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2019 (11) TMI 731 - SC - Insolvency and BankruptcyCorporate Insolvency resolution process (CIRP) - Role of resolution applicants, resolution professionals, the Committee of Creditors that are constituted under the Insolvency and Bankruptcy Code, 2016 - constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. Role of the resolution professional in the revival of Corporate Debtor - HELD THAT - The resolution professional is a person who is not only to manage the affairs of the corporate debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a resolution plan is approved by the Adjudicating Authority, but is also a key person who is to appoint and convene meetings of the Committee of Creditors, so that they may decide upon resolution plans that are submitted in accordance with the detailed information given to resolution applicants by the resolution professional - Another very important function of the resolution professional is to collect, collate and finally admit claims of all creditors, which must then be examined for payment, in full or in part or not at all, by the resolution applicant and be finally negotiated and decided by the Committee of Creditors. Role of the prospective resolution applicant - HELD THAT - Under the Code, the prospective resolution applicant has a right to receive complete information as to the corporate debtor, debts owed by it, and its activities as a going concern, prior to the admission of an application under section 7, 9 or 10 of the Code. For this purpose, it has a right to receive information contained in the information memorandum as well as the evaluation matrix mentioned in Regulation 36-B. Regulation 38 then deals with the mandatory contents of a resolution plan, making it clear that such plan must contain a provision that the amount due to operational creditors shall be given priority in payment over financial creditors - Such plan must also include provisions as to how to deal with the interests of all stakeholders including financial creditors and operational creditors of the corporate debtor, Regulation 38 (1A). It must then provide for the term of the plan, management and control of the business of the corporate debtor during such term, and its implementation. It must also demonstrate that it is feasible and viable, and that the resolution applicant has the capability to implement the said plan. Role of the committee of creditors in the corporate resolution process - HELD THAT - Since corporate resolution is ultimately in the hands of the majority vote of the Committee of Creditors, nothing can be done qua the management of the corporate debtor by the resolution professional which impacts major decisions to be made in the interregnum between the taking over of management of the corporate debtor and corporate resolution by the acceptance of a resolution plan by the requisite majority of the Committee of Creditors. Most importantly, under Section 30(4), the Committee of Creditors may approve a resolution plan by a vote of not less than 66% of the voting share of the financial creditors, after considering its feasibility and viability, and various other requirements as may be prescribed by the Regulations - Regulation 39(3) fleshes out Section 30(4) of the Code, making it clear that ultimately it is the commercial wisdom of the Committee of Creditors which operates to approve what is deemed by a majority of such creditors to be the best resolution plan, which is finally accepted after negotiation of its terms by such Committee with prospective resolution applicants. Jurisdiction of the Adjudicating Authority and the Appellate Tribunal - HELD THAT - After a resolution plan is approved by the requisite majority of the Committee of Creditors, the aforesaid plan must then pass muster of the Adjudicating Authority under Section 31(1) of the Code. The Adjudicating Authority s jurisdiction is circumscribed by Section 30(2) of the Code - it is clear that the limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned. A harmonious reading, therefore, of Section 31(1) and Section 60(5) of the Code would lead to the result that the residual jurisdiction of the NCLT under Section 60(5)(c) cannot, in any manner, whittle down Section 31(1) of the Code, by the investment of some discretionary or equity jurisdiction in the Adjudicating Authority outside Section 30(2) of the Code, when it comes to a resolution plan being adjudicated upon by the Adjudicating Authority. This argument also must needs be rejected. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal. Secured and unsecured creditors; the equality principle - HELD THAT - The Code and the Regulations, read as a whole, together with the observations of expert bodies and this Court s judgment, all lead to the conclusion that the equality principle cannot be stretched to treating unequals equally, as that will destroy the very objective of the Code - to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs secured or unsecured, financial or operational. The constitution of a sub-committee by the Committee of Creditors - HELD THAT - Standard Chartered Bank did not agree to put the reconstitution of the sub-committee to vote by the Committee of Creditors. Given these facts, we find, therefore, that it is only when Standard Chartered Bank found that things were going against it that it started raising objections on the technical plea that sub-committees cannot be constituted under the Code. This is not a bonafide plea. For all these reasons, this objection of Standard Chartered Bank is also rejected. Extinguishment of Personal Guarantees and Undecided Claims - HELD THAT - it is difficult to accept Shri Rohatgi s argument that that part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile directors of the corporate debtor. So far as the present case is concerned, we hasten to add that we are saying nothing which may affect the pending litigation on account of invocation of these guarantees. However, the NCLAT judgment being contrary to Section 31(1) of the Code and this Court s judgment in State Bank of India (supra), is set aside. Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. This is for the reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were - 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. