REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL/APPELLATE JURISDICTION

CIVIL APPEAL NO. 8766-67 OF 2019           DIARY NO.24417 OF 2019

Committee of Creditors of Essar Steel India Limited  Through Authorised Signatory  ...Appellant

Versus Satish Kumar Gupta & Ors. ...Respondents

WITH

CIVIL APPEAL NOS.5634-5635 OF 2019

CIVIL APPEAL NOS.5636-5637 OF 2019

CIVIL APPEAL NOS.5716-5719 OF 2019

CIVIL APPEAL NO.5996 OF 2019

CIVIL APPEAL NO.6266 OF 2019

CIVIL APPEAL NO.6269 OF 2019

WRIT PETITION (CIVIL) NO.1055 OF 2019

WRIT PETITION (CIVIL) NO.1064 OF 2019  

WRIT PETITION (CIVIL) NO.1049 OF 2019  

WRIT PETITION (CIVIL) NO.1050 OF 2019  

WRIT PETITION (CIVIL) NO.1057 OF 2019

WRIT PETITION (CIVIL) NO.1058 OF 2019

WRIT PETITION (CIVIL) NO.1061 OF 2019

WRIT PETITION (CIVIL) NO.1060 OF 2019

WRIT PETITION (CIVIL) NO.1056 OF 2019

CIVIL APPEAL NO.6409 OF 2019  

WRIT PETITION (CIVIL) NO.1063 OF 2019  

CIVIL APPEAL NOS.6433-6434 OF 2019  

WRIT PETITION (CIVIL) NO.1066 OF 2019   

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WRIT PETITION (CIVIL) NO.1087 OF 2019

WRIT PETITION (CIVIL) NO.1110 OF 2019

WRIT PETITION (CIVIL) NO.1113 OF 2019

WRIT PETITION (CIVIL) NO.1121 OF 2019

CIVIL APPEAL NO._8768_OF 2019

DIARY NO.31409 OF 2019

CIVIL APPEAL NO.7266 OF 2019  

CIVIL APPEAL NO.7260 OF 2019  

WRIT PETITION (CIVIL) NO.1246 OF 2019

CIVIL APPEAL NO._8769_OF 2019 DIARY NO.36838 OF 2019

WRIT PETITION (CIVIL) NO.1296 OF 2019

J U D G M E N T

R.F. Nariman, J.  

Delay Condoned in Civil Appeal Diary No. 31409 of 2019 and

Civil Appeal Diary No. 36838 of 2019. I.A. No. 102638 of 2019 in Civil

Appeal  Diary  No.  24417  of  2019  for  Permission  to  File  Appeal

allowed. Appeal Admitted.

1. This  group  of  appeals  and  writ  petitions  raises  important

questions  as  to  the  role  of  resolution  applicants,  resolution

professionals, the Committee of Creditors that are constituted under

the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as

“the Code”), and last, but by no means the least, the jurisdiction of the

National  Company  Law  Tribunal  (hereinafter  referred  to  as

“NCLT”/“Adjudicating  Authority”)  and  the  National  Company  Law

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Appellate  Tribunal  (hereinafter  referred  to  as  “NCLAT”/“Appellate

Tribunal”),  qua  resolution  plans  that  have  been  approved  by  the

Committee of Creditors. The constitutional validity of Sections 4 and 6

of  the  Insolvency  and  Bankruptcy  Code  (Amendment)  Act,  2019

(hereinafter  referred to as the “Amending Act  of  2019”)  have also

been challenged. These appeals and writ petitions are an aftermath

of this Court’s judgment dated 04.10.2018, reported as ArcelorMittal

India Private Limited v. Satish Kumar Gupta (2019) 2 SCC 1.

2. On  02.08.2017,  the  NCLT,  Ahmedabad  admitted  Company

Petition  (I.B.)  No.  39  of  2017  filed  by  Standard  Chartered  Bank

together with a Petition filed by the State Bank of India under Section

7 of the Code. One Satish Kumar Gupta was appointed as the interim

resolution  professional,  who  was  later  confirmed  as  resolution

professional. On 06.10.2017, the resolution professional by way of an

advertisement in the Economic Times, invited expressions of interest

from all interested resolution applicants to present resolution plans for

rehabilitating the corporate debtor, namely, Essar Steel India Limited.

On  24.12.2017,  the  resolution  professional  issued  a  request  for

proposal  (hereinafter  referred  to  as  “RFP”),  inter  alia,  inviting

resolution plans for the aforesaid corporate debtor, which was later

amended on  08.02.2018.  Two resolution  plans  were  submitted  on

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12.02.2018,  one  by  ArcelorMittal  India  Private  Limited  (hereinafter

referred  to  as  “ArcelorMittal”)  and  another  by  Numetal  Limited

(hereinafter referred to as “Numetal”) both of which were found to be

ineligible under Section 29-A of the Code. On 02.04.2018, resolution

plans  were  then  submitted  by  ArcelorMittal,  Numetal  and  one

Vedanta Limited (hereinafter referred to as “Vedanta”). The resolution

plan of ArcelorMittal specifically provided for an upfront payment of

INR 35,000 crores in order to resolve debts amounting to INR 49,213

crores. It was stated that unsecured financial creditors shall be paid

an aggregate amount of 5% of their admitted claims. Apart from the

above, INR 8,000 crores of fresh capital infusion by way of capex and

working capital was also to be infused. INR 3,339 crores - being the

aggregate  admitted  claims  of  operational  creditors,  other  than

workmen and employees, was to be paid to the extent of INR 196

crores, but only to trade creditors and government creditors. Small

trade  creditors,  defined  as  “having  claims of  less  than  one crore”

were  to  be  honoured  in  full,  as  was  the  claim  of  workmen  and

employees  of  the  corporate  debtor,  amounting  to  INR  18  crores.

Importantly,  the  resolution  applicant  empowered  the  Committee  of

Creditors to decide the manner in which the financial package being

offered would be distributed among the secured financial creditors.

Standard  Chartered  Bank,  which  was  stated  to  be  an  unsecured

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creditor, was to be paid an aggregate amount of 5% of its admitted

claims.  On  19.04.2018,  the  Adjudicating  Authority  directed  the

Committee of Creditors of the corporate debtor, which by then had

been set up by the interim resolution professional,  to consider the

eligibility of the aforesaid resolution applicants.  

3. On 10.09.2018, Standard Chartered Bank was classified as a

secured financial creditor  of the corporate debtor by the resolution

professional.  On 04.10.2018, this Court declared both ArcelorMittal

and Numetal ineligible by virtue of their resolution plans being hit by

Section  29-A of  the  Code.  However,  an  order  was  passed  under

Article 142 of the Constitution, stating that one more opportunity be

granted to both ArcelorMittal and Numetal to pay off the NPAs of their

related corporate  debtors  within  two weeks of  the Supreme Court

judgment, failing which the corporate debtor would go into liquidation.

On 18.10.2018, ArcelorMittal informed the resolution professional and

the Committee of  Creditors that  it  had made payments as per the

Supreme Court’s judgment dated 04.10.2018. However, Numetal did

not make any such payment. As a result, on 19.10.2018, ArcelorMittal

resubmitted  its  resolution  plan  of  02.04.2018,  which  was  then

evaluated  by  the  Committee  of  Creditors  on  the  same  date  -

ArcelorMittal  being  declared  as  the  highest  evaluated  resolution

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applicant  vis-a-vis  Vedanta.  On  25.10.2018,  the  final  negotiated

resolution plan of  ArcelorMittal  was approved by the Committee of

Creditors by a 92.24% majority. After several proceedings before the

NCLT and the NCLAT, the NCLT, by its judgment dated 08.03.2019

disposed  of  the  application  to  allow  the  resolution  plan  filed  by

ArcelorMittal as follows:

“…we are of the view that the dues of the operational creditors  must  get  at  least  similar  treatment  as compared to the dues of the financial creditors on the principle  of  equity  and  fair  play  as  well  as  the Wednesbury  Principle  of  Unreasonableness  and  the Doctrine of  Proportionality,  so  as  to  avoid  disparity  in making  payments  to  the  operational  creditors  having debt value of Rs.1 crore and above (a token of Re.1) and  the  allegation  of  discriminatory  practice  could  be ruled out…Hence, in our view, if  a reasonable formula for  apportionment  is  worked  out  so  that  85%  of  the amount offered by the resolution applicant is distributed among the financial creditors and the remaining 15% of the  amount  is  distributed  amongst  the  rest  of  the operational  creditors,  then  the  entire  claim  of  the operational  creditors,  which comes to around Rs.4700 crore  can  be  substantially   paid  off  or  at  least  the operational creditors can get 50% of their admitted and undisputed  claim  in  the  light  of  the  judgment  of  the Hon’ble Supreme Court in  Chitra Sharma  v. Union of India (supra). Such  object  can  be  achieved,  if  the financial creditor and the members of the CoC are willing to  sacrifice  the  interest  component  on  their  principal loan, because it is established position in the record that the  principal  loan  liability   of  the  corporate  debtor company comes to around Rs.35,000 crore in the year 2017  when  these  IB  Petitions  were  admitted,  which includes the interest component also and by giving such hair-cut to the interest component to the extent possible by  providing  provision  for  15%  amount  for  the  other operational  creditors  and  stakeholders,  we  are  of  the

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view that debts of the entire operational creditors can be satisfied in a reasonable and fair manner and then such I.A.s preferred by the operational  creditors would also become  infructuous  and  this  Adjudicating  Authority would not be required to deal with the merits of each and every  I.A.  Thus,  this  would  be  beneficial  to  avoid multiplicity  of  legal  proceedings  and  to  remove  any impediment for effective implementation of the resolution plan and to achieve the main theme and object of the present I & B Code.”

4. By an interim order dated 20.03.2019 in the appeals that were

filed before NCLAT, the NCLAT directed the Committee of Creditors

to take a decision on certain suggestions that were made. Pursuant

to this, on 27.03.2019 the Committee of Creditors decided - voting

having concluded on 30.03.2019 -  to  appeal  against  the NCLAT’s

order, and, by a majority of 70.73%  approved making an  ex gratia

payment of INR 1,000 crores to operational creditors above INR 1

crore.  Appeals  filed  against  the interlocutory  orders  of  the NCLAT

were then heard by this Court, which by its order dated 12.04.2019,

inter  alia, directed  non-implementation  of  the  judgment  dated

08.03.2019  of  the  NCLT  and  expeditious  disposal  of  the  appeal

before the NCLAT.   

5. By its final judgment dated 04.07.2019, the NCLAT held that:  

(i) In  a  resolution  plan  there  can  be  no  difference  between  a

financial creditor and an operational creditor in the matter of payment

of  dues,  and  that  therefore,  financial  creditors  and  operational

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creditors  deserve  equal  treatment  under  a  resolution  plan.

Accordingly,  the  NCLAT  has  re-distributed  the  proceeds  payable

under the approved resolution plan as per the method of calculation

adopted by it so that all financial creditors and operational creditors

be paid 60.7% of their admitted claims;  

(ii) Securities  and  security  interest  is  irrelevant  at  the  stage  of

resolution  for  the  purposes  of  allocation  of  payments,  thereby

directing that each financial creditor (whether secured or unsecured)

with a claim equal to or more than INR 10 lakhs be paid 60.7% of its

admitted claim irrespective of their security interest;

(iii) Operational creditors by definition have separate classes within

themselves and can be classified into sub-classes for the purpose of

distribution (while  rejecting any classification amongst  the financial

creditors) on the basis of the admitted amounts thereby directing that

operational creditors with a claim of equal to or more than INR 1 crore

be paid 60.268% of their admitted claims.

(iv) Certain  additional  claims  of  operational  creditors  (some  of

which  were  highly  belated  and/or  without  sufficient  proof)  were

admitted,  such that  the admitted operational  debt of  approximately

INR  5,058  crores  at  the  time  of  the  approval  of  the  approved

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resolution  plan  became an  operational  debt  of  approximately  INR

19,719.20 crores.

(v) The  profits  generated  by  the  corporate  debtor  during  the

Corporate Insolvency Resolution Process (hereinafter referred to as

the  “CIRP”)  would  be  distributed  equally  amongst  the  financial

creditors and operational creditors of the corporate debtor.

(vi) A  sub-committee  or  core  committee  cannot  be  constituted

under  the  Code,  being  a  foreigner  thereto.  The  Committee  of

Creditors alone are to take all decisions by themselves.

(vii) The Committee of Creditors has not been empowered to decide

the manner in which the distribution is to be made between one or

other  creditors,  as  there  would  be  a  conflict  of  interest  between

financial  and  operational  creditors,  financial  creditors  favouring

themselves to the detriment of operational creditors.

(viii) Section 53 of the Code cannot be applied during the corporate

resolution process but will apply only at the stage of liquidation.  

(ix) Claims that have been decided by the resolution professional

and affirmed by the Adjudicating Authority or the Appellate Tribunal

are final and binding on all creditors. However, claims which have not

been decided by the Adjudicating Authority or the Appellate Tribunal

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on  merits  may  be  decided  by  an  appropriate  forum  in  terms  of

Section 60(6) of the Code.

(x) Financial Creditors in whose favour guarantees were executed,

as their total claim stands satisfied to the extent of the guarantee,

cannot re-agitate such claims as against the principal borrower.   

6. We  have  heard  detailed  arguments  made  by  Shri  Gopal

Subramanium and Shri Rakesh Dwivedi, learned senior counsel, on

behalf  of  the Committee of  Creditors of  Essar  Steel  India Limited.

They have argued that the provisions of the Code provide for a broad

classification  of  creditors  as  financial  creditors  and  operational

creditors  on  the  basis  of  the  nature  of  the  transaction  between

creditors and a corporate debtor. They have further argued that the

Code  does  not  mandate  identical  treatment  of  differently  situated

creditors either inter se within financial creditors, who may be secured

or unsecured, and/or financial creditors vis-a-vis operational creditors.

The  Code  only  posits  equitable  treatment  of  different  classes  of

creditors  recognising  that  different  classes  deserve  differential

treatment. According to them, financial creditors as a class have a

superior status as against operational creditors, the same being the

case with  secured creditors  vis-a-vis  unsecured creditors.  For  this

purpose, they relied upon certain provisions of the Code. They further

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argued that the general law of the land as contained in Section 48 of

the  Transfer  of  the  Property  Act,  1882  and  Section  77  of  the

Companies Act, 2013 would not have been taken away  sub-silentio

by the Code and have relied upon a large number of authorities for

this purpose. They also referred to and relied upon the UNCITRAL

Legislative Guide on Insolvency Law (hereinafter referred to as the

“UNCITRAL Legislative Guide”), which was referred to by this Court

in Swiss Ribbons Private Limited v. Union of India (2019) 4 SCC

17,  and  upon  a  report  by  the  International  Monetary  Fund  titled

“Orderly  and Effective Insolvency Procedures – Key Issues”.  They

also referred to and relied upon judgments under Article 14 of the

Constitution  of  India  which  highlight  the  fact  that  classification  is

permissible  so  as  to  differentiate  persons  who  are  unequal,  who

cannot  then be treated equally.  They also argued,  relying strongly

upon  the  IMF  paper  on  “Development  of  Standards  for  Security

Interest”  by Pascale De Boeck and Thomas Laryea, in addition to

several  expert  reports, that  classification of  creditors based on the

nature of the debt and/or security interest is a  sine qua non for any

Insolvency Code. They argued that if secured financial creditors are

to be treated at par with unsecured creditors, such secured creditors

would  rather  vote  for  liquidation rather  than Corporate  Resolution,

contrary to the main objective sought to be achieved by the Code.

