Akhil Kumar and Ayushi Singh

There is a need for better coordination among the different regulators and statutory bodies in order to reduce the number of compliances to be undertaken by the successful resolution applicant. It will help in attracting more resolution applicants and facilitate value maximization of assets.

The Reserve Bank of India had directed banks to refer twelve large corporate accounts for resolution under the Insolvency and Bankruptcy Code, 2016. The resolution of Bhushan Power and Steel Limited, (“BPSL”) one of the twelve large corporate accounts had hit a deadlock for about two years owing to numerous litigation at various stages. The principal bench of the National Company Law Tribunal has recently approved the resolution plan submitted by JSW Steel Ltd. In this post, the authors attempt to analyse the judgement rendered by the NCLT and highlight some of the drawbacks associated with it.

Background and Facts

An application for initiating Corporate Insolvency Resolution Process (“CIRP”) was filed by Punjab National Bank against BPSL under section 7 of the Insolvency and Bankruptcy Code, 2016 (“the Code”). In pursuance of the initiation of CIRP and the public announcements therein, resolution plans were submitted by Tata Steel Limited and JSW Steel Ltd (“JSW”). It is imperative to note that the Committee of Creditors (“CoC”) had refused to open the resolution plan submitted by Liberty House, as it was filed post the deadline to submit resolution plans as per section 25 (2) (h) of the Code read with Regulation 39 (1) of the CIRP Regulations. Against this decision of the CoC, an interim relief was ordered by the NCLT on an application filed by Liberty House which in turn was challenged before the Appellate Tribunal (“NCLAT”) by Tata Steel Ltd.

Vide one of its orders, the NCLAT, inter alia, allowed the original resolution applicants along with Liberty House to submit revised financial offers without altering the basic standards of the original resolution plans, as submitted before the CoC. Thereafter, the matter was remitted to the NCLT to pass appropriate orders under section 31 of the Code, keeping in mind the revised financial offers and to ensure non-discrimination between the Financial and Operational Creditors as per the directions issued by the NCLAT in Binani Industries Ltd. v. Bank of Baroda.

The revised resolution plans of the applicants were evaluated by the CoC, representatives of the operational creditors and the directors of the corporate debtor in its 18^th meeting dated August 14, 2018. Thereafter, JSW’s plan was approved by the CoC as the highest evaluated plan. The three resolution plans (revised), along with the voting approval was submitted in a sealed cover before the NCLAT. The NCLAT, thereafter, directed the NCLT to consider the approved resolution plan of JSW.

Issues

The NCLT was called upon to decide the following issues:

1. Whether the resolution plan was in conformity with the judgement rendered by the Hon’ble Supreme Court in the case of Vijay Kumar Jain Standard Chartered Bank?
2. Should the financial and operational creditors be treated on par as per the directions of the NCLAT in Binani Industries Ltd. Bank of Baroda?
3. Whether the resolution plan was liable to be invalidated due to the failure of the CoC to record reasons for approving the resolution plan?

Whether the directions issued by the Hon’ble Supreme Court in Vijay Kumar Jain’s case were substantially complied with?

According to section 24 (2) of the Code, the resolution professional is bound to conduct all the meetings of the CoC in a non-partisan and an independent manner. Further, as per section 24 (4), although the erstwhile directors are allowed to attend the meetings of the CoC, they are not entitled to vote in these meetings. The notice sent out for each of the meetings clearly established that copies were sent to the erstwhile members of the Board of Directors. It is also pertinent to note that as per the scheme of the Code, the absence of any member of the erstwhile Board of Directors shall not invalidate such meetings of the CoC. Additionally, the minutes of the CoC meetings clearly established that the contents of the resolution plan were shared with the erstwhile directors, sans the confidential information.

In K Sashidhar v. Indian Overseas Bank and Others, the Supreme Court has categorically held that the commercial wisdom of the CoC is paramount and that it was neither within the powers of the NCLT or the NCLAT to reopen the same. Furthermore, the willingness of the erstwhile directors to submit a plan for settlement under section 12A of the Code classified them as resolution applicant and therefore, a competitor of the other resolution applicants. In view of the same, the exercise of withholding confidential information was found to be justifiable in the present situation. It is also imperative to note that upon failure of the plan of settlement by the erstwhile directors, the judgement in Vijay Kumar Jain would not apply, as the directors were competitors of the other resolution applicants.

Treatment of the Operational Creditors

As per the judgement rendered in Binani Industries, there shall not be any discrimination between the financial and operational creditors. However, it is to be noted that section 30 (2) (b) of the Code was amended vide a notification dated August 5, 2019, effectively nullifying the order of the NCLAT in Binani Industries. Therefore, the resolution plan was found to be in conformity with section 30 (2) (e) of the NCLT, which states that “the resolution professional shall examine each resolution plan received by him to confirm that each resolution plan does not contravene any of the provisions of the law for the time being in force”.