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate - For these reasons, the NCLAT judgment must also be set aside on this count. Utilisation of profits of the corporate debtor during CIRP to pay off creditors - HELD THAT - The RFP issued in terms of Section 25 of the Code and consented to by ArcelorMittal and the Committee of Creditors had provided that distribution of profits made during the corporate insolvency process will not go towards payment of debts of any creditor - On this short ground, this part of the judgment of the NCLAT is also incorrect. Constitutional Validity of Section 4 and 6 of the Amending Act, 2019 - HELD THAT - Given the fact that timely resolution of stressed assets is a key factor in the successful working of the Code, the only real argument against the amendment is that the time taken in legal proceedings cannot ever be put against the parties before the NCLT and NCLAT based upon a Latin maxim which sub-serves the cause of justice namely, actus curiae neminem gravabit. - even under the newly added proviso to Section 12, if by reason of all the aforesaid factors the grace period of 90 days from the date of commencement of the Amending Act of 2019 is exceeded, there again a discretion can be exercised by the Adjudicating Authority and/or Appellate Tribunal to further extend time keeping the aforesaid parameters in mind. It is only in such exceptional cases that time can be extended, the general rule being that 330 days is the outer limit within which resolution of the stressed assets of the corporate debtor must take place beyond which the corporate debtor is to be driven into liquidation. The challenge to sub-clause (b) of Section 6 of the Amending Act of 2019, again goes to the flexibility that the Code gives to the Committee of Creditors to approve or not to approve a resolution plan and which may take into account different classes of creditors as is mentioned in Section 53, and different priorities and values of security interests of a secured creditor. This flexibility is referred to in the BLRC report, 2015 (see paragraph 33 of this judgment). Also, the discretion given to the Committee of Creditors by the word may again makes it clear that this is only a guideline which is set out by this sub-section which may be applied by the Committee of Creditors in arriving at a business decision as to acceptance or rejection of a resolution plan. For all these reasons, therefore, it is difficult to hold that any of these provisions is constitutionally infirm. The resolution plan of ArcelorMittal as amended and objections thereto - HELD THAT - The payment of INR 17.4 crore was to be made to unsecured financial creditors with a claim amount of more than INR 10 lakhs, and INR 30.55 lakhs to such creditors with a claim amount of less than INR 10 lakhs, with the fresh capital infusion for improving operations and enhancing revival prospects of the corporate debtor remaining at INR 8,000 crores. So far as operational creditors were concerned, there was no change made. The NCLAT judgment which substitutes its wisdom for the commercial wisdom of the Committee of Creditors and which also directs the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, must therefore be set aside. The appeals filed by the Committee of Creditors of Essar Steel Limited and other Civil Appeals are allowed - The impugned NCLAT judgment is set aside, except insofar as Civil Appeal No. 6409 of 2019, Civil Appeal No. 7266 of 2019, Civil Appeal No. 7260 of 2019 are concerned, which are dismissed - appeal allowed in part.
Issues Involved:
1. Role of resolution applicants, resolution professionals, and the Committee of Creditors under the Insolvency and Bankruptcy Code, 2016. 2. Jurisdiction of the NCLT and NCLAT regarding approved resolution plans. 3. Constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. 4. Treatment of secured and unsecured creditors. 5. Extinguishment of personal guarantees and undecided claims. 6. Utilization of profits of the corporate debtor during CIRP to pay off creditors. Detailed Analysis: 1. Role of Resolution Applicants, Resolution Professionals, and the Committee of Creditors: The judgment emphasizes the administrative role of the resolution professional, who manages the affairs of the corporate debtor, collects and collates claims, and presents resolution plans to the Committee of Creditors (CoC). The CoC, comprising financial creditors, evaluates and approves resolution plans based on their commercial wisdom. The resolution professional's role is non-adjudicatory but administrative, ensuring that the resolution plans conform to the legal requirements before presenting them to the CoC. 2. Jurisdiction of NCLT and NCLAT: The NCLT's jurisdiction is limited to ensuring that the resolution plan meets the requirements specified in Section 30(2) of the Code. The NCLAT's jurisdiction is similarly circumscribed, focusing only on the grounds specified in Section 61(3) of the Code. The judgment reiterates that the commercial decisions of the CoC are not subject to judicial review unless they violate the provisions of the Code. The Adjudicating Authority and the Appellate Tribunal cannot interfere with the merits of the CoC's business decisions. 3. Constitutional Validity of Sections 4 and 6 of the Amending Act, 2019: The judgment upholds the amendments, stating that the legislature can amend laws to address issues arising from judicial interpretations. The amendments apply generally and are not targeted at any specific judgment. The judgment also clarifies that the time taken in legal proceedings should not unduly prejudice the parties, and the outer limit of 330 days for completing the CIRP can be extended in exceptional cases where delays are attributable to the adjudicatory process. 4. Treatment of Secured and Unsecured Creditors: The judgment emphasizes that equitable treatment of creditors means treating similarly situated creditors in the same manner. It rejects the NCLAT's approach of treating all creditors equally, regardless of their secured or unsecured status. The CoC has the discretion to classify creditors and determine the distribution of amounts based on the value of their security interests. The judgment highlights that secured creditors are often incentivized to vote for liquidation if they are not given priority, which would defeat the purpose of the Code. 5. Extinguishment of Personal Guarantees and Undecided Claims: The judgment clarifies that once a resolution plan is approved, it is binding on all stakeholders, including guarantors. This ensures that the successful resolution applicant can start afresh without being burdened by past liabilities. The judgment also sets aside the NCLAT's decision to allow undecided claims to be pursued post-approval of the resolution plan, emphasizing that all claims must be decided during the CIRP to provide certainty to the resolution applicant. 6. Utilization of Profits of the Corporate Debtor During CIRP: The judgment invalidates the NCLAT's direction to use profits generated during the CIRP to pay off creditors, as it contradicts the agreed terms in the resolution plan. The RFP and the resolution plan explicitly stated that such profits would not be used for debt repayment. Conclusion: The Supreme Court's judgment reinforces the sanctity of the CoC's commercial decisions, limits judicial intervention to ensure compliance with the Code, and upholds the amendments made to address practical challenges in the insolvency resolution process. It clarifies the roles and responsibilities of various stakeholders and ensures that resolution plans provide certainty and finality to the resolution process.
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