Supreme Court’s verdict on Essar establishes much more than Section 29A jurisprudence

The Supreme Court has given its first (and final) ruling, interpreting Section 29A of the IBC. The precedent set in the case of Essar Steel by Justices Rohinton Nariman and Indu Malhotra, will now serve as a template for Section 29A (in)eligibility, just like the Innoventive ruling has served as a precedent for the IBC..Arguably, Essar could be the most dramatic episode in two years of IBC. It has tested and continues to test the resilience of this (still) nascent law. Essar was one of the first 12 cases which the RBI referred to insolvency with its newly granted powers under the Banking Regulation (Amendment) Ordinance of 2017. Essar sought to challenge the method adopted by RBI in selecting those 12 firms, however, with no success. Once in the insolvency process, the promoters sought to apply as resolution applicants which was viewed as a ‘moral hazard’ problem by many, and enough for the legislature to insert Section 29A by an Ordinance amending the IBC. Section 29A introduced a set of disqualifications for resolution applicants, most notably, one which said that the resolution applicants could not be persons who were (in the widest manner) connected to NPAs..At this stage, there were two resolution applicants, Numetal, which was an SPV created (by the Essar promoters) to bid for Essar Steel, and ArcelorMittal. Both suffered from disqualifications – Numetal’s complex structure gave Rewant Ruia (son of Essar Steel promoter Ravi Ruia) control over Numetal, and Laxmi Mittal (promoter of ArcelorMittal) indirectly held control over two companies which were declared as NPAs, Uttam Galva Steels and KSS Petron. Before submitting their respective resolution plans, both resolution applicants sought to cure their ineligibility in a hurried manner. Numetal brought down the Ruia control to what they thought would be an acceptable level (25%), a point where it would not be ‘control’ and Mittal sold his shares in both NPAs to become eligible. The Resolution Professional, however, found both to be ineligible..Obviously, both parties approached the NCLT against this decision. The NCLT held a view similar to that of the Resolution Professional and granted both Numetal and Mittal time to cure ineligibility. Meanwhile, Numetal had submitted a revised resolution plan dropping Rewant Ruia completely from the Numetal structure..Obviously, appeals were filed at the NCLAT. NCLAT held a slightly different view from NCLT and ruled that Numetal’s second resolution plan would be eligible, in view of no further connection with Rewant Ruia. However, the NCLAT also held that Mittal would have to pay dues, even for companies from which he had divested shareholdings. This eliminated Mittal from the race for acquiring Essar Steel..Obviously, an appeal was filed with the Supreme Court. On the question of 29A, the Supreme Court made a few broad observations. But the one which is most relevant is how were both Numetal and Mittal declared as ineligible..The Court observed that the language in Section 29A itself lifts the corporate veil; it refers to a de facto as opposed to de jure position of persons who are barred under the provision. The Court found that although it is well settled that a shareholder is a separate legal entity from the company in which he holds shares, but when it comes to a corporate vehicle that is set up for the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such a company..What this meant for Numetal was that it was ineligible, since by itself Numetal was a newly incorporated entity, with no financial or experience credentials of its own and it relied entirely on the credentials of each of its constituent shareholders. Further, the Rs. 500 crores that has been deposited towards submission of earnest money continues to remain deposited by Rewant Ruia even post after submission of the second resolution plan..As regards Mittal, the Court looked into the manner in which the shareholdings in Uttam Galva and KSS Petron were divested. Shares in Uttam Galva were sold far below market value, at ‘distress’ prices to overcome the 29A hurdle. In the case of KSS Petron, the sale of shares along with the resignation of directors so close to the submission was done with the sole objective of avoiding 29A ineligibility..For the above reasons, both resolution applicants were held to be ineligible..At the same time, the Court also made some observations which are relevant. It delved into the meaning of the terms ‘management’, ‘control’ and ‘promoter’- all of whom have the 29A ineligibility attached to them insofar as NPAs are concerned..The Court found that the expression ‘management’, would refer to the de jure management of a corporate debtor and that the de jure management of a corporate debtor, would ordinarily vest in a Board of Directors, and would include, “manager”, “managing director” and “officer” as defined under the Companies Act, 2013..As regards ‘control’, the Court held that so long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be “in control”. Thus, the expression ‘control’, in Section 29A(c), denotes only positive control, which means that the mere power to block special resolutions (negative control) of a company cannot amount to control..As for ‘promoter’, the Court found that it was a mix of de jure and de facto depending on which sub-section of Section 29A was being referred to. But under the one dealing with NPAs, it refers to a de jure position, namely, where a person is expressly named in a prospectus or identified by the company in an annual return as a promoter. It then crystallised its understanding of Section 29A(c) ineligibility in the following words,.“Any person who wishes to submit a resolution plan, if he or it does so acting jointly, or in concert with other persons, which person or other persons happen to either manage or control or be promoters of a corporate debtor, who is classified as a non-performing asset and whose debts have not been paid off for a period of at least one year before commencement of the corporate insolvency resolution process, becomes ineligible to submit a resolution plan.”.One crucial point which the Court ruled, is the right of a resolution applicant to appeal at the stage of rejection by the Resolution Professional. The Court found that, given the fact that a resolution applicant has no vested right that his resolution plan be considered, no challenge can be preferred to the NCLT at this stage. A writ petition under Article 226 filed before a High Court would also be turned down on the ground that no right, much less a fundamental right, is affected at this stage. This, it said, is also made clear by the first proviso to Section 30(4), whereby a Resolution Professional may only invite fresh resolution plans if no other resolution plan has passed muster..Ironically, the present appeal disposed of by the Supreme Court is one which has been filed at this very stage..As concerns the power of the Resolution Professional in approving resolution plans, the Court held that the fact that the Resolution Professional is also to confirm that a resolution plan does not contravene any of the provisions of law for the time-being in force, including Section 29A of the Code, only means that his prima facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to “decide” whether the resolution plan does or does not contravene the provisions of law..It further opined that while it is not necessary for the Resolution Professional to give reasons while submitting a resolution plan to the Committee of Creditors, it would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration, and to state briefly as to why it does or does not conform to the law..On a much-debated point, timelines under the IBC- the Court also recorded its findings. It certainly read and understood what the BLRC was saying when they put a 270-day period end date to the process. However, it noted that a reasonable and balanced construction of this stature would lead to a result that the time taken in litigation ought to be excluded, in view of the problems that may arise in deciding important questions in a hurried fashion. The bias in favour of resolution and against liquidation was apparent..And thus, while exercising its powers under Article 142 of the Constitution, the Court granted another 2 weeks for both resolution applicants to pay off their debts. While ArcelorMittal may do so, the interesting development will be if the debts of Essar Steel are cleared. If so, all that has happened in the last one year would be futile. And while the next two weeks will tell us what happens with Numetal and Mittal, a third resolution applicant, Vedanta, may be quietly hoping for this to fall apart.