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They then argued that the health of the financial sector is critical for

the overall health and growth of the economy, which would otherwise

be subverted, if the impugned judgment were to be given effect. They

relied  strongly  upon  paragraphs  27  and  28  of  Swiss  Ribbons

(supra),  in  particular,  which  differentiated  between  secured  and

unsecured creditors, most financial creditors being secured creditors

and most operational creditors being unsecured. They also argued

that the law laid down in  K. Sashidhar v. Indian Overseas Bank

2019 SCCOnline SC 257, had made it clear that there is a judicial

hands-off when it comes to the commercial wisdom of the Committee

of  Creditors,  which  has  been  directly  infracted  by  the  impugned

judgment,  which  has  held  that  the  Committee  of  Creditors  has

nothing to do with the distribution of amounts which are infused by

the  resolution  applicant  for  payment  of  the  corporate  debtor’s

erstwhile  debts.  They  relied  heavily  upon  the  Bankruptcy  Law

Reforms  Committee  Report,  2015  (hereinafter  referred  to  as  the

“BLRC Report”) to buttress this submission, as well as the UNCITRAL

Legislative Guide.  They then submitted that  a resolution plan is  a

consent-based  plan  proposed  by  the  resolution  applicant  for  a

corporate debtor. The counterparty to such a plan is the Committee of

Creditors, which is required to give a minimum consent of 66% voting

share,  which consent  then becomes the basis for  the Adjudicating

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Authority to approve a resolution plan for the corporate debtor. Once

approved by the Adjudicating Authority, such plan becomes binding

on  all  stakeholders  as  is  mentioned  by  Section  31  of  the  Code.

Therefore, any modification, as has been done by the NCLAT, of such

plan is illegal. They then argued that the Committee of Creditors has

both  the  power  and  the  jurisdiction  to  deal  with  all  commercial

aspects of a resolution plan, including distribution of proceeds under

such  plan,  and  also  referred  to  and  relied  upon  the  recent

amendments made to Section 30 of the Code. They stated that the

ArcelorMittal  plan,  as  amended,  looked  after  all  stakeholders

including operational creditors, and stated that a staggering amount

of INR 55,000 crores qua operational creditors was paid during the

600 odd days of CIRP being carried out, operational creditors whose

claims were above INR 1 crore, now being paid approximately 20% of

their admitted dues. They also highlighted the fact that the secured

creditors have lost  about  INR 17,000 crores of  interest  in  the last

three years due to the account of the corporate debtor having been

classified as NPA. They then argued that  the setting up of  a sub-

committee by the Committee of  Creditors is  permissible under the

Code, and referred to certain judgments to buttress this proposition.

They further argued that no decision-making power was delegated to

the sub-committee, nor did the sub-committee at any time decide or

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even recommend on distribution of amounts. They then argued that

the NCLAT admitted various rejected/disputed/estimated claims worth

INR  13,767  crores,  which  was  more  than  the  amount  originally

claimed by operational creditors. Various instances of non-application

of mind were pointed out by which claims worth INR 11,278, which

were not yet crystallized, were admitted by the NCLAT for payment,

and various examples of double payment were also given. It was also

argued that the NCLAT erroneously permitted several disputed claims

to be raised outside the provisions of the Code after approval of the

resolution plan, by referring to and relying upon Section 60(6) of the

Code,  which  merely  saved limitation  for  barred  claims.  They  then

argued that extinguishment of the right of creditors against individual

guarantees  extended  by  the  promoters/promoter  group  of  the

corporate  debtor  was  wholly  illegal  being  contrary  to  several

judgments of this Court and contrary to the terms of the guarantees

themselves.  They  further  argued  that  the  profits  that  were  made

during the CIRP can obviously not be used for payment of the debts

of  the  corporate  debtor,  as  has  been  ordered  by  the  NCLAT.

Ultimately, according to the learned counsel, the impugned NCLAT

judgment  deserves  to  be  set  aside  because  it  has  curtailed  the

authority of the Committee of Creditors; expanded the jurisdiction of

the Adjudicating Authority as well as the NCLAT beyond the bounds

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contained in the Code; and has transgressed the most basic tenet of

the Committee of Creditors’ commercial wisdom being reflected by an

over 66% majority vote, which has been nullified by the NCLAT by

completely modifying and substituting the resolution plan approved by

the Committee of Creditors.   

7. Shri  Shyam  Divan,  learned  senior  advocate  appearing  on

behalf of the State Bank of India, has supported the submission made

on behalf of the Committee of Creditors of Essar Steel India Limited.

According  to  the  learned senior  advocate,  whereas  his  client  and

other secured creditors are secured to the extent of 99.66% of their

outstanding dues, the only security of Standard Chartered Bank is a

pledge of  the  shares  held  by  the  corporate  debtor  in  an  offshore

Mauritian  subsidiary,  namely  Essar  Steel  Offshore  Limited

(hereinafter  referred  to  as  “ESOL”),  and  the  fair  value  of  ESOL

pledged shares has been determined at  only INR 24.86 crores as

against the total outstanding admitted dues of  INR 3487.10 crores

(being 0.7% of the total admitted debt of Standard Chartered Bank).

Thus, according to him, Standard Chartered Bank is an unsecured

creditor to the extent of INR 3462.14 crores, and as against a sum of

INR 60.71 crores which was payable under the resolution plan as

approved by the Committee of Creditors, the NCLAT has now upped

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this figure to approximately INR 2160 crores completely beyond its

limited jurisdiction under  the Code.  Apart  from the above,  he also

argued that Standard Chartered Bank is precluded from raising any

challenge to the constitution of a sub-committee as it had participated

in  several  meetings  in  which  it  raised  no  objection  to  the  sub-

committee,  and  had  in  fact  requested  to  be  a  part  of  the  sub-

committee. He then argued that negotiations that were undertaken by

the  sub-committee  was  in  accordance  with  the  mandate  of  the

Committee  of  Creditors,  which  alone  took  all  decisions;  the  sub-

committee  merely  being  an  executive  arm  of  the  Committee  of

Creditors.

8. Shri Kapil Sibal, appearing on behalf of the Standard Chartered

Bank,  defended the NCLAT judgment on all  aspects.  According to

him, the offer made by ArcelorMittal was to make a payment of INR

42,000 crores as an upfront  amount  in  order  to  pay 100% of  the

principal  outstanding  of  the  secured  financial  creditors  of  the

corporate debtor. That this sum came to be offered only as a result of

an offer made by Numetal on 07.09.2018 to pay INR 37,000 crores

as  upfront  payment  to  secured  financial  creditors.  According  to

learned counsel, the sum of INR 42,000 crores cannot be worked out

unless the principal amount owed to Standard Chartered Bank is also

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included  in  the  said  figure.  The  figure  of  INR 42,000  crores  was

stated  by  the  counsel  of  the  Committee  of  Creditors  before  this

Hon’ble  Court,  in  the  final  hearing  which  took  place  before  the

judgment in  ArcelorMittal India (supra), and that this sum could be

the minimum value of payment with a scope for further negotiations.

However, what ultimately turned out is a payment of a lesser value,

namely INR 39,500 crores as upfront, INR 2,500 crores being added

as an eyewash towards Guaranteed Working Capital Adjustment. The

reason  this  was  an  eyewash  is  because  Odisha  Slurry  Pipeline

Infrastructure Limited (hereinafter referred to as “OSPIL”),  a wholly

owned subsidiary of  the corporate debtor,  owned a slurry pipeline.

ArcelorMittal, in order to ensure unhindered usage of the said slurry

pipeline, agreed that it would acquire the debts of OSPIL. In order to

achieve such acquisition of the debts of OSPIL, the Core Committee

of Creditors relieved ArcelorMittal from the solemn offer made to the

Supreme Court of India to pay upfront a sum of INR 42,000 crores,

and reduced from this said amount, a sum of INR 2,500 crores. Thus,

the  Core  Committee’s  decision,  as  ratified  by  the  Committee  of

Creditors,  was  to  accept  a  sum  lesser  than  that  guaranteed  as

upfront  payment  by ArcelorMittal.  Shri  Sibal  then trained  his  guns

against  the  very  formation  of  a  Core  Committee/Sub-Committee,

stating  that  it  is  against  the  provisions  of  the  Code,  and  that  as

17

originally conceived, it was only to facilitate representation before the

Adjudicating Authority, which was over, in any case, by 31.05.2018.

The  Core  Committee  however  went  on  conducting  secret

negotiations with ArcelorMittal by which it buried Standard Chartered

Bank’s debt almost completely. This was done by reducing Standard

Chartered Bank’s entitlement of INR 2585 crores (INR 2646 crores

minus INR 61 crores), if it were to have outstanding payments made

on the basis of value of debt instead of value of security. In any case,

it was further argued that the resolution plan of ArcelorMittal was itself

flawed  in  that  it  would  be  contrary  to  Regulation  38(1A)  of  the

Insolvency  and  Bankruptcy  Board  of  India  (Insolvency  Resolution

Process  for  Corporate  Persons)  Regulations,  2016  (hereinafter

referred to as the “2016 Regulations”),  as it  did not  deal  with the

interests of all stakeholders. It would also be contrary to the RFP that

was issued on 24.12.2017, clause 4.6.1(d) of which stated that the

resolution plan should have contained a statement as to how it would

deal with the interest of all stakeholders including, but not limited to,

break  up  of  amounts  to  be  paid  to  secured  financial  creditors,

unsecured financial creditors and operational creditors, all  of which

was  left,  thanks  to  secret  negotiations  with  ArcelorMittal  by  the

resolution plan to the Committee of Creditors. Learned counsel then

argued  that  under  the  provisions  of  the  Code,  the  role  of  the

18

Committee of  Creditors is  limited to considering the feasibility  and

viability of the resolution plan, which does not include the manner of

distribution of the amount payable by the resolution applicant to the

erstwhile creditors of the corporate debtor. In any event, the decision

of the Committee of Creditors on the manner of distribution in the

facts  of  this  case  is  illegal  and  arbitrary,  as  once  a  creditor  is

classified  as  a  financial  creditor,  such  creditor  is  entitled  to  equal

treatment with all other financial creditors, irrespective of whether it is

secured or unsecured. For this purpose, the learned senior advocate

relied upon the UNCITRAL Legislative Guide as well  as the BLRC

Report, 2015. According to the learned senior advocate, Parliament

has advisedly chosen not to create different classes of financial or

operational creditors when it comes to the process of resolution of

debts; and importance is given to the value of debt, as opposed to,

the  value  of  security  which  is  given  importance  only  when  the

liquidation process is to take place. He argued that Section 53 of the

Code would  apply  only  during  liquidation  and  not  at  the  stage  of

resolving insolvency as is clear from the fact that “secured creditor”

as defined by Section 3(30) of the Code is used only in Section 53 of

the  Code  which  is  contained  in  Chapter  III  entitled  “Liquidation

Process” and not at all  in Chapter II  of the Code which is entitled

“Corporate  Insolvency  Resolution  Process”.  In  Chapter  II,  only

19

financial and operational creditors, as defined, are spoken about. In

point of fact, in the 17th meeting of the Committee of Creditors held on

09.08.2018, the Committee of Creditors had earlier decided that the

upfront payment made shall be divided amongst financial creditors on

the basis of their voting shares, which in turn is fixed on the basis of

the debt that is owed to each one of them. He further argued that the

Committee  of  Creditors  could  not  possibly  decide  the  manner  of

distribution as it would give rise to a serious conflict of interest, as the

majority  may get  together  to  ride roughshod over  the minority.  He

further  argued  that  no  categorisation  can  be  made  based  on  the

security  interest  of  financial  creditors,  which  security  interest  may

itself  vary from first  charge holders to second charge holders and

then  to  subservient  and  residual  charge  holders.  The  fact  that

Standard  Chartered  Bank  has  been  recognised,  albeit  only  on

10.09.2018,  as  a  secured  financial  creditor  by  the  resolution

applicant,  is  not challenged by any of the other financial creditors.

Further, the valuation of pledged shares at INR 24.86 crores is itself a

flawed evaluation, the actual value of the shares being in excess of

US $600 million.  

9. Shri  Sibal  then  took  us  to  the  Amending  Act  of  2019  and

Section 6 of the Amending Act of 2019 in particular, which amended

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Section 30 of the Code, shortly after the judgment of NCLAT in the

present  case.  This amendment  was made in the Code with effect

from  16.08.2019.  Shri  Sibal’s  first  argument  is  that  the  aforesaid

amendment would not apply to the facts of the present case, in as

much as the amendment made is prospective in nature. Further, even

under  Explanation 2 that  has been added by the amendment,  the

facts of the present case do not fall within sub-clauses (i) to (iii) of the

aforesaid  Explanation.  A reading of  the amended Section 30(2)(b)

together with the Explanations contained therein, and the amendment

of Section 30(4) would leave nobody in any manner of doubt that the

purpose of the amendment was to get over the NCLAT judgment in

order  that  the  huge  amount  of  around  INR  2,100  crores,  that  is

payable to a private foreign bank namely Standard Chartered Bank,

gets reduced to around INR 61 crores, so that nationalised banks and

other  entities in which the Government  has an interest  may get a

larger share of the pie to the detriment of Standard Chartered Bank.

The legislature has, therefore, overstepped the separation of powers

boundaries  to  step  in  and  legislatively  adjudicate  the  facts  of  a

particular  case. Even otherwise,  according to learned counsel,  the

provision is an arbitrary exercise of power which brings in Section 53,

which is applicable only when the corporate debtor gets liquidated,

into  the  Corporate  Resolution  Process,  contrary  to  the  original

21

scheme of the Code.  Also, Explanation 1 directly interferes with the

judicial function and cannot state that a distribution shall be fair and

equitable, which can only be decided by the Adjudicating Authority

and not by Parliament. Also, the amendment made to Section 30(4)

cannot possibly include value of security interest of a secured creditor

within the expression “feasibility and viability” which has been done

only in order that it be applied to the present case.

10. Shri  Arvind Datar  supplemented the arguments  of  Shri  Sibal

and also appeared on behalf  of the Standard Chartered Bank. He

argued  that  the  loan  by  Standard  Chartered  Bank  to  the  wholly

owned subsidiary of the corporate debtor is also a loan towards the

project asset of the corporate debtor and that the State Bank of India

was fully aware of such lending that was availed of by the corporate

debtor. The wholly owned subsidiary is a Special Purpose Vehicle in

order to ensure availability of coal for the corporate debtor to cater to

enhanced production capacity.  

11. He elaborated on the meaning of the expression “modifications”

contained in Regulation 39(3) of the 2016 Regulations, arguing that

the  power  to  make  modifications  does  not  include  the  power  to

discriminate  among  creditors  who  are  equally  situated.  Also,  the

Committee  of  Creditors  cannot  make  rankings  among  financial

22

creditors or otherwise create a class within a class. He reiterated that

the status of Standard Chartered Bank as a secured financial creditor

has not been disputed by any member of the Committee of Creditors.

12. Shri Ranjit Kumar, learned senior advocate appearing on behalf

of  Ideal  Movers  Limited,  an  operational  creditor  of  the  corporate

debtor, stated that the admitted claim by the resolution professional

was INR 178,50,51,792, and the original  resolution plan contained

nothing by way of repayment to his client. It is only after the NCLT

judgment when INR 1,000 crores extra was paid by ArcelorMittal for

operational  creditors  generally,  that  his  client  would  now  receive

20.5% of the admitted claim. Of course under the NCLAT judgment,

he would stand to gain much more. He argued from a reading of the

preamble of the Code and some of its provisions that a key objective

of the Code is to ensure that the corporate debtor goes on doing its

business as a going concern during the CIRP as a result of which a

large number of operational creditors have to be paid their dues –

such as workmen, electricity dues, etc. It is for this reason that the

CIRP has  to  ensure  the  balancing  of  interest  of  all  stake  holders

which can only be achieved by a feasible and viable resolution plan

which is capable of effective implementation. He, therefore, argued

that the process of revival and the process of liquidation are distinct

23

and separate and have been so treated by the Code. This being so,

priorities of payment which apply in liquidation obviously cannot apply

when  the  corporate  debtor  is  being  run  as  a  going  concern  as

otherwise secured creditors alone will  be paid and not  operational

creditors who are necessary for  the running of  the business.  This

stems  from  the  fact  that  the  insolvency  resolution  process  is  to

maximise  the  value  of  assets  of  corporate  debtors  whereas  the

liquidation  process  is  to  recover  outstanding  dues  by  selling  the

assets  of  the  corporate  debtor.  He  relied  strongly  on  certain

observations  in  Swiss  Ribbons (supra)  to  buttress  the  aforesaid

proposition. He also argued that  the UNCITRAL Legislative Guide,

being a guide to legislation, ought not to be looked at once the Code

has  been  enacted.  He  then  argued,  that  it  is  obvious  that  the

Amending Act of 2019 has been made in a great hurry in order that

the NCLAT judgment be neutralised by law. This is clear from the fact

that the NCLAT judgment is dated 04.07.2019 and the Amending Act

of  2019 was passed only  one month later  i.e.  on 06.08.2019.  No

Standing Committee was consulted, as was the case of all previous

amendments  made  to  the  Code,  resulting  in  completely  arbitrary

provisions being inserted. He trained his guns against Section 4 of

the Amending Act of 2019, arguing that timelines cannot be imposed

or stipulated for the adjudication of disputes by any court, least of all

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the  Supreme  Court  of  India.  The  period  of  time  taken  in  court

proceedings  cannot  possibly  be  included  within  a  timeframe as  it

would  then  nullify  the  role  of  the  Adjudicating  Authority  and  the

Appellate Tribunal, and would defeat the primary object and purpose

of the Code, which is resolution rather than liquidation.

