Supreme Court gives Primacy to Commercial Wisdom of CoC, Upholds Constitutional Validity of Amendment Act

Supreme Court gives Primacy to Commercial Wisdom of CoC, Upholds Constitutional Validity of Amendment Act

The Supreme Court (SC) transferring the control of Essar Steel to ArcelorMittal is a big step towards the functioning of the Insolvency & Bankruptcy Code, 2016 (IBC). Justice Rohinton Nariman reaffirmed the soundness of the provisions of the Code. The Top Court also gave the Committee of Creditors (CoC) the discretion to determine the precise nature of the resolution process and the distribution of the proceeds amongst creditors.

Case Name: Committee of Creditors Of Essar (Appellants) v. Satish Kumar Gupta (Respondent)

Court: Supreme Court of India

Bench: Justices Rohinton Fali Nariman and S. Ravindra Bhat

Judgment Date: 15 November 2019

Background of the case

The resolution plan submitted by ArcelorMittal provided that the operational creditors with an exposure of above ₹1 crore would not be entitled to any distributions.

The resolution plan of ArcelorMittal specifically provided for an upfront payment of ₹35,000 crore to resolve debts amounting to ₹49,213 crore. It was stated that unsecured financial creditors shall be paid an aggregate amount of five per cent of their admitted claims. However, the offer did not have much for operational creditors to Essar Steel. The Committee of Creditors (CoC) approved the resolution plan offered by ArcelorMittal.

The National Company Law Tribunal (NCLT) in March 2019 had approved ArcelorMittal's (a global steel-giant) bid for Essar Steel. It cleared the CoC's plan but changed the financial distribution plan by ordering an equal recovery plan for all creditors, including financial and operational creditors.

Decision of the NCLT

ArcelorMittal's resolution plan was approved by the NCLT and it asked the CoC to distribute 85 per cent of the amount under the resolution plan amongst financial creditors and the remaining 15 per cent amongst the operational creditors.

The said order of the NCLT was subsequently challenged before the National Company Law Appellate Tribunal (NCLAT/Appellate Tribunal).

Decision of the NCLAT

The Appellate Tribunal also approved the resolution plan of ArcelorMittal. However, it held that there cannot be any difference between a financial creditor and an operational creditor regarding payment of dues in the resolution plan.

It further held that the 'waterfall mechanism' under Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC) does not apply to a resolution plan but it applies only to the stage of liquidation.

It ordered that each financial creditor, be it a secured or an unsecured creditor, having a claim equal to or more than ₹10 lakh shall be paid 60.7 per cent of its admitted claim despite the security interest.

The Appellant Tribunal assailed the supremacy and the powers of regarding approval of a resolution plan that is considered to be a foundation of the IBC.

An appeal was filed before the Supreme Court by the CoC being aggrieved by the decision of NCLAT.

Decision of the Supreme Court

The Supreme Court (SC) set aside the NCLAT's order wherein the Appellate Tribunal had directed for equal distribution of proceeds between financial and operational creditors.

The Top Court clarified in its order that the financial creditors enjoyed primacy. It added that the Tribunal or the Appellate Tribunal had limited power to interfere with the decisions taken by the CoC. It emphasized the concept of supremacy of the commercial wisdom of the CoC in approving the resolution plan.

Justice Nariman stated that "No doubt the ultimate discretion on distribution is with the CoC but its decision should also balance the interests of all stakeholders."

It further held that "Nothing can be done qua the management of the corporate debtor by the resolution process that affects major decisions to be made in between the taking over the management of the corporate debtor and acceptance of a resolution plan by the requisite majority of the CoC."

It further clarified that the CoC had supreme power to approve a resolution plan under Section 30(4) of the Code. The power of the CoC could not be delegated to any other body. Further, Section 31(1) of the Code that states that once a resolution plan is approved by the CoC then the same shall be binding on all stakeholders that would also include the guarantors.

The Court stated that "The CoC is free to suggest modifications to the prospective resolution plan to ensure that dues of systemically important operational creditors are paid in full, so that the carrying on of the business of the corporate debtor does not become impossible for want of most basic and essential element, for example, electricity."

The Court opined that the commercial wisdom of the requisite majority comprising of 66 per cent of the CoC under the IBC could not be surpassed. It further emphasized the 'principle of equality' wherein the Top Court stated that the equality principle could not be stretched to treating unequals equally, as doing this would destroy the very object of the Code. Secured and unsecured financial creditors were differentiated in resolution plans and operational creditors were viewed separately.

The Apex Court upheld the validity of the Amendment Act of 2019 of the Code. It stated that u/s 4 of the Amendment Act 2019, a CIRP was required to be 'mandatorily' completed within 330 days from the commencement date, which included an extension in time granted and time taken in legal proceedings regarding the resolution process.

Otherwise, the corporate debtor would refer the proceeding for liquidation. The Top Court clarified the time taken in legal proceedings should not harm a litigant if he/she was not responsible for the delay caused.

The Apex Court granted relaxation of the timeline for 330 days for the resolution of insolvency and bankruptcy cases after which liquidation is invoked. It stated that it was open for the Appellate Tribunal to extend the timeline if further required.