Picking up from the last hearing, Sibal appearing on behalf of Standard Chartered Bank (SCB) continued his arguments on the third day of the Essar Steel Insolvency hearing. The Supreme Court Bench led by Justice Nariman started hearing the batch of appeals against the NCLAT's decision in the Essar Steel insolvency resolution, on 16th October, 2019.
Countering the argument put forth by the CoC (Committee of Creditors, Essar) and Arcelor Mittal India Ltd. (AMIL) that an upfront payment of Rs. 42000 cr. has been made keeping mind the 'just' treatment of all the stakeholders, Sibal argued that there was no need for 'an upfront payment' at all. He submitted that the resolution plan should have ideally provided for paying off all the creditors slowly, as that's what resolution is all about.
"Any resolution plan must provide for costs, and dues of the OCs (Operational Creditors) must have priority while paying off debts", said Sibal. He further contended that if there's ambiguity of coverage of OCs then RP (Resolution Professional) must ask for clarity. Referring to the amended provision, he raised the issue that under the amended section 30(2)(b), there's no protection of OCs.
It was Sibal's contention that the 'Core Committee' of Essar, comprising of secured financial creditors viz. SBI,IDBI, ICICI and EARC, illegally negotiated in private with AMIL, and did not reveal the final commercial offer to SCB till the last minute. The Final Resolution Plan ultimately offered a sum of Rs. 39,500 crores as upfront amount, which was lower than the commitment made by AMIL to Supreme Court, Sibal contended. He argued that in a 'show of artificial compliance', a sum of Rs. 2,500 cr. was added to the upfront amount of Rs. 39,500 cr. as 'guaranteed working capital adjustment' to reach the figure of 'Rs. 42,000 crores'. Sibal referred to this 'working capital adjustment' as a complete eyewash since the working capital adjustment already accrued and payable to the creditors of Essar, as of June 2019, was Rs. 5,339 crores, in addition of the upfront cash.
Not only did SCB challenge the 'Core Committee' for its secret negotiations, but also questioned its very validity. Sibal argued that there was no provision in the Code that permits constitution of a Core-Committee or Sub-Committee or delegating the CoC to such a core or sub Committee. He contended that the sub-committee showed a certain amount of bias towards SCB as, SCB was kept out of negotiations taking place between the CoC and AMIL, and was only informed about the plan on the last day before voting took place. Due to the secret negotiations between AMIL and the sub-committee, SCB contended that AMIL agreed to delegate the right to decide the manner of distribution to the CoC, and that such delegation was 'wholly unwarranted'.
Questioning the role of distribution taken over by the CoC, Sibal on SCB's behalf argued that the CoC is not authorised to decide the distribution of the resolution plan, and going by the provisions of section 30(4) of the IBC (Insolvency and Bankruptcy Code, 2016), the jurisdiction of the CoC is limited to consider the feasibility and viability of the resolution plan. However, it was argued by SCB that the Adjudicating Authority (NCLT/NCLAT) can examine the legality and validity of a resolution plan approved by the CoC on the touchstone of Section 30(2) read with Section 60(5)(c) of the IBC, and can also therefore determine all questions regarding distribution of proceeds.
Furthermore, relying upon the NCLAT's judgment in Binani Industries v/s Bank of Baroda and Anr., Sibal submitted that once a creditor is classified as a Financial Creditor, that creditor is entitled to be treated equally with all other Financial Creditors. In support of this argument, he said that as far as the UNCITRAL Legislative Guide on Insolvency Law were concerned, they were precisely a guide to the legislatures of various countries in the matter of framing insolvency laws but ultimately, it is the Code (IBC) alone that determines the question to be dealt with in Insolvency matters.
Deliberating upon the question whether the NCLAT had overstepped its jurisdiction while taking decision on the distribution, Therefore, Sibal contended that questioning the correctness of the distribution proposed was within the scope and ambit of NCLAT's jurisdiction and the CoC's argument that it has abrogated to itself the right to re-write the resolution plan could not stand. He further pressed that the change in the distribution undertaken by NCLAT was not unilateral since AMIL had maintained that it was agnostic to the manner of distribution and authorized NCLAT to alter the distribution in the manner considered fit.