Furthermore, a plain reading of section 30 makes it evident that the amount to be paid to the operational creditors shall not be less than the amount payable to such creditor in the event of liquidation under section 53 of the Code. Explanation 2 to section 30 further clarifies that the amendment to section 30 is to apply to all resolution plans which have been approved or rejected by the NCLT or have been rejected at the stage of appeal by the NCLAT. Therefore, it was found that the resolution plan was in line with the legal requirements under the Code and did not suffer from any infirmity.

Recording of reasons and the Resolution Plan

Section 30 read with section 25 of the Code and the proviso to Regulation 39 (3) of the IBBI (Insolvency Resolution for Corporate Persons) Regulations, 2016 impose a mandatory requirement on the CoC to record reasons for approving/rejecting a resolution plan. At this juncture, it is to be noted that upon a reading of the minutes of the 16^th to 19^th meeting of the CoC, it became evident that detailed discussions took place and was sufficient in the opinion of the NCLT. The NCLT further relied on K Sasidhar v. Indian Overseas Bank to hold that the non-recording of reasons would not per-se invalidate the collective decision of the financial creditors.

The conduct of the erstwhile directors, who tried every possible trick up their sleeve to delay the entire process, was observed to be ‘not praiseworthy’. It was further clarified that the criminal proceedings initiated against the erstwhile promoters shall not affect the implementation of the approved resolution plan. Further, the resolution professional was directed to redistribute the profits earned by running the corporate debtor during CIRP in accordance with the judgement of the NCLAT in Standard Chartered Bank v. Satish Kumar Gupta.

Analysis and Conclusion

Although various reliefs were granted to the resolution applicants in consonance with the provisions of the Code, the tribunal turned down the submission of the resolution applicants seeking taxation reliefs from the various statutory authorities. This, in my opinion, should have been allowed by the NCLT in light of the repugnancy clause under section 238 of the Code. Furthermore, applying to different statutory authorities for taxation reliefs would cause difficulties to the resolution applicants. It might result in a decrease in the number of resolution applicants, effectively resulting in more instances of liquidation, an event contrary to the objective of the Code. Although JSW, the successful resolution applicant, in its appeal before the NCLAT has not challenged the denial of indemnity from statutory dues, such an approach by the NCLT can be troublesome to prospective resolution applicants.

Also, though, the NCLT has categorically held that the criminal proceedings initiated against the erstwhile promoters shall not affect the implementation of the approved resolution plan there has been a lack of clarity regarding immunity of the corporate debtor post the approval of the resolution plan. This becomes a serious issue primarily because of the several proceedings under the Prevention of Money Laundering Act, 2002 (“PMLA”) wherein the assets of the corporate debtor might be liable to be attached. It is also to be noted that in case of a conflict between the provisions of the Code and the PMLA, the PMLA shall prevail.[1] It is also interesting to note that the resolution applicants do not have the protection of moratorium after the approval of the resolution plan. Per Contra, it is imperative to note that section 31 (1) of the Code was amended vide the Insolvency and Bankruptcy Code (Amendment) Act, 2019. The amended provision makes it amply clear that an approved resolution plan, inter alia, is binding on Central Government, State Governments or any other statutory authority. The Enforcement Directorate, an instrumentality of the Central Government, shall also be bound by an approved resolution plan.[2] Furthermore, it is a settled position of law that the latter enacted legislation will have an overriding effect on the previously enacted legislation in cases of any subsisting inconsistency between two special legislations.[3] The abovementioned rule, read with the non-obstinate clause enshrined under section 238, clearly indicates that the Code shall prevail over any other special law to the extent of the inconsistency. Therefore, in our opinion, the present matter was one in which the NCLT should have expressly prevented the Enforcement Directorate from attaching the properties of the corporate debtor.

To conclude, the authors suggest the need of a better coordination among the different regulators and statutory bodies in order to reduce the number of compliances to be undertaken by the successful resolution applicant. It will help in attracting more resolution applicants resulting in greater competition among the applicants and therefore, facilitate value maximization of assets. This, in turn, would be in the better interest of the creditors and therefore, serve the purpose of the Code as envisaged by the legislature.

[1] The Deputy Director Directorate of Enforcement Delhi v. Axis Bank and Ors., CRL.A. 143/2018 & Crl. M.A. 2262/2018, Decided on: April 02, 2019.

[2] The NCLAT in JSW Steel Limited v. Mahender Kumar Khandelwal & Anr has prohibited the Directorate of Enforcement from attaching any of the properties of the corporate debtor without the prior approval of the NCLAT.

[3] Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., (2001) 3 SCC 71.

Akhil Kumar (V) and Ayushi Singh (IV) are students of NUAlS, Kochi. 

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