13. Shri  Harin  P.  Raval,  learned  senior  advocate  appearing  on

behalf of Kamaljit Singh Ahluwalia in Writ Petition (Civil) No.1058 of

2019  also  assailed  the  Amending  Act  of  2019.  Apart  from  the

arguments made by Shri Sibal and Shri Ranjit Kumar, he also argued

that the amendments made in Section 30 would be contrary to the

rationale and design of the BLRC Report, 2015. He also added that

the Amending Act of 2019, insofar as it applied retrospectively, would

be constitutionally infirm as it cannot be said that the amendments

made thereto are in any manner clarificatory but are new substantive

amendments.  

14. Shri  A.K.  Gupta,  learned  advocate  appearing  for  L&T

Infrastructure Finance Co. Limited in Civil Appeal No.6409 of 2019,

assailed the classification of his client as an operational creditor and

stated  that,  on  facts,  the  appellant  had  entered  into  a  facility

agreement, sanctioning a term loan of INR 75 crores to Essar Power

Gujarat Limited, a subsidiary of the corporate debtor. The borrower

25

then entered  into  a  Promoter  Obligation  Agreement  by which one

Essar Power Limited undertook an obligation to arrange for cheques

from the corporate debtor. INR 62 crores of such post-dated cheques

were  issued  in  favour  of  this  appellant,  as  a  result  of  which  this

appellant is also entitled to be classified as a financial creditor and

not  an  operational  creditor.  He  thus  assailed  the  finding  of  the

resolution professional, the NCLT and the NCLAT on this aspect of

his case.  

15. Shri Mishra, learned advocate, appeared on behalf of Dakshin

Gujarat  Vij  Company,  in  which  he  submitted  that  the  NCLAT had

rightly directed that the claim of his client should be considered with

all  other  creditors,  and prayed in  the alternative that  directions be

issued  that  his  client  be  entitled  to  recover  the  amount  claimed,

subject to the decision of the court, from the corporate debtor as a

going  concern.  Similar  were  the  submissions  made  by  Smt.

Ramachandran  on  behalf  of  the  Gujarat  Energy  Transmissions

Corporation Limited.  Shri  Maninder  Singh,  learned senior  counsel,

appeared on behalf of the State of Gujarat and supported paragraph

196 of the NCLAT judgment by which his client would be paid 60.26%

of  Sales  Tax  dues.  Shri  Mukul  Rohatgi,  learned  senior  advocate

appearing on behalf of Mr. Prashant Ruia supported the findings of

26

the NCLAT, insofar as the NCLAT held that the personal guarantees

given by his client had become ineffective in view of the payment of

the debt by way of  resolution to the original  lenders.  Further,  Shri

Rohatgi also argued that the right of subrogation and the right to be

indemnified conferred on a guarantor under the Indian Contract Act

would continue to exist in the absence of a positive waiver of such

right by the said guarantor.

16. Shri Harish Salve, learned senior advocate appearing on behalf

of  ArcelorMittal,  referred  to  the  appeal  filed  by  the  Standard

Chartered Bank, being Civil Appeal No. 6433 of 2019, and stated that

the remedy sought therein was restricted to quashing the impugned

judgment to the extent of paragraph 221 thereof which had held that

financial creditors in whose favour guarantees were executed, could

not re-agitate their claims against the principal borrower, as their total

claim  stands  satisfied  to  the  extent  of  the  guarantee,  and  that

therefore all the arguments made by Shri Sibal on behalf of Standard

Chartered Bank, being outside the scope of the appeal, ought not to

be  considered  at  all.  He  further  argued  that  since  most  of  the

arguments of Shri Sibal would go to the validity of the resolution plan,

which Shri Sibal himself has stated that he is not assailing, should

therefore be rejected on this ground alone. He also argued that it was

27

wholly  incorrect  to  say  that  only  INR 39,500  crores  would  be  an

upfront payment. He read to us certain documents which would show

that  the guaranteed upfront  payment  INR 42,000 crores which his

client had committed very much continued and that INR 2,500 crores

which formed part  of  this figure was allowed by the Committee of

Creditors while negotiating with his client for very good reason.

17. Shri Neeraj Kishan Kaul, learned senior counsel also appearing

on behalf of ArcelorMittal, stressed the fact that the importance of the

insolvency resolution process is that not only is the corporate debtor

to be put back on its feet, but that the resolution applicant whose plan

is accepted must be able to start  on a fresh slate.  This being the

case,  obviously  Shri  Rohatgi’s  argument,  that  the  personal

guarantees of the erstwhile promoters do not stand extinguished and

that, at the very least, the right of subrogation cannot be taken away,

would boomerang upon the successful  resolution applicant  if  such

right  of  subrogation  were  to  be  allowed to  continue.  Shri  Salman

Khurshid and Shri P. Tripathi, learned senior advocates appearing on

behalf of Deutsche Bank, stressed that it was important to recognise

separate classes of creditors and reiterated the arguments made on

behalf of a number of their forbears as to how it is important to make

a  sub-classification  among  financial  creditors,  as  also  among

28

operational  creditors,  so  that  there  may  be  real  equality,  that  is,

equality  among  equals.  Shri  Vikas  Mehta,  learned  advocate

appearing  on  behalf  of  GAIL,  adverted  to  paragraph  84  of  the

impugned NCLAT judgment and argued that the facts qua his client

were  wrongly  stated  inasmuch  as  the  admitted  claim  figures  are

wrongly stated.

18. Mrs.  Madhavi  Divan,  learned  Additional  Solicitor  General  of

India, replied to the arguments of Standard Chartered Bank and the

operational creditors as to the constitutional invalidity of Sections 4

and 6 of the Amending Act, 2019. She argued that the amendments

further  the  objects  sought  to  be  achieved  by  the  Code,  which  is

maximisation of value of the assets of the corporate debtor in a time-

bound  frame.  She  pithily  stated  that  the  value  of  assets  and  the

passage of time within which insolvency resolution takes place are in

inverse proportion as the passage of time erodes the value of these

assets. She pointed out the previous experiments that had failed and

adverted to certain judgments to show that the failure of previous acts

such as The Sick Industrial Companies (Special Provisions) Act, 1985

(hereinafter referred to as “SICA”) and the Recovery of Debts Due to

Banks and Financial Institutions Act, 1993 (hereinafter referred to as

“Recovery of Debts Act”) were due to enormous delays in disposal of

29

cases. It is this loophole that was sought to be plugged in accordance

with the original conception for the framework of the Insolvency Code

that is to be found in the BLRC Report of 2015. She also referred to

Regulation 39-C of  the 2016 Regulations and 32(e) and (f)  of  the

Insolvency  and  Bankruptcy  Board  of  India  (Liquidation  Process)

Regulations,  2016  (hereinafter  referred  to  as  “Liquidation  Process

Regulations”) together with Regulation 32-A(4) of Liquidation Process

Regulations, to state that a longer period than was originally given by

Section 12 of the Code is now given so that, taking into account court

proceedings,  there must  now be an outer  limit  within which either

resolution  takes  place  or  the  company  goes  into  liquidation.  The

Regulations pointed out also show that even if the corporate debtor

goes into liquidation, 90 days is given to sell the undertaking of the

corporate debtor as a going concern so that 90 days over and above

330 days are also available to dispose of the corporate debtor as a

going concern. So far as the challenge to Section 6 of the Amending

Act  of  2019  is  concerned,  she  argued  that  there  is  a  symbiotic

relationship  between  a  resolution  applicant  and  the  Committee  of

Creditors,  who  alone  are  to  take  a  commercial  decision  by  the

requisite majority whether or not to put the corporate debtor back on

its feet. The reason for Explanation 1 to Section 30(2)(b) is that, what

is fair and equitable must be determined within the framework of the

30

Code, which is the commercial wisdom of the Committee of Creditors,

subject  to  certain  minimum  guidelines  to  be  observed.  Thus,

operational creditors who were originally to be paid only a minimum

calculated on the basis of what they would be paid in the event of

liquidation of a corporate debtor, are now to be paid the higher of two

amounts,  thereby raising the threshold of  what  is to  be paid by a

resolution applicant  by way of  a minimum to operational  creditors,

being  enhanced  under  the  amended  provision.  Further,  even

dissentient  financial  creditors  are  now  to  be  paid  a  minimum

guaranteed amount for the first time, as 66% of the financial creditors

may give a certain class of financial creditors ‘nil’ recovery, in which

case this provision now comes to their rescue stating that they shall

not  be  given  anything  less  than  the  amount  to  be  paid  to  such

creditors  in  accordance with  Section 53(1)  of  the Code.  She also

argued that it is important to realise that the mention made of Section

53 in Section 6 of the Amending Act of 2019 is not in order that the

priorities as to liquidation be apportioned among creditors, but only in

order  that  a  minimum  amount  be  calculated  so  as  to  see  that

operational creditors and dissentient financial creditors get something

more than what they would have got pre-amendment. So far as the

Explanation 2 of the substituted Section 30(2)(b) is concerned, she

relied upon this Court’s judgment in ArcelorMittal India (supra) and

31

Swiss Ribbons (supra), for the proposition that there is no vested

right in a resolution applicant to have its plan accepted. This being

the case,  and an appeal  being a continuation of  the proceedings,

there is nothing wrong with applying the amended law in the three

cases that  have been mentioned by Explanation 2.  So  far  as  the

addition to Section 30(4) by the Amending Act of 2019 is concerned,

the idea was to get over the judgment of the Appellate Tribunal in this

very case stating that  sub-classification among different  classes of

creditors may be done by the Committee of  Creditors also on the

basis of the value of the security interest of a secured creditor. She

also  read  in  copious  detail,  the  Rajya  Sabha  Debate  held  on

29.07.2019 in  which  the  Hon’ble  Minister  piloted  this  amendment.

According to her, the Federation of Indian Chambers of Commerce

and  Industry  (hereinafter  referred  to  as  “FICCI”)  gave  a

representation  dated  17.07.2019  to  the  Secretary,  Ministry  of

Corporate Affairs pointing out the flawed judgment of the NCLAT in

this very case and asking the Government to swiftly amend the Code

so  as  to  reinstate  the  law  as  it  originally  stood,  to  which  the

Government  and Parliament  responded by enacting the Amending

Act of 2019.

32

19. Shri  Tushar  Mehta,  learned  Solicitor  General  of  India,  has

supplemented  the  submissions  of  the  learned  Additional  Solicitor

General by written arguments. He has argued that it is well settled

that  the  legislature  can  always  take  away  the  basis  of  a  judicial

decision without directly interfering with the judgment of the Court,

and has cited several decisions to buttress this point. He also argued

that Shri  Sibal’s assault  on the constitutional validity of  Sections 4

and  6  of  the  Amending  Act  of  2019  on  the  ground  that  the

Amendment was tailor-made to do away with the judgment in this

very matter,  so that  his  client  may walk away without  anything,  is

answered by the well settled principle that an Act of the legislature

cannot be attacked on the ground of improper or bad motive, and

cited certain judgments of this Court in support of the same.

Role of the resolution professional

20. The  role  of  the  resolution  professional  in  the  revival  of  the

corporate debtor is stated in detail in several Sections of the Code

read with the 2016 Regulations.

21. The  ball  starts  rolling  with  the  Adjudicating  Authority,  after

admitting an application under either Sections 7,  9 or  10, ordering

that a public announcement of the initiation of the CIRP together with

calling for the submission of claims under Section 15 shall be made –

33

see Section 13(1)(b) of the Code. For this purpose, the Adjudicating

Authority appoints an interim resolution professional in the manner

laid down in Section 16 – see Section 13(1)(c) of the Code. In the

public announcement of the CIRP, under Section 15(1), information

as to the last date for submission of claims, as may be specified, is to

be given; details of the interim resolution professional, who shall be

vested  with  the  management  of  the  corporate  debtor  and  be

responsible for receiving claims, shall also be given, and the date on

which the CIRP shall close is also to be given – see Section 15(1)(c),

(d)  and  (f)  of  the  Code.  Under  Section  17  of  the  Code,  the

management of the affairs of the corporate debtor shall vest in the

interim resolution professional, the Board of Directors of the corporate

debtor standing suspended by law. Among the important duties of the

interim  resolution  professional  is  the  receiving  and  collating  of  all

claims submitted by creditors and the constitution of a Committee of

Creditors – see Section 18(1)(b) and (c) of the Code. Under Section

20 of the Code, the interim resolution professional is to make every

endeavour to protect and preserve the value of the property of the

corporate debtor and manage the operations of the corporate debtor

as a going concern.  

34

22. At the first meeting of the Committee of Creditors, which shall

be held within 7 days of its constitution, the Committee, by majority

vote of not less than 66% of the voting share of financial creditors,

must  immediately  resolve  to  appoint  the  interim  resolution

professional  as a resolution professional,  or  to  replace the interim

resolution  professional  by  another  resolution  professional  –  see

Section  22(1)  and  (2)  of  the  Code.  Under  Section  23(1),  the

resolution professional shall conduct the entire CIRP and manage the

operations of the corporate debtor during the same. Importantly, all

meetings of the Committee of Creditors are to be conducted by the

resolution professional, who shall give notice of such meetings to the

members  of  the  Committee  of  Creditors,  the  members  of  the

suspended board of directors, and operational creditors, provided the

amount of their aggregate dues is not less than 10% of the entire

debt owed. Like the duties of the interim resolution professional under

Section  18  of  the  Code,  it  shall  be  the  duty  of  the  resolution

professional to preserve and protect assets of the corporate debtor

including the continued business operations of the corporate debtor –

see Section 25(1) of the Code. For this purpose, he is to maintain an

updated  list  of  claims;  convene  and  attend  all  meetings  of  the

Committee  of  Creditors;  prepare  the  information  memorandum  in

accordance with Section 29 of the Code; invite prospective resolution

35

applicants;  and present all  resolution plans at  the meetings of  the

Committee of  Creditors  –  see Section 25(2)(e)  to  (i)  of  the Code.

Under  Section 29(1)  of  the Code,  the resolution professional  shall

prepare  an  information  memorandum  containing  all  relevant

information, as may be specified, so that a resolution plan may then

be formulated by a prospective resolution applicant. Under Section 30

of the Code, the resolution applicant must then submit a resolution

plan  to  the  resolution  professional,  prepared  on  the  basis  of  the

information memorandum. After this, the resolution professional must

present  to  the  Committee  of  Creditors,  for  its  approval,  such

resolution plans which conform to the conditions referred to in Section

30(2) of the Code – see Section 30(3) of the Code. If the resolution

plan  is  approved  by  the  requisite  majority  of  the  Committee  of

Creditors, it is then the duty of the resolution professional to submit

the resolution plan as approved by the Committee of Creditors to the

Adjudicating Authority – see Section 30(6) of the Code.  

23. The aforesaid provisions of the Code are then fleshed out in the

2016 Regulations.  Under  Chapter  IV of  the aforesaid Regulations,

claims  by  operational  creditors,  financial  creditors,  other  creditors,

workmen  and  employees  are  to  be  submitted  to  the  resolution

professional  along  with  proofs  thereof  –  see  Regulations  7  to  12.