On the position of the dissenting FCs (Financial Creditors), Sibal argued that there was no need for dissenting FCs in the IB Code. He said that there was no provision in the Code to question of the justness of the dissent, and the adjudicating authority cannot examine the commercial wisdom applied while the plan is approved or rejected.
Sibal challenged the vires of section 6 of the IBC Amendment act, 2019, which amended section 30(2)(b) and 30(4) of the IBC. It was his contention that the differentiation allowed by such an amendment would defeat the purpose of the Code, which is to achieve maximization of asset value. The insertion of the Explanation via the amendment puts CoC at the 'driver's seat' and they will always take care of their interests instead of Resolution Applicant(RA). In such situations, Sibal said, what will happen is that RAs will have a deal with CoC, and no one else will get anything. The amendment, he argued, encourages RAs to ignore minority financial creditors, or to offer minimum liquidation value to those with less security amount. He submitted that the amendment made such a discrimination between FCs statutorily 'fair and equitable' and this was against the spirit of the Code as the 'resolution' is for a 'going concern' entity and cannot be equated with the sale of assets, much less in liquidation. Hence, Section 53 IBC could not be read into section 30, as was done by the CoC.
Sibal also argued on the retrospectivity of the law. It was his contention that on the date of voting, when SCB dissented, the right of distribution was not affected by the dissent. Hence, such an amendment in a substantive law cannot be applied retrospectively to the unsecured FCs and OCs, he said. He further challenged the amendment to section 30(4) on the ground of arbitrariness, saying that manner of distribution cannot form part of feasibility and viability in light of regulation 38(2) read with reg. 38(3) read with reg. 38(4) of the CIR Regulations. He submitted that the 'CoC was acting as a judge in its own cause', and the amendment provision would allow the CoC to modify the resolution plan and step into the shoes of the RA.
After Sibal's arguments, the next day Justice Nariman asked Sibal if within the same class FCs were to dissent, whether they will be getting the same value as others or not. To this, Sibal replied that this was not the case after the amendment. He said "If I accept the plan, I will get the value that CoC decides even if the value is minimal. And if I dissent, then I get liquidation value. So there's no scope for me to dissent with the plan after the amendment."
Senior Counsel Arvind Datar, appearing for SCB, referred to section 392 of the Companies Act, 1956 and submitted that once Parliament has put together all classes of FCs together, then it could not create a class within that. He also questioned the constitutionality of the amendment to section 30(4) saying that the majority were using their strength in numbers to impose upon the minority, defeating the fundamental right to vote in any corporate democracy.
Appearing for one of the OCs, Ideal Packers and Movers Ltd, Senior Advocate Ranjith Kumar (Former SG) also challenged the constitutionality of the amendments on the ground of Retrospectivity. He argued that while procedural law can be made retrospective, substantive law can only be prospective. "So this amendment should be prospective and not apply to OCs", he said. He submitted that in order to achieve the object of the Code, it was necessary to balance the interest of all the stakeholders so as to maximise the value of the assets. He asserted that OCs are required to maintain the going concern status, so the argument that 55k cr has been paid is incorrect as it's not 'some form of charity', but the cost for providing raw materials so that pending projects of the Corporate Debtor (Essar Steel) may be completed.
While making his submissions, Ranjith Kumar expressed how 'Tribunalisation of justice' had become 'an issue'. Sr. Advocates Harish Salv and Arvind Datar also agreed with him saying that one could not blame the Tribunals for delayed justice, as all the work has now been shifted to the Tribunals, making it difficult for them to adhere to the timeline. Justice Nariman said "Everything should go back to the High Courts. High Court should be the feedings ground, as it's the HC judges that come here (to the Tribunals)."
Sr. Adv. Harish Salve began his objections to the submissions of SCb and the OCs stating that the appeal memo of SCB limits did not include the 'huge appeal' alleging illegal actions on part of the CoC. Referring to the fact that Sibal had argued that SCB was only against the distribution of the resolution plan, and not the resolution plan itself, Salve said "If Sibal had made his impassioned plea against the 'obnoxious' behaviour of the CoC, then the whole resolution plan should be thrown out."
