of creditors has rejected a plan because it violates a law or doesn’t meet the Section 29A criteria. The Supreme Court has said until this stage, there’s no vested right in a resolution applicant.
What are the implications of this outcome?
Sinha: It’s a practical outcome and a strong indictment from the Supreme Court of the approach taken by the NCLTs and NCLAT in the various cases. What is the role of resolution professional (RP) when it comes to checking the eligibility of the various bidders and checking compliance with the various laws? The Supreme Court has laid that it is not their prerogative to decide on eligibility or the legality of bids because RP is not a judicial authority. So, the RP has to merely form a prima facie opinion on the basis of facts which are before him and give a report to committee of creditors for these findings. Ultimately, it is the committee of creditors that has to decide the bid on commercial grounds or the question of eligibility. That is the CoC’s prerogative and RP is only a facilitator.
The stage at which you can challenge it is not when RP has given an opinion on your eligibility but at the stage when CoC puts you down. That is major step as it cuts down frivolous litigation which ends up wasting a lot of time within a 270-day period. The Supreme Court has also said that it’s not just the NCLT that can’t intervene at this stage, but even the high courts cannot exercise writ jurisdiction at this stage before a plan has been rejected by CoC because there are no fundamental rights that a bidder has prior to this stage.
Is it fair that bidders–aggrieved by a decision of the RP or CoC–won’t get an opportunity to be heard?
Shroff: There are situations where the NCLT or NCLAT are taking into their own hands a procedure which is beyond what the law has prescribed. A statutory tribunal is a creature of the law and cannot strike down any regulation and cannot decide its own regulations. As a result of this Supreme Court decision, if the tribunals refuse to give hearing in relation to interim decisions taken by the resolution professional or turned down by the CoC, this could all be part of the final appeal post the disposal of the resolution plans where one or the other is preferred. So, if the infirmity is so serious that it goes to the root of the matter, such issues will still remain open till the final disposal happens.
The Supreme Court does not want multifarious rounds for every legal issue which arises in a matter. And they have clubbed all of this in one proceeding after the CoC has effectively decided. Those rights are preserved. Instead of every procedural issue landing up in a tribunal and appellate tribunal, the court has said that let it be part of a clubbed final appeal.
Sinha: The recourse is postponed. It makes sense because otherwise you can have bidders challenging various part of the process during the 270-day process which when you add up the litigation period, ends ups exceeding the 27-day timeline. Whereas now, under the Supreme Court guidance, if you club all the various issues, substantive and procedural, all the issues can be heard at one shot after the CoC has made its decision on the resolution plans, and it is an efficient way of handling the process.
Litigation Period: To Include Or Not To Include?
So far, the understanding has been that the litigation period ought to be excluded from the 270-day timeline prescribed under the Insolvency and Bankruptcy Code. The Supreme Court has reiterated this in the Essar order. But they’ve also added 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.”
How should one interpret this? What part of the litigation period would need to be included in the 270-day timeline?
Sinha: The Supreme Court has said that the period of litigation which does not lead to a stay on the matter or insolvency proceedings being halted, then that period needs to be included in the 270-day timeline. There could be litigation of non-material facts, procedural matters which does not mean you need to stay the insolvency process. Let’s assume that a proof of claim has been suggested by a certain financial creditor. The resolution professional has rejected a part of the claim. That may be litigated by the financial creditor at the NCLT level. It is not something which will stay the process because it is ancillary to the outcome of the process. In such cases, the litigation period will be included.
Let’s take a different scenario where there is a bidder who on the 180th day challenges the resolution process. If the grounds on which the process is challenged goes to the root of the resolution, that litigation period shall be excluded. So, you need to see if it is a substantive matter or procedural issue, which can derail the IBC process or run parallel to it. It is not as black and white. The Supreme Court has said that just because there is period consumed in litigation, then that should not condemn a company and loss of jobs.
Therefore, call needs to be taken on which is essential litigation. I would imagine that every time the NCLT or NCLAT stay the process and say that for these 10 days, for instance, the bid will not go forward. Such period will be excluded from the 270-day timelines. And if the NCLT hasn’t stayed the matter, then 270 days is sacrosanct.
‘Control’ Check
The Supreme Court has looked at what constitutes control under Section 29A(c). This section makes a person ineligible to submit a resolution plan if he’s been a promoter, in management or control of a NPA account for more than a year before the insolvency process started.
What prompted the apex court to interpret ‘control’ in the Essar case?
Shroff: It was argued in the ArcelorMittal appeal that they’ve been treated as co-promoters even though they had not appointed people on the board; and that they only have veto rights and certain affirmative votes. So the question was whether this should constitute as ‘control’. The Supreme Court has affirmed the Shubhkam decision by the Securities Appellate Tribunal to say that what really matters is the positive aspect of ‘control’—it is hands on the wheel approach rather than foot on the break approach.
Does this mean that a resolution applicant that has negative ‘control’ over a corporate debtor that has been classified as a NPA for over a year will not get tainted by the ineligibility provisions under Section 29A(c)?
Sinha: That’s correct. There are many structures in the market that have a negative right. For instance, non-disposal undertaking–where without taking the consent of a shareholder or a lender, you cannot dispose the shares of the company or the shares that you hold in the company. There are certain issues where you need to consult a particular shareholder before you can go ahead with those decisions. So, negative rights, veto rights, non-disposal undertakings have been deemed to be not substantive enough to say that you are a promoter, manager or in control of the company. Therefore, if you merely have a veto right vis-à-vis a certain company, that does not deem you to be Section 29A non-compliant because you are not a connected person vis-à-vis that entity.
Watch the full discussion here:
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