36

Thereafter,  under  Regulation  13,  the  resolution  professional  shall

verify  each  claim as  on  the  insolvency  commencement  date,  and

thereupon  maintain  a  list  of  creditors  containing  the  names  of

creditors  along  with  the  amounts  claimed  by  them,  the  amounts

admitted by him, and the security interest, if any, in respect of such

claims,  and  constantly  update  the  aforesaid  list  –  see  Regulation

13(1).   

24. Chapter X of the Regulations then deals with resolution plans

that are submitted. Under Regulation 35, “fair value” as defined by

Regulation 2(hb)1 and “liquidation value”  as  defined by Regulation

2(k)2 shall be determined by two registered valuers appointed under

Regulation  27,  which  shall  be  handed  over  the  resolution

professional.

25. After  receipt  of  the  resolution  plans  in  accordance  with  the

Code  and  the  Regulations,  the  resolution  professional  shall  then

provide the fair value and liquidation value to every member of the

Committee  of  Creditors  –  see  Regulation  35(2).  Regulation  36  is

1 Under Regulation 2(hb), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process  for  Corporate  Persons)  Regulations,  2016  - “fair  value”  means  the  estimated realizable value of the assets of the corporate debtor, if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion

2 Id. Under Regulation 2(k) - “liquidation value” means the estimated realizable value of the assets  of  the  corporate  debtor,  if  the  corporate  debtor  were  to  be  liquidated  on  the insolvency commencement date.

37

important as it forms the basis for the submission of a resolution plan.

The  information  memorandum,  spoken of  by  this  regulation,  must

contain the following:

“(a) assets and liabilities with such description, as on the insolvency  commencement  date,  as  are  generally necessary for ascertaining their values.  

Explanation: “Description” includes the details such as date of  acquisition,  cost  of  acquisition,  remaining  useful  life, identification  number,  depreciation  charged,  book  value, and any other relevant details.

(b) the latest annual financial statements;  

(c) audited financial statements of the corporate debtor for the  last  two  financial  years  and  provisional  financial statements for the current financial year made up to a date not  earlier  than  fourteen  days  from  the  date  of  the application;  

(d) a list of creditors containing the names of creditors, the amounts  claimed  by  them,  the  amount  of  their  claims admitted and the security interest, if any, in respect of such claims;  

(e) particulars of a debt due from or to the corporate debtor with respect to related parties;  

(f) details of guarantees that have been given in relation to the  debts  of  the  corporate  debtor  by  other  persons, specifying which of the guarantors is a related party;  

(g) the names and addresses of the members or partners holding at least one per cent stake in the corporate debtor along with the size of stake;  

(h)  details  of  all  material  litigation  and  an  ongoing investigation  or  proceeding  initiated  by  Government  and statutory authorities;  

(i) the number of workers and employees and liabilities of the corporate debtor towards them;  

(j) ***  

38

(k) ***

(l)  other  information,  which  the  resolution  professional deems relevant to the committee.”

26. Under Regulation 36-A, the resolution professional shall  then

publish brief particulars of the invitation for expression of interest in

Form G of the Schedule. This document must also, inter alia, provide

for  such  basic  information  about  the  corporate  debtor  as  may  be

required by a prospective resolution applicant for  its expression of

interest  –  see  Regulation  36-A (4)(c).  The  resolution  professional,

once he receives a proposed resolution plan, must then conduct due

diligence  based  on  the  material  on  record,  in  order  that  the

prospective resolution applicant complies with Section 25(2)(h) of the

Code (which,  inter alia, requires prospective resolution applicants to

fulfil  such  criteria  as  may  be  laid  down,  having  regard  to  the

complexity and scale of operations of the business of the corporate

debtor); the provisions of Section 29-A; and other requirements as

may be specified in  the invitation for  expression of  interest  – see

Regulation  36-A(8).  Once this  is  done,  the  resolution  professional

shall  issue  a  provisional  list  of  eligible  prospective  resolution

applicants to the Committee of Creditors, and after considering any

objection to their inclusion or exclusion, shall then issue the final list

of prospective resolution applicants to the Committee of Creditors –

see  Regulation  36-A  (10)  to  (12).  Under  Regulation  36-B,  the

39

resolution  professional  shall  issue  the  information  memorandum,

evaluation matrix, as defined by Regulation 2(h)(a)3, and a request for

resolution  plan  within  the  time  stated.  Importantly,  the  resolution

professional shall endeavour to submit the resolution plan approved

by the Committee of Creditors to the Adjudicating Authority, at least

15 days before the maximum period for completion of CIRP, along

with a compliance certificate in Form H of the Schedule.  

27. The  detailed  provisions  that  have  been  stated  hereinabove

make it clear 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

3 Under Regulation 2(ha), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – (ha) - “evaluation matrix” means such parameters to be applied and the manner of applying such parameters, as approved by the committee, for consideration of resolution plans for its approval

40

decided by the Committee of Creditors. In fact, in ArcelorMital India

(supra), this Court referred to the role of the resolution professional

under the Code and the aforesaid Regulations, making it clear that

the said role is not adjudicatory but administrative, in the following

terms:

“80. However,  it  must  not  be forgotten that  a  Resolution Professional is only to “examine” and “confirm” that each resolution plan conforms to  what  is  provided by Section 30(2). Under Section 25(2)(i), the Resolution Professional shall  undertake  to  present  all  resolution  plans  at  the meetings of the Committee of Creditors. This is followed by Section  30(3),  which  states  that  the  Resolution Professional shall present to the Committee of Creditors, for  its  approval,  such resolution plans which confirm the conditions referred to in sub-section (2). This provision has to be read in conjunction with Section 25(2)(i), and with the second proviso to Section 30(4), which provides that where a  resolution  applicant  is  found  to  be  ineligible  under Section 29-A(c), the resolution applicant shall be allowed by the Committee of Creditors such period, not exceeding 30  days,  to  make  payment  of  overdue  amounts  in accordance  with  the  proviso  to  Section  29-A(c).  A conspectus  of  all  these  provisions  would  show  that  the Resolution  Professional  is  required  to  examine  that  the resolution plan submitted by various applicants is complete in  all  respects,  before  submitting  it  to  the  Committee  of Creditors.  The Resolution Professional  is  not  required to take any decision, but merely to ensure that the resolution plans submitted are complete in all  respects before they are placed before the Committee of Creditors, who may or may  not  approve  it.  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 29-A 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

41

plan does or  does not  contravene the provisions of  law. Regulation  36-A  of  the  CIRP  Regulations  specifically provides as follows: “36-A.  (8) The  resolution  professional  shall  conduct  due diligence based on the material on record in order to satisfy that the prospective resolution applicant complies with— (a) the provisions of clause (h) of sub-section (2) of Section 25; (b) the applicable provisions of Section 29-A, and (c)  other  requirements,  as  specified  in  the  invitation  for expression of interest. (9) The resolution professional may seek any clarification or additional information or document from the prospective resolution  applicant  for  conducting  due  diligence  under sub-regulation (8). (10) The resolution professional  shall  issue a  provisional list  of eligible prospective resolution applicants within ten days  of  the  last  date  for  submission  of  expression  of interest to the committee and to all prospective resolution applicants who submitted the expression of interest. (11) Any objection to inclusion or exclusion of a prospective resolution applicant in the provisional list referred to in sub- regulation (10) may be made with supporting documents within five days from the date of issue of the provisional list. (12) On  considering  the  objections  received  under  sub- regulation (11), the resolution professional shall issue the final list of prospective resolution applicants within ten days of the last date for receipt of objections, to the committee.”

81. Thus, the importance of the Resolution Professional is to ensure that a resolution plan is complete in all respects, and to conduct  a due diligence in  order to report  to the Committee of Creditors whether or not it is in order. Even though 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.”

42

Role of the prospective resolution applicant

28. The UNCITRAL Legislative Guide discusses what ought to be the

contents  of  a  resolution  plan  in  an  Insolvency  Code in  the  following

terms:

“4. The plan  

       xxx xxx xxx

18. The question of what is to be included in the plan is closely related to the procedure for approval of the plan, that  is,  which creditors are required to approve the plan and the level of support required for approval, the effect of the  plan  once  approved,  that  is,  will  it  bind  dissenting creditors and secured creditors and who will be responsible for  implementation  of  the  plan  and  for  ongoing management of the debtor, and whether or not there is a requirement for court confirmation. Many insolvency laws include  provisions  addressing  the  content  of  the reorganization plan. Some laws address the content of the plan by reference to general criteria, such as requirements that the reorganization plan should adequately and clearly disclose  to  all  parties  information  regarding  both  the financial condition of the debtor and the transformation of legal  rights  that  is  being  proposed  in  the  plan,  or  by reference to minimal requirements, such as that the plan must  make  provision  for  payment  of  certain  preferred claims. It should be noted that a plan need not modify or otherwise affect the rights of every class of creditor.  

19. Other  laws set  out  more specific requirements as to what  information  is  required  in  relation  to  the  debtor’s financial situation and the proposals that can be included in a plan. Information on the financial situation of the debtor could  include  asset  and  liability  statements;  cash  flow statements;  and  information  relating  to  the  causes  or reasons for the financial situation of the debtor. Information relating  to  what  is  proposed  by  the  plan  could  include, depending  upon  the  objective  of  the  plan  and  the circumstances of a particular debtor, details of classes of

43

claims; claims modified or affected under the plan and the treatment to be accorded to each class under the plan; the continuation  or  rejection  of  contracts  that  are  not  fully executed;  the  treatment  of  unexpired  leases;  measures and arrangements for dealing with the debtor’s assets (e.g. transfer,  liquidation  or  retention);  the  sale  or  other treatment  of  encumbered  assets;  the  disclosure  and acceptance procedure; the rights of disputed claims to take part in the voting and provisions for disputed claims to be resolved;  arrangements  concerning  personnel  of  the debtor;  remuneration  of  management  of  the  debtor; financing  implementation  of  the  plan;  extension  of  the maturity date or a change in the interest rate or other term of outstanding security interests; the role to be played by the debtor in implementation of the plan and identification of those to be responsible for future management of the debtor’s  business;  the settlement  of  claims and how the amount that creditors will  receive will  be more than they would have received in liquidation; payment of interest on claims; distribution of all  or any part of the assets of the estate  among  those  having  an  interest  in  those  assets; possible changes to the instrument or  organic document constituting the debtor (e.g. changes to by-laws or articles of  association)  or  the  capital  structure  of  the  debtor  or merger  or  consolidation  of  the  debtor  with  one  or  more persons; the basis upon which the business will be able to keep  trading  and  can  be  successfully  reorganized; supervision  of  the  implementation  of  the  plan;  and  the period  of  implementation  of  the  plan,  including  in  some cases a statutory maximum period.  

20. Rather  than  specifying  a  wide  range  of  detailed information to be included in a plan, it may be desirable for the  insolvency  law to  identify  the minimum content  of  a plan,  focusing  upon  the  key  objectives  of  the  plan  and procedures  for  implementation.  For  example,  the insolvency law may require the plan to detail the classes of creditors and the treatment each is to be accorded in the plan;  the  terms  and  conditions  of  the  plan  (such  as treatment of contracts and the ongoing role of the debtor); and what is required for implementation of the plan (such

44

as sale of  assets or  parts  of  the business,  extension of maturity dates, changes to capital structure of the business and supervision of implementation).”

29. 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. Once it evinces an expression of interest, what

follows is laid down in Regulation 36-A(7) which reads as follows:

“36-A. Invitation for Expression of Interest

xxx xxx xxx

(7) An expression of interest shall be unconditional and be accompanied by-  

(a) an undertaking by the prospective resolution applicant that it meets the criteria specified by the committee under clause (h) of sub-section (2) of section 25;  

(b)  relevant  records  in  evidence  of  meeting  the  criteria under clause (a);  

(c) an undertaking by the prospective resolution applicant that it  does not suffer from any ineligibility under section 29A to the extent applicable;  

(d)  relevant  information  and  records  to  enable  an assessment of ineligibility under clause (c);  

(e) an undertaking by the prospective resolution applicant that it shall intimate the resolution professional forthwith if it becomes  ineligible  at  any  time  during  the  corporate insolvency resolution process;  

45

(f) an undertaking by the prospective resolution applicant that every information and records provided in expression of interest is true and correct and discovery of any false information or record at any time will render the applicant ineligible to submit  resolution plan,  forfeit  any refundable deposit, and attract penal action under the Code; and  

(g) an undertaking by the prospective resolution applicant to  the  effect  that  it  shall  maintain  confidentiality  of  the information and shall not use such information to cause an undue gain or undue loss to itself or any other person and comply  with  the  requirements  under  sub-section  (2)  of section 29”

Thereafter,  the  resolution  plan  submitted  by  the  prospective

resolution applicant must provide for measures as may be necessary

for the insolvency resolution of the corporate debtor for maximisation

of the value of its assets, which may include transfer or sale of assets

or part thereof, whether subject to security interests or not. The plan

may  provide  for  either  satisfaction  or  modification  of  any  security

interest of a secured creditor and may also provide for reduction in

the amount payable to different classes of creditors – see Regulation

37.  

30. Accordingly,  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 – see Regulation

38(1). Such plan must also include provisions as to how to deal with

the  interests  of  all  stakeholders  including  financial  creditors  and

46

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. Regulation 38, being important, is set out hereinbelow:

“38. Mandatory contents of the resolution plan

(1) The amount due to the operational  creditors under a resolution  plan  shall  be  given  priority  in  payment  over financial creditors.

(1A) A resolution plan shall include a statement as to how it has dealt  with the interests of  all  stakeholders,  including financial  creditors  and  operational  creditors,  of  the corporate debtor.

(2) A resolution plan shall provide:  

(a) the term of the plan and its implementation schedule;

(b)  the management and control  of  the business of  the corporate debtor during its term; and

(c) adequate means for supervising its implementation.

(3) A resolution plan shall demonstrate that –  

(a) it addresses the cause of default;  

(b) it is feasible and viable;  

(c) it has provisions for its effective implementation;  

(d) it has provisions for approvals required and the timeline for the same; and

(e) the resolution applicant has the capability to implement the resolution plan.”

Role of the committee of creditors in the corporate resolution process  

47

31. Since  it  is  the  commercial  wisdom  of  the  Committee  of

Creditors  that  is  to  decide  on  whether  or  not  to  rehabilitate  the

corporate debtor by means of acceptance of a particular resolution

plan, the provisions of the Code and the Regulations outline in detail

the  importance  of  setting  up  of  such  Committee,  and  leaving

decisions to be made by the requisite majority of the members of the

aforesaid Committee in its discretion. Thus, Section 21(2) of the Code

mandates that the Committee of Creditors shall comprise all financial

creditors of the corporate debtor. “Financial creditors” are defined in

Section 5(7) of the Code as meaning persons to whom a financial

debt is owed and includes a person to whom such debt has been

legally  assigned or  transferred.  “Financial  debt”  is  then  defined  in

Section 5(8) of the Code as meaning a debt along with interest, if any,

which is  disbursed against  the consideration for  the time value of

money. “Secured creditor” is separately defined in Section 3(30) of

the Code as meaning a creditor in favour of whom a security interest

is  created  and  “security  interest”  is  defined  by  Section  3(31)  as

follows:

“3.  Definitions.  –  In  this  Code,  unless  the  context otherwise requires. –  

xxx xxx xxx

(31)  "security  interest"  means right,  title  or  interest  or  a claim to property,  created in favour of,  or  provided for  a secured creditor by a transaction which secures payment

48

or  performance  of  an  obligation  and  includes  mortgage, charge,  hypothecation,  assignment  and  encumbrance  or any other agreement or arrangement securing payment or performance of any obligation of any person:  

Provided  that  security  interest  shall  not  include  a performance guarantee;”

32. It is settled by several judgments of this Court that in order to

trigger  application  of  the  Code,  a  neat  division  has  been  made

between financial creditors and operational creditors. It has also been

noticed in some of our judgments that most financial  creditors are

secured  creditors  and  most  operational  creditors  are  unsecured

creditors. The rationale for only financial creditors handling the affairs

of the corporate debtor and resolving them is for reasons that have

been deliberated upon by the BLRC Report of 2015, which formed

the basis for the enactment of the Insolvency Code.  