Salve took objection to the fact that Sibal was questioning the integrity of AMIL and CoC by suggesting an act of collusion between them and in a rather heated argument, said "If you (Kapil Sibal) are raising corruption allegations against a big corporation (Arcelor) and trying to show the government in a poor light, then please go do that in a different forum, not here." He also contended that AMIL should not be obliged to pay more than it accepted to pay viz. an amount of Rs. 39,500 cr. plus 2,500 cr. for working capital adjustment. On the ground of 'feasibility' being taken by SCB and the OCs, Salve argued that Rs. 8ooo cr worth capital will also be infused into Essar Steel corporation, and that AMIL will also be modernising the enterprise and bring it back on its feet. As regards the issue of unconstitutionality, Salve contended that the amendment only restored the security interest, it didn't create a new right.
ASG Madhavi Divan, appearing for the Centre, defended the constitutionality of the amendments, urging that the Code must be looked at in a larger context rather than nitpicking 'individual provisions'. She submitted that the object of the Code was 'maximisation of value of the assets of the Corporate Debtor' (CD), in a time bound manner. While defending the time limit of 330 days introduced as a 'mandatory' provision, Divan said 'Time' is of absolute essence in the Code, and passage of time was inversely proportional to maximisation of value.
Divan informed the Court that the government was concerned by the alarming increase in non-viable sick industries, and the 'petitioners have been short sighted' in their arguments. She contended that NPAs have been emboldened by the practice of 'lending and borrowing' which the Government wanted to break away from, and the Code, along with the amendments, acts as a form of automated 'checks and balance'. She further argued that the Code and the amendments were workable only if all the parties recognised their limited roles, and did not transcend all of that - whether it's the CoC, or the adjudicating authority.
Divan submitted in Court that, the adjudicating authority had many times, overstepped its jurisdiction, which was understandable in extreme cases like insolvency of Jaypee, but that such overstepping should not become a precedent. Defending the strict timeline, Divan said that the purpose was that it is supposed to be deterrent. As time passes and backlog of 'rotten' cases is cleared, then the insolvency will become easier and shall be done in 90 days, she submitted.
On Divan's arguments, Justice Nariman expressed his concern that a lot of times, tribunals are not manned properly, and given that there's no residual discretion allowed by the Code, it becomes difficult to deal with a delay which may occur due to no one's fault. He asked if the Centre could consider reducing the period as was amended, but exclude time taken for litigation. He said that such a suggestion was worth considering as litigations can carry on due to no fault of the litigants. On Justice Nariman's suggestion, Diwan said sometimes litigation carries on due to the fault of litigants, to which J. Nariman replied "Surely you could differentiate between cases where the fault is of the litigants and when it isn't?"
While considering the arguments, Justice Nariman also asked the ASG if the word 'mandatorily' can be removed from the amended section, thus giving the adjudicating authority the window to allow extension of time on a case-to-case basis, where it feels that a strict implementation of the rule will cause 'undue hardship' and defeat the object of the Code.
"We are preserving your entire amendment. However, you can't say that in every case, the chopper of 'mandatorily' will come down. Think about it." Justice Nariman asked Diwan.
The ASG argued that the reason why speed and time are of essence, is two-fold. Firstly, the 'Calm period' helps the Corporate Debtor to get back on its feet. However, she said that since significant decisions without clear leadership and management cannot be made, a longer delay may be counter-productive. The second reason she gave was that liquidation value tends to go down with time due to loss of value of assets.
To show the success of the Code brought by the Centre, ASG Madhavi Divan told the Court that ease of doing business in India has increased since the implementation of the Code. She submitted latest report which shows that India is not ranked 63 in the Global Index Report on 'ease of doing business', and adverted to the IBC for the success. As far as the issue of 'fair and equitable' treatment of creditors was concerned, Divan contended that 'fair and equitable' does not mean 'equal', and equality does not mean equality between all the creditors. "This has to be left to the business", she said. Justice Nariman, on this submission, replied "For everything you are saying that decision should be left to the commercial wisdom. Statute cannot supplant the wisdom or plant the wisdom."
The arguments in the matter have concluded on October 24 and before pronouncing the judgment, the Bench has allowed the parties to file written submissions within a week, if any.
Read Written Submissions (As Argued by Kapil Sibal)