Case Analysis: Arcelor Mittal India Pvt. Ltd. vs Satish Kumar Gupta
A section 7 application filed by State Bank of India and Standard Chartered against Essar Steel India Ltd.(ESIL) for a default of Rs. 45,000 crores was admitted by NCLT and Mr. Satish Kumar Gupta was appointed as the IRP. In response to the invitation for expression of interest, ArcelorMittal(AM) India on 11th October 2017 and an entity called Numetal Ltd. on 20th October 2017 submitted their interest. The resolution plans were submitted on 12th February 2018. On the apprehension that the RP might find it ineligible under Section 29A, Numetal filed an application before the NCLT to declare it eligible on 20th March 2018. However, on 23rd March the RP found both the resolution applicants to be ineligible. In his report he stated the reasons for declaring both the Ras ineligible.
AM Netherlands holds 29.05% shareholding in Uttam Galva and has been classified as a promoter by the way of a co-promoter agreement dt. 4th September 2004. AM Netherlands and AM India are connected persons as mentioned in the resolution plan. The account of Uttam Galva was classified as NPA for a period more than 1 year till 2nd August 2017. AM Netherlands sold its shareholding to the other promoters on 7th February 2018 and applied before NSE and BSE for declassification as a promoter as per SEBI regulations. As on the submission date of the resolution plan, AM Netherlands has not been declassified as a promoter of Uttam Galva and is hence ineligible under Section 29A(c). The plan was rejected and was not placed before the COC.
Numetal as on the date of submission of expression of interest, was reliant on Essar Communications, one of its shareholders to comply with the eligibility requirements concerning tangible net worth in the EOI. On the date of submission of the resolution plan, it was reliant on Crinium Bay to comply with these regulations. Numetal was incorporated as a joint venture between Crinium Bay and Aurora Enterprises. Since Numetal relied on its shareholders for meeting the eligibility criteria at various stages, the RP decided to take into scrutiny the joint venture holders themselves to check the eligibility of the RA. Aurora Enterprises is comptletely held by Rewant Ruia and he comes within the scope of immediate relatives being the son of the promoter of ESIL, which was declared an NPA for over a year prior to the commencement of CIRP. Rewant Ruia was deemed to be acting in consort with his father Ravi Ruia and hence declared ineligible.
- Whether purposive interpretation of Section 29A is to be adopted on both the text and the context of the enacted provision?
- Whether the text of the provision evinces persons acting in consort to the persons in management and control as stated under Section 29A?
- Whether management, control and promoter are all to be met with for ineligibility under the section?
- Whether the timeline provided under Section 12 read with 33 are mandatory and cannot be extended?
- Whether the corporate veil is to be lifted for determining the eligibility under Section 29A of the Code?
- Whether Section 29A(c) applies as on date of commencement of CIRP or as on the date of submission of the resolution plan?
The court held that the provision should be interpreted to mean de facto position of the persons so as to include persons who are actually in control whether jointly or in concert. It is imperative to find the real individuals for the submission of a resolution plan. For the purpose of this provision if the persons are acting jointly then establishing an element of a joint venture is also not required. The court held that for persons to be acting in concert, an understanding (even if it is informal and indirect) to exercise over a target entity must be decided depending upon the facts of the case.
The court stated that the ineligibility shall be applicable from the date of submission of the resolution plan as made clear by the statute itself in the opening words of the provision.
Elucidating on the requirements of persons in management or control or promoters an NPA, the court held that any one of these elements needs to be proved for the RA to be ineligible. Both control and being a promoter of the NPA shall include de jure and de facto position while management refers to only de jure position as provided under the Companies Act. This ineligibility can be removed only if the persons falling under these categories make all the overdue payments before the submission of the resolution plan. The court emphasised on this aspect to avoid letting persons who are in charge of the corporate debtor to regain control without paying off its debts. But this interpretation does not extend to promoters of the companies with PUFE transactions. Even the complete payment of PUFE amounts cannot make them eligible again.
The timeline given under Section 12(1) is mandatory and if no resolution plans are received or if they are rejected then the corporate debtor needs to be liquidated. It is of utmost importance for all the authorities to follow the model timeline.
RP is required to examine the resolution plans and shall submit only the complete resolution plans before the COC. This provision does not empower the RP to decide if a resolution plan is in contravention with the law or not but he is required to form a prima facie opinion cornering its legal compliance. Though it is not a statutory requirement, it is advised that the RPs attach a due diligence report to each resolution plan stating its compliance of law or lack thereof. It was held by the Apex Court that RA does not have a vested right to have his plan be considered so a rejection by the RP cannot be challenged before the AA. Since no right is being affected a writ to this effect is also not maintainable. RA can approach the NCLT only if its plan has been considered by the COC after its voting.
The rejection of a resolution plan by COC on the basis of ineligibility under Section 29A is not final and can be determined by the AA after hearing both the parties. If however the plan gets approved by both the COC and the AA, then the appellate tribunal may be approached for adjudication.
Both the RAs were held to be ineligible but the continuation of the CD as a going concern is in the best interests of all stakeholders so every effort was to be made in that respect. Since the law on Section 29A was laid down for the first time the court permitted the resolution applicants another opportunity to submit their resolution plans if they pay off their NPAs within two weeks. Then the COC may consider all the plans before it accept the best one with requisite majority or the CD will be liquidated.