33. At this juncture, it is important to set out the relevant extracts

from the aforementioned report:

“2. Executive Summary  

xxx xxx xxx

The key economic question in the bankruptcy process  

xxx xxx xxx

The  Committee  believes  that  there  is  only  one  correct forum  for  evaluating  such  possibilities,  and  making  a decision:  a  creditors  committee,  where  all  financial creditors have votes in proportion to the magnitude of debt that they hold. In the past, laws in India have brought arms of the government (legislature, executive or judiciary) into this  question.  This  has  been  strictly  avoided  by  the

49

Committee. The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.

xxx xxx xxx

5. Process for legal entities

xxx xxx xxx

Business decisions by a creditor committee  

All  decisions  on  matters  of  business  will  be  taken  by  a committee  of  the  financial  creditors.  This  includes evaluating proposals to keep the entity as a going concern, including  decisions  about  the  sale  of  business  or  units, retiring  or  restructuring  debt.  The  debtor  will  be  a  non- voting  member  on  the  creditors  committee,  and  will  be invited  to  all  meetings.  The  voting  of  the  creditors committee will be by majority, where the majority requires more than 75 percent of the vote by weight.

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No  prescriptions  on  solutions  to  resolve  the insolvency  

The choice of  the solution to keep the entity as a going concern will be voted on by the creditors committee. There are  no  constraints  on  the  proposals  that  the  Resolution Professional can present to the creditors committee. Other than  the  majority  vote  of  the  creditors  committee,  the Resolution Professional needs to confirm to the Adjudicator that  the  final  solution  complies  with  three  additional requirements. The first  is that the solution must explicitly require the repayment of any interim finance and costs of the insolvency resolution process will be paid in priority to other payments.  Secondly, the plan must explicitly include payment  to  all  creditors  not  on  the  creditors  committee, within  a  reasonable  period  after  the  solution  is implemented. Lastly, the plan should comply with existing laws governing the actions of the entity while implementing the solutions.

xxx xxx xxx

5.3.1 Steps at the start of the IRP

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4. Creation of the creditors committee  

The creditors committee will have the power to decide the final  solution  by  majority  vote  in  the  negotiations.  The majority vote requires more than or equal to 75 percent of the  creditors  committee  by  weight  of  the  total  financial liabilities.  The majority vote will also involve a cram down option on any dissenting creditors once the majority vote is obtained…The Committee deliberated on who should be on the creditors committee, given the power of the creditors committee to ultimately keep the entity as a going concern or liquidate it.  The Committee reasoned that members of the creditors committee have to be creditors both with the capability  to  assess  viability,  as  well  as  to  be  willing  to modify terms of existing liabilities in negotiations. Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to  be  rapid  and  efficient,  the  Code  will  provide  that  the creditors  committee  should  be  restricted  to  only  the financial creditors.

5.3.3 Obtaining the resolution to insolvency in the IRP

The  Committee  is  of  the  opinion  that  there  should  be freedom  permitted  to  the  overall  market  to  propose solutions on keeping the entity as a going concern. Since the manner and the type of possible solutions are specific to  the  time  and  environment  in  which  the  insolvency becomes visible,  it  is  expected to evolve over  time,  and with the development of the market. The Code will be open to all forms of solutions for keeping the entity going without prejudice,  within  the  rest  of  the  constraints  of  the  IRP. Therefore, how the insolvency is to be resolved will not be prescribed in the Code. There will be no restriction in the Code on possible ways in which the business model of the entity, or its financial model, or both, can be changed so as to keep the entity as a going concern.  The Code will not state that the entity is to be revived, or the debt is to be restructured, or the entity is to be liquidated. This decision will come from the deliberations of the creditors committee in response to the solutions proposed by the market.”

(emphasis supplied)

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34. The aforesaid extracts follow what is stated in the UNCITRAL

Legislative Guide which prescribes as follows:

“2. Nature or form of a plan

3. The  purpose  of  reorganization  is  to  maximize  the possible  eventual  return  to  creditors,  providing  a  better result  than  if  the  debtor  were  to  be  liquidated  and  to preserve viable businesses as a means of preserving jobs for  employees  and  trade  for  suppliers.  With  different constituents involved in reorganization proceedings, each may have different views of how the various objectives can best  be  achieved.  Some  creditors,  such  as  major customers or suppliers, may prefer continued business with the debtor to rapid repayment of their debt. Some creditors may favour taking an equity stake in the business, while others  will  not.  Typically,  therefore,  there  is  a  range  of options  from  which  to  select  in  a  given  case.  If  an insolvency law adopts a prescriptive approach to the range of options available or to the choice to be made in a particular case, it is likely to be too constrictive. It is desirable that the law not restrict reorganization plans to those designed only to fully rehabilitate the debtor; prohibit debt from being written off; restrict the amount that must eventually  be paid  to  creditors  by specifying a minimum percentage; or prohibit exchange of debt for equity. A non- intrusive  approach  that  does  not  prescribe  such limitations is  likely  to  provide  sufficient  flexibility  to allow the most suitable of a range of possibilities to be chosen for a particular debtor.

xxx xxx xxx

20.  Rather than specifying a wide range of  detailed information  to  be  included  in  a  plan,  it  may  be desirable  for  the  insolvency  law  to  identify  the minimum  content  of  a  plan,  focusing  upon  the  key objectives  of  the  plan  and  procedures  for implementation.  For  example,  the  insolvency  law  may require the plan to detail the classes of creditors and the treatment each is to be accorded in the plan; the terms and conditions of the plan (such as treatment of contracts and the ongoing role of  the debtor);  and what is required for

52

implementation of the plan (such as sale of assets or parts of  the business,  extension of  maturity dates,  changes to capital  structure  of  the  business  and  supervision  of implementation).”       

(emphasis supplied)

35. Section 24 of the Code deals with meetings of the Committee of

Creditors. Though voting on the approval of a resolution plan is only

with the financial creditors who form the Committee of Creditors, yet

the  resolution  professional  is  to  conduct  the  aforesaid  meeting  at

which members of the suspended board of directors may be present,

together  with  one  representative  of  operational  creditors,  provided

that the aggregate dues owed to all operational creditors is not less

than 10% of the entire debt owed – see Sections 24(2),(3) and (4) of

the  Code.   Voting  shall  be  in  accordance  with  the  voting  share

assigned to each financial creditor, which is based on the financial

debts owed to such creditors – see Section 24(6) of the Code.  

36. Even though it is the resolution professional who is to run the

business  of  the  corporate  debtor  as  a  going  concern  during  the

intermediate  period,  yet,  such  resolution  professional  cannot  take

certain  decisions  relating  to  management  of  the  corporate  debtor

without  the  prior  approval  of  at  least  66%  of  the  votes  of  the

Committee of Creditors. Section 28 of the Code is important and is

set out hereinbelow:

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“28.  Approval  of  committee  of  creditors  for  certain actions

(1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely:—

(a) raise any interim finance in excess of the amount as may  be  decided  by  the  committee  of  creditors  in  their meeting;  

(b)  create  any  security  interest  over  the  assets  of  the corporate debtor;  

(c)  change the  capital  structure  of  the  corporate  debtor, including  by  way  of  issuance  of  additional  securities, creating  a  new  class  of  securities  or  buying  back  or redemption  of  issued  securities  in  case  the  corporate debtor is a company;  

(d)  record  any  change  in  the  ownership  interest  of  the corporate debtor;

(e)  give  instructions  to  financial  institutions  maintaining accounts  of  the  corporate  debtor  for  a  debit  transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting;  

(f) undertake any related party transaction;  

(g) amend any constitutional documents of the corporate debtor;  

(h) delegate its authority to any other person;  

(i)  dispose  of  or  permit  the  disposal  of  shares  of  any shareholder of the corporate debtor or  their  nominees to third parties;  

(j) make any change in the management of the corporate debtor or its subsidiary;  

(k)  transfer  rights or  financial  debts  or  operational  debts under  material  contracts  otherwise  than  in  the  ordinary course of business;  

54

(l) make changes in the appointment or terms of contract of such personnel as specified by the committee of creditors; or  

(m) make changes in the appointment or terms of contract of  statutory auditors or  internal  auditors of  the corporate debtor

(2) The resolution professional shall convene a meeting of the  committee  of  creditors  and  seek  the  vote  of  the creditors  prior  to  taking  any  of  the  actions  under  sub- section (1).  

(3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of sixty-six per cent of the voting shares.  

(4) Where any action under sub-section (1) is taken by the resolution professional without seeking the approval of the committee of  creditors in  the manner  as required in  this section, such action shall be void.

(5) The committee of creditors may report the actions of the resolution professional under sub-section (4) to the Board for taking necessary actions against him under this Code.”

Thus, it  is  clear 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

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feasibility  and viability,  and various other  requirements  as may be

prescribed by the Regulations.

37. Regulation 18 to 26 of the 2016 Regulations deal with meetings

to be conducted by the Committee of Creditors. The quorum at the

meeting is fixed by Regulation 22, and the conduct of the meeting is

to  take  place  as  under  Regulation  24.  Voting  takes  place  under

Regulation 25 and 26. Most importantly, Regulation 39(3) states:

“39. Approval of resolution plan

xxx xxx xxx

(3)  The  committee  shall  evaluate  the  resolution  plans received  under  sub-regulation  (1)  strictly  as  per  the evaluation matrix to identify the best  resolution plan and may approve it with such modifications as it deems fit

Provided that the committee may approve any resolution plan with such modifications as it deems fit.”

38. This Regulation 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.  

39. In K. Sashidhar (supra), the role of the Committee of Creditors

in the corporate resolution process was laid down by this Court thus:

“20. The CoC is constituted as per Section 21 of the I&B Code,  which  consists  of  financial  creditors.  The  term

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‘financial creditor’ has been defined in Section 5(7) of the I&B Code to mean any person to whom a financial debt is owed and includes a person to whom such debt has been legally  assigned  or  transferred  to.  Be  it  noted  that  the process of insolvency resolution and liquidation concerning corporate debtors has been codified in Part II of the I&B Code, comprising of seven Chapters. Chapter I predicates that Part II shall apply in matters relating to the insolvency and  liquidation  of  corporate  debtor  where  the  minimum amount of default is Rs. 1,00,000/-. Section 5 in Chapter I is  a  dictionary  clause  specific  to  Part  II  of  the  Code. Chapter II deals with the gamut of procedure to be followed for the corporate insolvency resolution process. For dealing with the issue on hand, the provisions contained in Chapter II will be significant. From the scheme of the provisions, it is clear  that  the provisions in  Part  II  of  the Code are self- contained  code,  providing  for  the  procedure  for consideration of the resolution plan by the CoC.

21. The  stage  at  which  the  dispute  concerning  the respective  corporate  debtors  (KS&PIPL  and  IIL)  had reached the adjudicating authority (NCLT) is ascribable to Section 30(4) of the I&B Code, which, at the relevant time in October 2017, read thus:

“30(4)- The  committee  of  creditors  may  approve  a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors.”

22. If  the  CoC  had  approved  the  resolution  plan  by requisite percent of voting share, then as per Section 30(6) of  the  I&B  Code,  it  is  imperative  for  the  resolution professional  to  submit  the  same  to  the  adjudicating authority  (NCLT).  On  receipt  of  such  a  proposal,  the adjudicating  authority  (NCLT)  is  required  to  satisfy  itself that  the resolution plan  as approved by  CoC meets  the requirements specified in Section 30(2). No more and no less.  This is  explicitly  spelt  out  in  Section 31 of  the I&B Code, which read thus (as in October 2017):

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“31. Approval of resolution plan.-(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by  the  committee  of  creditors  under  sub-section  (4)  of section 30 meets the requirements as referred to in sub- section(2)  of  section  30,  it  shall  by  order  approve  the resolution  plan  which  shall  be  binding  on  the  corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

(2) Where the Adjudicating Authority is satisfied that the resolution  plan  does  not  confirm  to  the  requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.

(3) After the order of approval under sub-section (1),-

(a)  the  moratorium  order  passed  by  the  Adjudicating Authority under section 14 shall cease to have effect; and

(b)  the  resolution  professional  shall  forward  all  records relating  to  the  conduct  of  the  corporate  insolvency resolution process and the resolution plan to the Board to be recorded on its database.”

xxx xxx xxx

39. As  aforesaid,  upon  receipt  of  a  “rejected”  resolution plan the adjudicating authority (NCLT) is not expected to do anything  more;  but  is  obligated  to  initiate  liquidation process  under  Section  33(1)  of  the  I&B  Code.  The legislature  has  not  endowed  the  adjudicating  authority (NCLT)  with  the  jurisdiction  or  authority  to  analyse  or evaluate the commercial decision of the CoC muchless to enquire into the justness of the rejection of the resolution plan  by  the  dissenting  financial  creditors.  From  the legislative  history  and  the  background  in  which  the  I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach,  there  is  a  calm  period  followed  by  a  swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the

58

corporate  debtor  could  indefinitely  continue  to  enjoy  the protection  given  under  Section  22  of  Sick  Industrial Companies  Act,  1985  or  under  other  such  enactments which  has  now been forsaken.  Besides,  the  commercial wisdom  of  the  CoC  has  been  given  paramount  status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors  are  fully  informed  about  the  viability  of  the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team  of  experts.  The  opinion  on  the  subject  matter expressed  by  them  after  due  deliberations  in  the  CoC meetings  through  voting,  as  per  voting  shares,  is  a collective business decision.  The legislature,  consciously, has not provided any ground to challenge the “commercial wisdom”  of  the  individual  financial  creditors  or  their collective decision before the adjudicating authority. That is made nonjusticiable.”

40. The importance of  the majority decision of  the Committee of

Creditors is then stated in Section 31(1) of the Code which is set out

as follows:

“31. Approval of resolution plan

(1) If  the  Adjudicating  Authority  is  satisfied  that  the resolution  plan  as  approved  by  the  committee  of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall  be  binding  on  the  corporate  debtor  and  its employees,  members,  creditors,  guarantors and other stakeholders involved in the resolution plan.”

Thus,  what  is  left  to  the  majority  decision  of  the  Committee  of

Creditors is the “feasibility and viability” of a resolution plan, which

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obviously takes into account  all  aspects of  the plan,  including the

manner  of  distribution  of  funds  among  the  various  classes  of

creditors. As an example, take the case of a resolution plan which

does not provide for payment of electricity dues. It is certainly open to

the  Committee  of  Creditors  to  suggest  a  modification  to  the

prospective resolution applicant to the effect that such dues ought to

be paid in full, so that the carrying on of the business of the corporate

debtor  does not  become impossible for  want of  a most basic and

essential  element  for  the  carrying  on  of  such  business,  namely,

electricity. This may, in turn, be accepted by the resolution applicant

with a consequent modification as to distribution of funds,  payment

being provided to a certain type of operational creditor, namely, the

electricity distribution company, out of upfront payment offered by the

proposed resolution applicant which may also result in a consequent

reduction  of  amounts  payable  to  other  financial  and  operational

creditors. What is important is that it is the commercial wisdom of this

majority of creditors which is to determine, through negotiation with

the prospective resolution applicant, as to how and in what manner

the corporate resolution process is to take place.

Jurisdiction  of  the  Adjudicating  Authority  and  the  Appellate Tribunal

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41. As has already been seen hereinabove, it  is the Adjudicating

Authority which first admits an application by a financial or operational

creditor, or by the corporate debtor itself under Section 7, 9 and 10 of

the Code. Once this is done, within the parameters fixed by the Code,

and as expounded upon by our judgments in Innoventive Industries

Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Macquarie Bank Ltd v.

Shilpi Cable Technologies Ltd. (2018) 2 SCC 674, the Adjudicating

Authority then appoints an interim resolution professional who takes

administrative decisions as to the day to day running of the corporate

debtor; collation of claims and their admissions; and the calling for

resolution plans in the manner stated above. 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.  In  this

context, the decision of this court in K. Sashidhar (supra) is of great

relevance.  

42. In  K. Sashidhar  (supra) this Court was called upon to decide

upon the scope of judicial review by the Adjudicating Authority. This

Court set out the questions to be determined as follows:

“18. Having heard learned counsel for the parties, the moot question  is  about  the  sequel  of  the  approval  of  the

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resolution  plan  by  the  CoC  of  the  respective  corporate debtor,  namely KS&PIPL and IIL,  by a vote of  less than seventy  five  percent  of  voting  share  of  the  financial creditors; and about the correctness of the view taken by the  NCLAT  that  the  percentage  of  voting  share  of  the financial  creditors  specified  in  Section  30(4)  of  the  I&B Code is mandatory. Further, is it open to the adjudicating authority/appellate  authority  to  reckon  any  other  factor (other than specified in Sections 30(2) or 61(3) of the I&B Code  as  the  case  may  be)  which,  according  to  the resolution  applicant  and  the  stakeholders  supporting  the resolution plan, may be relevant?

xxx xxx xxx

25. The Court, however, was not called upon to deal with the specific issue that is being considered in the present cases  namely,  the  scope  of  judicial  review  by  the adjudicatory authority in relation to the opinion expressed by the CoC on the proposal for approval of the resolution plan.”

After  adverting  to  the  2016  Regulations,  the  Court  set  out  the

jurisdiction  of  the  Adjudicating  Authority  as  well  as  the  Appellate

Tribunal as follows:

“42. Whereas,  the discretion of  the adjudicating authority (NCLT) is circumscribed by Section 31 limited to scrutiny of the resolution plan “as approved” by the requisite percent of voting share of financial creditors. Even in that enquiry, the grounds on which the adjudicating authority can reject the resolution plan is in reference to matters specified in Section 30(2), when the resolution plan does not conform to the stated requirements. Reverting to Section 30(2), the enquiry to be done is in respect of whether the resolution plan  provides:  (i)  the  payment  of  insolvency  resolution process  costs  in  a  specified  manner  in  priority  to  the repayment of other debts of the corporate debtor, (ii)  the repayment  of  the  debts  of  operational  creditors  in

62

prescribed manner, (iii)  the management of the affairs of the  corporate  debtor,  (iv)  the  implementation  and supervision of the resolution plan, (v) does not contravene any of the provisions of the law for the time being in force, (vi)  conforms  to  such  other  requirements  as  may  be specified by the Board. The Board referred to is established under  Section  188  of  the  I&B  Code.  The  powers  and functions of the Board have been delineated in Section 196 of  the I&B Code.  None of  the specified functions of  the Board,  directly  or  indirectly,  pertain  to  regulating  the manner in which the financial creditors ought to or ought not to exercise their commercial wisdom during the voting on the resolution plan under Section 30(4) of the I&B Code. The subjective satisfaction of the financial creditors at the time of voting is bound to be a mixed baggage of variety of factors. To wit, the feasibility and viability of the proposed resolution plan and including their  perceptions about  the general  capability  of  the  resolution applicant  to  translate the projected plan into a reality.  The resolution applicant may have given projections backed by normative data but still  in  the opinion of  the dissenting financial  creditors,  it would not be free from being speculative. These aspects are completely within the domain of the financial creditors who are called upon to vote on the resolution plan under Section 30(4) of the I&B Code.

43. For  the  same  reason,  even  the  jurisdiction  of  the NCLAT being in continuation of the proceedings would be circumscribed  in  that  regard  and  more  particularly  on account of Section 32 of the I&B Code, which envisages that any appeal from an order approving the resolution plan shall  be in  the manner  and on the grounds specified in Section 61(3) of the I&B Code. Section 61(3) of the I&B Code reads thus:

“61. Appeals and Appellate Authority.-(1) Notwithstanding anything to the contrary contained under the Companies Act,  2013 (18  of  2013),  any person  aggrieved  by the order of the Adjudicating Authority under this part may

63

prefer an appeal to the National Company Law Appellate Tribunal.

(2) xxx xxx xxx

(3) An appeal  against  an order approving a resolution plan  under  section  31  may  be  filed  on  the  following grounds, namely:—

(i) the approved resolution plan is in contravention of the provisions of any law for the time being in force;

(ii) there has been material irregularity in exercise of the powers  by  the  resolution  professional  during  the corporate insolvency resolution period;

(iii)  the  debts  owed  to  operational  creditors  of  the corporate  debtor  have  not  been  provided  for  in  the resolution plan in the manner specified by the Board;

(iv)  the  insolvency  resolution  process  costs  have  not been provided for repayment in priority to all other debts; or

(v) the resolution plan does not comply with any other criteria specified by the Board.

xxxxxxxxx.”

44. On a bare reading of the provisions of the I&B Code, it would  appear  that  the  remedy  of  appeal  under  Section 61(1)  is  against  an  “order  passed  by  the  adjudicating authority (NCLT)” - which we will assume may also pertain to recording of the fact that the proposed resolution plan has been rejected or not approved by a vote of not less than  75%  of  voting  share  of  the  financial  creditors. Indubitably,  the  remedy  of  appeal  including  the  width  of jurisdiction of  the appellate authority  and the grounds of appeal,  is  a creature of  statute.  The provisions investing jurisdiction and authority in the NCLT or NCLAT as noticed earlier, has not made the commercial decision exercised by the CoC of not approving the resolution plan or rejecting the same, justiciable. This position is reinforced from the limited grounds specified for instituting an appeal that too

64

against  an  order  “approving  a  resolution  plan”  under Section 31.  First,  that  the approved resolution plan is  in contravention  of  the  provisions  of  any  law  for  the  time being in force. Second, there has been material irregularity in  exercise  of  powers  “by  the  resolution  professional” during the corporate insolvency resolution period. Third, the debts owed to operational creditors have not been provided for in the resolution plan in the prescribed manner. Fourth, the  insolvency  resolution  plan  costs  have  not  been provided for repayment in priority to all other debts. Fifth, the resolution plan does not comply with any other criteria specified by the Board. Significantly, the matters or grounds - be it under Section 30(2) or under Section 61(3) of the I&B  Code  -  are  regarding  testing  the  validity  of  the “approved”  resolution  plan  by  the  CoC;  and  not  for approving the resolution plan which has been disapproved or deemed to have been rejected by the CoC in exercise of its business decision.

45. Indubitably,  the  inquiry  in  such  an  appeal  would  be limited  to  the  power  exercisable  by  the  resolution professional  under  Section 30(2)  of  the I&B Code or,  at best,  by the adjudicating authority  (NCLT) under  Section 31(2)  read with 31(1) of  the I&B Code.  No other inquiry would  be  permissible.  Further,  the  jurisdiction  bestowed upon  the  appellate  authority  (NCLAT)  is  also  expressly circumscribed. It can examine the challenge only in relation to the grounds specified in Section 61(3) of the I&B Code, which  is  limited  to  matters  “other  than”  enquiry  into  the autonomy or commercial wisdom of the dissenting financial creditors.  Thus, the prescribed authorities (NCLT/NCLAT) have been endowed with limited jurisdiction as specified in the I&B Code and not to act as a court of equity or exercise plenary powers.

46. In our view, neither the adjudicating authority (NCLT) nor  the  appellate  authority  (NCLAT)  has  been  endowed with the jurisdiction to reverse the commercial wisdom of the  dissenting  financial  creditors  and  that  too  on  the specious ground that it is only an opinion of the minority

65

financial  creditors.  The  fact  that  substantial  or  majority percent of financial creditors have accorded approval to the resolution plan would be of no avail, unless the approval is by a vote of not less than 75% (after amendment of 2018 w.e.f.  06.06.2018,  66%)  of  voting  share  of  the  financial creditors.  To  put  it  differently,  the  action  of  liquidation process  postulated  in  Chapter-III  of  the  I&B  Code,  is avoidable,  only if  approval  of  the resolution plan is by a vote of not less than 75% (as in October, 2017) of voting share of the financial creditors. Conversely, the legislative intent is to uphold the opinion or hypothesis of the minority dissenting financial creditors. That must prevail, if it is not less than the specified percent (25% in October, 2017; and now  after  the  amendment  w.e.f.  06.06.2018,  44%).  The inevitable  outcome  of  voting  by  not  less  than  requisite percent of voting share of financial creditors to disapprove the proposed resolution plan, de jure, entails in its deemed rejection.

xxx xxx xxx

49. The argument, though attractive at the first blush, but if accepted, would require us to re-write the provisions of the I&B  Code.  It  would  also  result  in  doing  violence  to  the legislative intent of having consciously not stipulated that as a ground - to challenge the commercial wisdom of the minority  (dissenting)  financial  creditors.  Concededly,  the process  of  resolution  plan  is  necessitated  in  respect  of corporate  debtors  in  whom their  financial  creditors  have lost  hope  of  recovery  and  who  have  turned  into  non- performer  or  a  chronic  defaulter.  The  fact  that  the concerned corporate debtor was still  able to carry on its business activities does not obligate the financial creditors to postpone the recovery of the debt due or to prolong their losses indefinitely. Be that as it may, the scope of enquiry and the grounds on which the decision of “approval” of the resolution plan by the CoC can be interfered with by the adjudicating authority (NCLT), has been set out in Section 31(1) read with Section 30(2) and by the appellate tribunal (NCLAT) under Section 32 read with Section 61(3) of the

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I&B Code. No corresponding provision has been envisaged by the legislature to empower the resolution professional, the  adjudicating  authority  (NCLT)  or  for  that  matter  the appellate  authority  (NCLAT),  to  reverse  the  “commercial decision” of the CoC muchless of the dissenting financial creditors for not supporting the proposed resolution plan. Whereas,  from  the  legislative  history  there  is  contra indication that the commercial or business decisions of the financial creditors are not open to any judicial review by the adjudicating authority or the appellate authority.

51. Suffice  it  to  observe  that  in  the  I&B  Code  and  the regulations  framed  thereunder  as  applicable  in  October 2017,  there  was  no  need  for  the  dissenting  financial creditors to record reasons for disapproving or rejecting a resolution  plan.  Further,  as  aforementioned,  there  is  no provision in the I&B Code which empowers the adjudicating authority (NCLT) to oversee the justness of the approach of the dissenting financial creditors in rejecting the proposed resolution  plan  or  to  engage  in  judicial  review  thereof. Concededly,  the  inquiry  by  the  resolution  professional precedes the consideration of  the resolution plan by the CoC. The resolution professional is not required to express his opinion on matters within the domain of the financial creditor(s), to approve or reject the resolution plan, under Section 30(4) of  the I&B Code. At  best,  the Adjudicating Authority (NCLT) may cause an enquiry into the “approved” resolution plan on limited grounds referred to  in  Section 30(2) read with Section 31(1) of the I&B Code. It  cannot make  any  other  inquiry  nor  is  competent  to  issue  any direction in relation to the exercise of commercial wisdom of the financial creditors - be it for approving, rejecting or abstaining, as the case may be. Even the inquiry before the Appellate Authority (NCLAT) is limited to the grounds under Section  61(3)  of  the  I&B  Code.  It  does  not  postulate jurisdiction  to  undertake  scrutiny  of  the  justness  of  the opinion  expressed  by  financial  creditors  at  the  time  of voting.  To  take  any  other  view  would  enable  even  the minority dissenting financial creditors to question the logic or  justness  of  the  commercial  opinion expressed by  the

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majority of the financial creditors albeit by requisite percent of voting share to approve the resolution plan; and in the process authorize the adjudicating authority  to  reject  the approved resolution plan upon accepting such a challenge. That  is  not  the  scope  of  jurisdiction  vested  in  the adjudicating authority  under  Section 31 of  the I&B Code dealing with approval of the resolution plan.”

Thus, 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,  and  Section  32  read  with  Section  61(3)  of  the  Code,

insofar  as  the  Appellate  Tribunal  is  concerned,  the  parameters  of

such review having been clearly laid down in K. Sashidhar (supra).  

43. However,  Shri  Sibal  exhorted  us  to  hold  that  K.  Sashidhar

(supra) missed a very vital provision of the Code which is contained

in Section 60(5) of the Code. Section 60(5) reads as follows:

“60. Adjudicating Authority for corporate persons

xxx xxx xxx

(5) Notwithstanding anything to the contrary contained in any  other  law  for  the  time  being  in  force,  the  National Company Law Tribunal shall have jurisdiction to entertain or dispose of—  

(a)  any  application  or  proceeding  by  or  against  the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and  

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(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.”

It will be noticed that the non-obstante clause of Section 60(5) speaks

of  any other law for the time being in force, which obviously cannot

include the provisions of the Code itself. Secondly, Section 60(5)(c) is

in the nature of a residuary jurisdiction vested in the NCLT so that the

NCLT may decide all  questions of  law or  fact  arising out  of  or  in

relation to insolvency resolution or liquidation under the Code. Such

residual jurisdiction does not in any manner impact Section 30(2) of

the  Code  which  circumscribes  the  jurisdiction  of  the  Adjudicating

Authority when it comes to the confirmation of a resolution plan, as

has  been mandated  by  Section  31(1)  of  the  Code.  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.

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44. The minimum value that is required to be paid to operational

creditors under a resolution plan is set out under Section 30(2)(b) of

the Code as being the amount to be paid to such creditors in the

event of a liquidation of the corporate debtor under Section 53. The

Insolvency Committee constituted by the Government in 2018 was

tasked with studying the major issues that arise in the working of the

Code and to recommend changes, if any, required to be made to the

Code. The Insolvency Committee Report, 2018 (hereinafter referred

to as “The Committee Report, 2018”), inter alia, deliberated upon the

objections to Section 30(2)(b) of the Code, inasmuch as it provided

for  a  minimum payment  of  a  “liquidation value”  to  the  operational

creditors and nothing more, and concluded as follows:

“18. VALUE  GUARANTEED  TO  OPERATIONAL CREDITORS UNDER A RESOLUTION PLAN  

18.1 Section  30(2)(b)  of  the  Code  requires  the  RP  to ensure that every resolution plan provides for payment of at  least  the  liquidation  value  to  all  operational  creditors. Regulation 38(1)(b) of the CIRP Regulations provides that liquidation value must be paid to operational creditors prior in  time to all  financial  creditors and within thirty  days of approval of resolution plan by the NCLT. The BLRC Report states  that  the  guarantee  of  liquidation  value  has  been provided to operational creditors since they are not allowed to be  part  of  the  CoC which  determines  the fate  of  the corporate debtor. (BLRC Report, 2015)  

18.2 However,  certain  public  comments  received  by  the Committee  stated  that,  in  practice,  the  liquidation  value which is  guaranteed to the operational  creditors may be negligible  as  they  fall  under  the  residual  category  of

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creditors under section 53 of the Code. Particularly, in the case of unsecured operational creditors, it was argued that they will have no incentive to continue supplying goods or services to the corporate debtor for it  to remain a ‘going concern’ given that their chances of recovery are abysmally low.

18.3 The  Committee  deliberated  on  the  status  of operational  creditors  and  their  role  in  the  CIRP.  It considered the viability of using ‘fair value’ as the floor to determine the value to be given to operational  creditors. Fair value is defined under regulation 2(1)(hb) of the CIRP Regulations to mean “the estimated realizable value of the assets  of  the  corporate  debtor,  if  they  were  to  be exchanged  on  the  insolvency  commencement  date between a willing  buyer  and a willing  seller  in  an arm’s length transaction,  after  proper marketing and where the parties  had  acted  knowledgeably,  prudently  and  without compulsion.”  However,  it  was  felt  that  assessment  and payment  of  the  fair  value  upfront,  may  be  difficult.  The Committee  also  discussed  the  possibility  of  using 'resolution value' or 'bid value' as the floor to be guaranteed to operational creditors but neither of these were deemed suitable.

18.4 It was stated to the Committee that liquidation value has  been  provided  as  a  floor  and  in  practice,  many operational creditors may get payments above this value. The Committee appreciated the need to protect interests of operational  creditors  and  particularly  Micro,  Small  and Medium  Enterprises  (“MSMEs”).  In  this  regard,  the Committee  observed  that  in  practice  most  of  the operational creditors that are critical to the business of the corporate debtor are paid out as part of the resolution plan as they have the power to choke the corporate debtor by cutting off supplies. Illustratively, in the case of Synergies- Dooray Automative Ltd. (Company Appeal No. 123/2017, NCLT Hyderabad, Date of decision – 02 August, 2017), the original resolution plan provided for payment to operational creditors above the liquidation value but contemplated that it would be made in a staggered manner after payment to financial  creditors,  easing  the  burden  of  the  30-day mandate  provided  under  regulation  38  of  the  CIRP Regulations. However, the same was modified by the NCLT

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and operational creditors were required to be paid prior in time,  due  to  the  quantum  of  debt  and  nature  of  the creditors.  Similarly,  the  approved  resolution  plan  in  the case of  Hotel  Gaudavan Pvt.  Ltd. (Company Appeal No. 37/2017,  NCLT  Principal  Bench,  Date  of  decision  –  13 December, 2017) provided for payment of all existing dues of  the  operational  creditors  without  any  write-off.  The Committee  felt  that  the  interests  of  operational  creditors must  be  protected,  not  by  tinkering  with  what  minimum must be guaranteed to them statutorily, but by improving the  quality  of  resolution  plans  overall.  This  could  be achieved by dedicated efforts of regulatory bodies including the IBBI and Indian Banks' Association.  

18.5 Finally, the Committee agreed that presently, most of the resolution plans are in the process of submission and there is no empirical evidence to further the argument that operational  creditors  do  not  receive  a  fair  share  in  the resolution process under the current scheme of the Code. Hence, the Committee decided to continue with the present arrangement  without  making  any  amendments  to  the Code.”

(emphasis supplied)

Ultimately,  the  Committee  decided  against  any  amendment  to  be

made  to  the  existing  scheme  of  the  Code,  thereby  retaining  the

prescription  as  to  the  minimum value  that  was  to  be  paid  to  the

operational creditors under a resolution plan.

45. However,  as  has  been  correctly  argued  on  behalf  of  the

operational  creditors,  the  preamble  of  the  Code  does  speak  of

maximisation  of  the  value  of  assets  of  corporate  debtors  and  the

balancing of the interests of all stakeholders. There is no doubt that a

key objective of the Code is to ensure that the corporate debtor keeps

operating  as  a  going  concern  during  the  insolvency  resolution

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process  and  must  therefore  make  past  and  present  payments  to

various operational creditors without which such operation as a going

concern  would  become  impossible.  Sections  5(26),  14(2),  20(1),

20(2)(d) and (e) of the Code read with Regulations 37 and 38 of the

2016  Regulations  all  speak  of  the  corporate  debtor  running  as  a

going  concern  during  the  insolvency  resolution  process.  Workmen

need to be paid, electricity dues need to be paid, purchase of raw

materials need to be made, etc. This is in fact reflected in this court’s

judgment in Swiss Ribbons (supra) as follows:

“26. The Preamble of the Code states as follows:

“An  Act  to  consolidate  and  amend  the  laws  relating  to reorganisation  and  insolvency  resolution  of  corporate persons, partnership firms and individuals in a time-bound manner  for  maximisation  of  value  of  assets  of  such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.” 27. As  is  discernible,  the Preamble gives an insight  into what is sought to be achieved by the Code. The Code is first  and  foremost,  a  Code  for  reorganisation  and insolvency  resolution  of  corporate  debtors.  Unless  such reorganisation  is  effected  in  a  time-bound  manner,  the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship  as  the  persons  in  management  of  the corporate  debtor  are  removed  and  replaced  by

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entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it  is  able to repay its  debts,  which,  in  turn, enhances the viability of credit in the hands of banks and financial institutions.  Above all, ultimately, the interests of all  stakeholders are looked after as the corporate debtor itself  becomes  a  beneficiary  of  the  resolution  scheme— workers are paid, the creditors in the long run will be repaid in  full,  and  shareholders/investors  are  able  to  maximise their  investment.  Timely  resolution of  a  corporate  debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come  back  into  the  economy,  business  then  eases  up, which  leads,  overall,  to  higher  economic  growth  and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is  either  no  resolution  plan  or  the  resolution  plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83, fn 3).”

(emphasis supplied)

46. This is the reason why Regulation 38(1A) speaks of a resolution

plan including a statement as to how it has dealt with the interests of

all  stakeholders,  including  operational  creditors  of  the  corporate

debtor.  Regulation  38(1)  also  states  that  the  amount  due  to

operational creditors under a resolution plan shall be given priority in

payment over financial creditors. If nothing is to be paid to operational

creditors, the minimum, being liquidation value - which in most cases

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would amount to nil after secured creditors have been paid - would

certainly not balance the interest of all stakeholders or maximise the

value of  assets  of  a  corporate  debtor  if  it  becomes impossible  to

continue running its business as a going concern. Thus, it is clear that

when the Committee of Creditors exercises its commercial wisdom to

arrive at a business decision to revive the corporate debtor, it must

necessarily take into account these key features of the Code before it

arrives at a commercial decision to pay off the dues of financial and

operational creditors. There is no doubt whatsoever that the ultimate

discretion of what to pay and how much to pay each class or sub-

class of creditors is with the Committee of Creditors, but, the decision

of such Committee must reflect the fact that it has taken into account

maximising the value of the assets of the corporate debtor and the

fact that it has adequately balanced the interests of all stakeholders

including operational creditors. This being the case, judicial review of

the Adjudicating Authority that the resolution plan as approved by the

Committee  of  Creditors  has  met  the  requirements  referred  to  in

Section  30(2)  would  include  judicial  review  that  is  mentioned  in

Section 30(2)(e), as the provisions of the Code are also provisions of

law for the time being in force. Thus, while the Adjudicating Authority

cannot interfere on merits with the commercial decision taken by the

Committee of Creditors, the limited judicial review available is to see

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that the Committee of Creditors has taken into account the fact that

the corporate debtor needs to keep going as a going concern during

the insolvency resolution process; that it needs to maximise the value

of  its  assets;  and  that  the  interests  of  all  stakeholders  including

operational  creditors  has  been  taken  care  of.  If  the  Adjudicating

Authority finds, on a given set of facts, that the aforesaid parameters

have not been kept in view, it may send a resolution plan back to the

Committee of  Creditors  to  re-submit  such plan after  satisfying the

aforesaid  parameters.  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

47. The  impugned  NCLAT  judgment  has  applied  an  equality

principle down the board stating that whether creditors are secured or

unsecured, financial or operational, equitable treatment demands that

they all be treated as one group of creditors similarly situate, as a

result of which no differences can be made in terms of the amount of

debt  to  be repaid to them based on whether  they are secured or

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unsecured, and whether they are financial  or operational creditors.

The aforesaid judgment relies upon certain paragraphs of this Court’s

judgment in Swiss Ribbons (supra) to buttress the aforesaid finding.  

48. The UNCITRAL Legislative Guide states:-

“Designing  the  key  objectives  and  structure  of  an effective and efficient insolvency law

xxx xxx xxx

4. Ensuring  equitable  treatment  of  similarly  situated

creditors

7. The  objective  of  equitable  treatment  is  based  on  the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognizes that all creditors do not  need to  be  treated  identically,  but  in  a  manner  that reflects  the  different  bargains  they  have  struck  with  the debtor.  This  is  less  relevant  as  a  defining  factor  where there is no specific debt contract with the debtor, such as in the  case  of  damage  claimants  (e.g.  for  environmental damage) and tax authorities. Even though the principle of equitable treatment  may be modified by social  policy  on priorities  and  give  way  to  the  prerogatives  pertaining  to holders of  claims or interests that  arise,  for  example,  by operation of law, it retains its significance by ensuring that the priority accorded to the claims of a similar class affects all members of the class in the same manner. The policy of equitable  treatment  permeates  many  aspects  of  an insolvency  law,  including  the  application  of  the  stay  or suspension, provisions to set aside acts and transactions and recapture value for the insolvency estate, classification of  claims,  voting  procedures  in  reorganization  and distribution mechanisms. An insolvency law should address problems of fraud and favouritism that may arise in cases of financial distress by providing, for example, that acts and

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transactions detrimental to equitable treatment of creditors can be avoided.

xxx xxx xxx

5. Approval of a plan

xxx xxx xxx

(i) Classification of claims  

27. The primary purpose of classifying claims is to satisfy the requirements to provide fair and equitable treatment to creditors,  treating  similarly  situated  claims  in  the  same manner and ensuring that all creditors in a particular class are offered the same menu of terms by the reorganization plan. It is one way to ensure that priority claims are treated in  accordance  with  the  priority  established  under  the insolvency  law.  It  may  also  make  it  easier  to  treat  the claims of major creditors who can be persuaded to receive different  treatment  from  the  general  class  of  unsecured creditors, where that treatment may be necessary to make the plan feasible. Classification can, however, increase the complexity  and  costs  of  the  insolvency  proceedings, depending upon how many different classes are identified. An alternative, to ensure that creditors who should receive special treatment are not oppressed by the majority, may be to give those groups the opportunity to challenge the decision  of  the  majority  in  court  if  they  have  not  been treated in a fair and equitable manner. The fact that such a facility  exists  may operate  to  discourage majorities  from making proposals that would unfairly disadvantage priority creditors.  

(ii) Treatment of dissenting creditors  

28. As to the treatment  of  dissenting creditors,  it  will  be essential to provide a way of imposing a plan agreed by the majority of a class upon the dissenting minority in order to increase the chances of success of the reorganization. It may also be necessary,  depending upon the mechanism that is chosen for voting on the plan and whether creditors vote in classes, to consider whether the plan can be made binding  upon  dissenting  classes  of  creditors  and  other affected parties.  

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29. To the extent that a plan can be approved and enforced upon dissenting parties, there will be a need to ensure that the content of the plan provides appropriate protection for those dissenting parties and, in particular, that their rights are  not  unfairly  affected.  The  law  might  provide,  for example, that dissenting creditors can not be bound unless assured of  certain treatment.  As a general  principle, that treatment might be that the creditors will receive at least as much  under  the  plan  as  they  would  have  received  in liquidation  proceedings.  If  the  creditors  are  secured,  the treatment  required  may  be  that  the  creditor  receives payment of the value of its security interest, while in the case  of  unsecured  creditors  it  may  be  that  any  junior interests, including equity holders, receive nothing. To the extent that the approval procedure results in a significant impairment  of  the  claims of  creditors  and  other  affected parties  without  their  consent  (in  particular  secured creditors), there is a risk that creditors will be unwilling to provide credit in the future. The mechanism for approval of the plan, and the availability of appropriate safeguards, is therefore of  considerable importance to the protection of these interests.

xxx xxx xxx

(c) Approval by secured and priority creditors

(i) The need for secured and priority creditors to vote

34. In  many  cases  of  insolvency,  secured  claims  will represent a significant portion of the value of the debt owed by  the  debtor.  Different  approaches  can  be  taken  to approval of the plan by secured and priority creditors. As a general principle, however, the extent to which a secured creditor is entitled to vote will depend upon the manner in which the insolvency regime treats secured creditors, the extent to which a reorganization plan can affect the security interest of the secured creditor and the extent to which the value  of  encumbered  assets  will  satisfy  the  secured creditor’s claim.  

35. Under one approach, where the insolvency law does not  affect  secured  creditors  and,  in  particular,  does  not preclude  them  from  enforcing  their  rights  against  the encumbered  assets,  there  is  no  need  to  give  these

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creditors the right to vote since their security interests will not be affected by the plan. Priority creditors are in a similar position under this approach—the plan cannot impair the value of their  claims and they are entitled to receive full payment  before  creditors  without  priority  are  paid.  The limitation of this approach, however, is that it may reduce the  chances  for  a  successful  reorganization  where  the encumbered assets or  modification of  the rights of  such creditors are key to the success of the plan. If the secured creditor  is  not  bound  by  the  plan,  the  election  by  the secured  creditor  to  enforce  its  rights,  such  as  by repossessing and selling the encumbered asset, may make reorganization  of  the  business  impossible  to  implement. Similarly,  there may be circumstances where ensuring a successful  reorganization  requires  that  priority  creditors receive  less  than  the  full  value  of  their  claims  upon approval of the plan. The prospects for reorganization may improve if priority creditors will accept payment over time and if secured creditors will acquiesce when the terms of the secured debt are modified over time. If these creditors are  not  included  in  the  plan  and  entitled  to  vote  on proposals affecting their rights, modification of those rights cannot be achieved.

(ii) Classes of secured and priority creditors

36. Recognizing the need for secured and priority creditors to  participate,  a  second  approach  provides  for  these creditors  to  vote  as  classes  separate  from  unsecured creditors on a plan that would modify or affect the terms of their  claims, or to otherwise consent to be bound by the plan.  Adopting  such  an  approach  provides  a  minimum safeguard  for  the  adequate  protection  of  these  creditors and recognizes that the respective rights and interests of secured  and  priority  creditors  differ  from  those  of unsecured creditors. In many cases, however, the rights of secured and priority creditors will differ from each other and it may not be feasible to require all secured creditors or all priority creditors to vote in a single class. In such cases, some  laws  provide  that  each  secured  creditor  with separate rights to encumbered assets forms a class of its own. Those laws also provide that, where secured creditors do vote as a class (e.g. where there are multiple holders of bonds that are secured by the same assets), the requisite

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majority of a class of secured creditors would generally be the  same  as  that  required  for  approval  by  unsecured creditors, although there are examples of laws that require different  majorities depending upon the manner  in  which secured creditors rights are to be affected by the plan (e.g. one law provides that a three-quarter majority is required where the maturity date is to be extended and a four-fifths majority  where  the  rights  are  to  be otherwise  impaired). Similarly, each rank of priority claims would be a separate class under those laws.

xxx xxx xxx  

(iii) Where secured creditors are not fully secured

38. To the extent that the value of the encumbered asset will  not  satisfy  the  full  amount  of  the  secured  creditor’s claim,  a  number  of  insolvency  laws  provide  that  those secured  creditors  should  vote  with  ordinary  unsecured creditors in respect of the unsatisfied portion of the claim. This may raise difficult  questions of valuation in order to determine whether, and to what extent, a secured creditor is in fact secured. For example, where three creditors hold security  interests over  the same asset,  the value of  that asset may only support the claim first in priority and part of the second in priority. The second creditor therefore may have a right to vote only in respect of the unsecured portion of its claim, while the third creditor will be totally unsecured. The  valuation  of  the  asset  is  therefore  crucial  to determining the extent to which these secured creditors are secured and whether  or  not  they are entitled to vote as unsecured  creditors  with  respect  to  any  portion  of  their claim.  

39. In determining which approach should be taken to this issue, it will be important to assess the effect of the desired approach  upon  the  availability  and  cost  of  secured financing  and  to  provide  as  much  certainty  and predictability  as  possible,  balancing  this  against  the objectives  of  insolvency  law  and  the  benefits  to  an economy of successful reorganization.”

(emphasis supplied)

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The BLRC Report,  2015 is of  great  help in understanding what is

meant  by  respecting  the  rights  of  all  creditors  equally.  Paragraph

3.4.2 of the said report states:

“3.4.2 Principles driving the design

The Committee chose the following principles to design the new insolvency and bankruptcy resolution framework:

IV. The Code will ensure a collective process.  

9. The  law  must  ensure  that  all  key  stakeholders  will participate  to  collectively  assess  viability.  The  law  must ensure that all  creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution.

V. The Code will respect the rights of all creditors equally.  

10. The law must  be impartial  to  the type of  creditor  in counting their  weight  in  the vote  on the final  solution in resolving insolvency.  

VI. The Code must ensure that, when the negotiations fail to establish viability,  the outcome of  bankruptcy must be binding.  

11. The  law  must  order  the  liquidation  of  an  enterprise which  has  been  found  unviable.  This  outcome  of  the negotiations should be protected against all appeals other than for very exceptional cases.  

VII. The Code must ensure clarity of priority, and that the rights  of  all  stakeholders  are  upheld  in  resolving bankruptcy.  

12. The law must clearly lay out the priority of distributions in  bankruptcy  to  all  stakeholders.  The  priority  must  be designed so as to incentivise all stakeholders to participate in the cycle of building enterprises with confidence.  

13. While  the  law  must  incentivise  collective  action  in resolving bankruptcy, there must be a greater flexibility to allow individual  action  in  resolution  and  recovery  during

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bankruptcy  compared  with  the  phase  of  insolvency resolution.”     

(emphasis supplied)

49. That equitable treatment of creditors is equitable treatment only

within  the  same  class  is  echoed  in  American  Jurisprudence,  2d,

Volume 9 (hereinafter  referred to as “American Jurisprudence”)  as

follows:

Ҥ 6. Distribution

Equality of distribution is the theme of a bankruptcy act and a  prime  bankruptcy  policy.  The  bankruptcy  system  is designed  to  distribute  an  estate  as  equally  as  possible among similarly situated creditors. Thus, creditors of equal status must be treated equally and equitably.

One of the conditions placed upon the debtor’s use of the Bankruptcy Code to obtain a fresh start is that the debtor treat all creditors fairly.

The  bankruptcy  process  is  the  process  by  which  a  res, under the constructive possession of the bankruptcy court, is  administered  for  the  purpose  of  allowing,  disallowing, organizing,  and prioritizing claims of  creditors in,  to,  and upon the res. Although the central policy of the Bankruptcy Code  is  equality  of  distribution  among  all  creditors, exceptions are made by granting priority to certain claims and subordinating others.  Pursuant  to  the central  policy, creditors of equal priority should receive a pro rata share of the debtor’s property; thus, when there is not enough to go around, the bankruptcy judge must establish priorities and apportion assets among creditors with the same priority.”

    (emphasis supplied)

Shri Sibal, however, relied upon the following statements in American

Jurisprudence, which read as follows:

“Chapter 11 reorganization, specifically, has been called a collective remedy, designed to find the optimum solution for

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all parties connected with a business – not solely for the business itself and not solely for its creditors.

xxx xxx xxx  

Protecting creditors in general is an important objective as is protecting creditors from each other.”  

There  is  no  doubt  that  even  under  our  Code,  reorganisation  is  a

collective remedy designed to find an optimum solution for all parties

connected  with  a  business  in  the  manner  provided  by  the  Code.

Protecting creditors in general is, no doubt, an important objective -

the  observation  that  protecting  creditors  from  each  other  is  also

important,  which  must  be  read  with  footnote  7  in  the  American

Jurisprudence, which reads as under:

"In re First Central Financial Corp., 377 F.3d 209 (2d Cir. 2004)  

The Bankruptcy Code generally does not imbue creditors with greater rights in a bankruptcy proceeding than they would  enjoy  under  otherwise  applicable  non-bankruptcy law unless it  is to serve some bankruptcy purpose. In re Vermont Elec. Generation & Transmission Co-op., Inc., 240 B.R. 476 (Bankr. D. Vt. 1999)”

A reading of this footnote will show that what is meant by protecting

creditors from each other is only that a Bankruptcy Code should not

be read so as to imbue creditors with greater rights in a bankruptcy

proceeding than they would enjoy under the general law, unless it is

to serve some bankruptcy purpose.    

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50. The  importance  of  valuing  security  interests  separately  from

interests of creditors who do not have security is well set out in the

IMF  paper  on  Development  of  Standards  for  Security  Interest  by

Pascale  De  Boeck  and  Thomas  Laryea,  Counsel,  IMF  Legal

Department. The learned authors state:

“I.VALUE OF SECURITY INTERESTS  

In developing standards for the legal framework of security interests, it is important to recognize that security interests serve  discernable  economic  goals.  Security  interests reduce credit risk by increasing the creditor’s likelihood to be repaid, not only when payment is due, but also in the event of a default by its debtor. This increased likelihood of repayment  produces  wider  economic  benefits.  First,  the availability of credit is enhanced; borrowers obtain credit in cases where they would  have otherwise failed absent  a security interest. Second, credit is also made available on better terms involving, for instance, lower interest rates and longer maturities. The relative cost of secured credit under that of unsecured credit reflects the commercial recognition of the advantages of secured credit in connection with the recovery of the debt.  

The efficiency of the legal framework for secured credit is a critical factor in the strengthening of financial systems. In the  face  of  financial  sector  crises,  an  effective  legal framework of  security  interests enables banks and other credit  institutions  to  mitigate  the  deterioration  of  their claims,  it  also  facilitates  corporate  restructuring  by providing tools to support interim financing. In the longer term, an effective framework for security interests fosters economic  growth.  Specifically,  it  supports  access  to affordable  credit,  thereby  facilitating  the  acquisition  of goods. Further, it increases the capacity of enterprises to finance expansion fueled by the supply of credit. Also, an effective framework for security interests can support the development of a sound banking system and promotion of capital markets founded on the efficient allocation of credit

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and  effective  and  predictable  mechanisms  for  realizing credit claims.

xxx xxx xxx

III. General Principles

xxx xxx xxx

• Establish clear and predictable priority rules  

The  issue  of  priorities  between  various  security  interest devices  and  between  various  types  of  creditors  is extremely complex, largely due to the myriad of possible competing  interests.  Whatever  priority  rules  a  legal framework establishes, they ought to be clear, predictable and transparent.  They need to allow creditors to assess their  position  before  creating  a  security  interest  and  to enforce their rights in case of default in a timely, predictable and cost-efficient manner.  

• Facilitate the enforcement of creditor rights  

Enforcement is a critical factor in the law and functioning of secured  credit.  A security  interest  is  of  little  value  to  a creditor  unless  the  creditor  is  able  to  enforce  it  in  a predictable, efficient and timely manner vis-à-vis the debtor and third  parties.  An effective  framework needs to  allow quick and predictable enforcement both within and outside insolvency proceedings.”

51. Likewise the World  Bank Report  of  2015 titled  Principles for

Effective Insolvency and Creditor/Debtor Regimes states:

“Claims and Claims Resolution Procedures

Treatment of Stakeholder Rights and Priorities

C12.1 The rights of  creditors and the priorities of  claims established  prior  to  insolvency  proceedings  under commercial or other applicable laws should be upheld in an insolvency  proceeding  to  preserve  the  legitimate expectations  of  creditors  and  encourage  greater predictability in commercial relationships. Deviations from this  general  rule  should  occur  only  where  necessary  to promote  other  compelling  policies,  such  as  the  policy

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supporting reorganization,  or  to  maximize the insolvency estate’s value. Rules of priority should enable creditors to manage  credit  efficiently,  consistent  with  the  following additional principles:  

C12.2 The priority  of  secured creditors in  their  collateral should  be  upheld  and,  absent  the  secured  creditor’s consent,  its  interest  in  the  collateral  should  not  be subordinated to other priorities granted in the course of the insolvency  proceeding.  Distributions  to  secured  creditors should be made as promptly as possible.  

C12.3  Following  distributions  to  secured  creditors  from their  collateral  and the payment  of  claims related to  the costs and expenses of administration, proceeds available for  distribution  should  be  distributed  pari  passu  to  the remaining  general  unsecured  creditors,  unless  there  are compelling  reasons  to  justify  giving  priority  status  to  a particular class of claims. Public interests generally should not be given precedence over private rights. The number of priority classes should be kept to a minimum.  

C12.4 Workers are a vital part of an enterprise, and careful consideration  should  be  given  to  balancing the rights  of employees with those of other creditors.”

However, Shri Sibal stated that this report should not be relied upon

as an earlier  World Bank Report  of  2010, titled “A Global View of

Business Insolvency Systems” (hereinafter referred to as the “2010

Report”) had opined to the contrary.

52. Quite  apart  from  the  fact  that  the  2010  report  is  an  earlier

report, which opined on the basis of the French system, that creditors

are  divided  into  two  separate  classes  without  any  further  sub-

classification and that the advantage of such system is that it avoids

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potential conflict of interest among creditors in a particular class, the

report then goes on to state:

“In some cases, classification makes it easier to treat the claims of major creditors, who may be persuaded to opt to receive  a  different  treatment  from  the  general  class  of unsecured creditors, where such treatment is necessary to render the plan feasible. In such cases, the treatment for these major creditors is generally on less favorable terms than other, similarly situated creditors. Finally, classification may be a useful means of overriding the vote of a class of creditors  that  votes  against  the  plan  where  the  class  is otherwise treated in a fair and equitable manner.4”

Even according to this report, therefore, a “cramdown” on dissentient

creditors would pass muster under an insolvency law if such creditors

will receive, under a resolution plan, an amount at least equal to what

such  creditors  would  receive  in  a  liquidation  proceeding  being

“liquidation value”.

53. Also,  Philip  R.  Wood’s  book titled  “Principles  of  International

Insolvency” states:

“Secured  creditors  are  super-priority  creditors  on insolvency. Security must stand up on insolvency which is when it is needed most. Security which is valid between the parties  but  not  as  against  the  creditors  of  the  debtor  is futile. Bankruptcy law which freeze or delay or weaken or de-prioritise  security  on insolvency  destroy what  the  law

4 This override, which has come to be known as a “cramdown” based on its effect, allows the court to conclude that a rejecting class should be compelled to accept the plan where the class is paid in strict accordance with the relative priority of creditor claims and will receive under the plan a distribution in an amount equal to or greater than such creditors would receive in a liquidation proceeding. The rationale is that these creditors cannot claim “foul” if their recovery is at least as good as they would have received if they had prevailed in having the enterprise liquidated.  

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created.  Hence  the  end  is  more  important  than  the beginning.

Rationale of security - The main purposes and policies of security  are:  protection  of  creditors  on  insolvency;  the limitation  of  cascade  or  domino  insolvencies;  security encourages  capital,  e.g.  enterprise  finance;  security reduces the cost of credit, e.g. margin collateral in markets; he  who pays for  the  asset  should  have the  right  to  the asset;  security  encourages  the  private  rescue  since  the bank feels safer; security is defensive control, especially in the case of project finance; security is a fair exchange for the credit.

Main Objections to  security  The objections to  security are mainly historical,  but  they resurrect  and live on.  The hostility  may  stem from:  debtor-protection  stirred  by  the ancient  hostility  to  usurers  and  money-lending  and  now expressed in consumer protection statutes; the prevention of false wealth, i.e. the debtor has many possessions but few  assets  –  this  is  usually  met  by  a  requirement  for possession  (inefficient  because  not  public)  or  public registration; unsecured creditors get less on insolvency and this is seen as a violation of bankruptcy equality, although more  often  it  is  motivated  by  desire  to  protect  unpaid employees and small creditors; security disturbs the safety of  commercial  transactions because of  priority risks,  e.g. the purchaser of goods; the secured creditor can disrupt a rescue by selling an essential asset.”

54. Indeed, if an “equality for all” approach recognising the rights of

different  classes  of  creditors  as  part  of  an  insolvency  resolution

process is adopted, secured financial creditors will, in many cases, be

incentivised  to  vote  for  liquidation  rather  than  resolution,  as  they

would have better rights if the corporate debtor was to be liquidated

rather than a resolution plan being approved. This would defeat the

entire objective of the Code which is to first ensure that resolution of

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distressed assets takes place and only if  the same is not possible

should liquidation follow.  

55. Financial creditors are in the business of lending money. The

RBI report  on Trend and Progress of  Banking in India,  2017-2018

reflects that the net interest margin of Indian banks for the financial

year 2017-2018 is averaged at 2.5%. Likewise, the global trend for

net interest margin was at 3.3% for banks in the USA and 1.6% for

banks in the UK in the year 2016, as per the data published on the

website of the bank. Thus, it is clear that financial creditors earn profit

by earning interest on money lent with low margins, generally being

between 1 to 4%.  Also, financial creditors are capital providers for

companies, who in turn are able to purchase assets and provide a

working  capital  to  enable  such  companies  to  run  their  business

operation, whereas operational creditors are beneficiaries of amounts

lent by financial creditors which are then used as working capital, and

often  get  paid  for  goods  and  services  provided  by  them  to  the

corporate  debtor,  out  of  such  working  capital.  On the other  hand,

market research carried out by India Brand Equity Foundation, a trust

established by the Ministry of Commerce and Industry, as regards the

Oil and Gas sector, has stated that the business risk of operational

creditors who operate with higher profit margins and shorter cyclical

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repayments must needs be higher. Also, operational creditors have

an immediate exit option, by stopping supply to the corporate debtor,

once  corporate  debtors  start  defaulting  in  payment.  Financial

creditors may exit on their long-term loans, either upon repayment of

the full  amount or upon default,  by recalling the entire loan facility

and/or enforcing the security interest which is a time consuming and

lengthy process which usually involves litigation. Financial creditors

are also part of a regulated banking system which involves not merely

declaring  defaulters  as  non-performing  assets  but  also  involves

restructuring  such  loans  which  often  results  in  foregoing  unpaid

amounts  of  interest  either  wholly  or  partially.  All  these  differences

between  financial  and  operational  creditors  have  been  reflected,

albeit differently, in the judgment of  Swiss Ribbons  (supra). Thus,

this Court in dealing with some of the differences has held:

“50. According to us, it is clear that most financial creditors, particularly  banks  and  financial  institutions,  are  secured creditors  whereas  most  operational  creditors  are unsecured,  payments for  goods and services as well  as payments  to  workers  not  being  secured  by  mortgaged documents and the like.  The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in  this  country.  Apart  from the  above,  the nature  of  loan  agreements  with  financial  creditors  is different  from  contracts  with  operational  creditors  for supplying goods and services. Financial creditors generally lend  finance  on  a  term  loan  or  for  working  capital  that enables  the  corporate  debtor  to  either  set  up  and/or operate  its  business.  On  the  other  hand,  contracts  with

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operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational  contracts  have  dues  whose  quantum  is generally  less.  In  the running of  a  business,  operational creditors can be many as opposed to financial  creditors, who lend finance  for  the  set-up  or  working of  business. Also,  financial  creditors  have  specified  repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have  any  such  stipulations.  Also,  the  forum  in  which dispute  resolution  takes  place  is  completely  different. Contracts  with  operational  creditors  can  and  do  have arbitration  clauses  where  dispute  resolution  is  done privately.  Operational  debts  also  tend  to  be  recurring  in nature and the possibility  of genuine disputes in case of operational  debts  is  much  higher  when  compared  to financial debts. A simple example will suffice. Goods that are  supplied  may  be  substandard.  Services  that  are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other  hand,  financial  debts  made to  banks and financial institutions  are  well  documented  and  defaults  made  are easily verifiable.

51. Most importantly, financial creditors are, from the very beginning,  involved  with  assessing  the  viability  of  the corporate debtor.  They can, and therefore do, engage in restructuring of  the loan as well  as reorganisation of  the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do.  Thus,  preserving  the  corporate  debtor  as  a  going concern, while ensuring maximum recovery for all creditors being  the  objective  of  the  Code,  financial  creditors  are clearly  different  from operational  creditors  and  therefore, there is obviously an intelligible differentia between the two which  has  a  direct  relation  to  the  objects  sought  to  be achieved by the Code.

xxx xxx xxx

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75. Since  the  financial  creditors  are  in  the  business  of moneylending,  banks  and  financial  institutions  are  best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report,  evaluation  of  business,  financial  projection,  etc. Since  this  detailed  study  has  already  been  undertaken before  sanctioning  a  loan,  and  since  financial  creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who  provide  goods  and  services,  are  involved  only  in recovering  amounts  that  are  paid  for  such  goods  and services,  and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear.

xxx xxx xxx

76. Quite apart from this, the United Nations Commission on  International  Trade  Law,  in  its Legislative  Guide  on Insolvency  Law (the UNCITRAL Guidelines)  recognises  the importance  of  ensuring  equitable  treatment  to  similarly placed creditors and states as follows:

“Ensuring equitable treatment of similarly situated creditors

7. The objective of equitable treatment is based on the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognises that all creditors do not  need to  be  treated  identically,  but  in  a  manner  that reflects  the  different  bargains  they  have  struck  with  the debtor.  This  is  less  relevant  as  a  defining  factor  where there is no specific debt contract with the debtor, such as in the  case  of  damage  claimants  (e.g.  for  environmental damage) and tax authorities. Even though the principle of equitable treatment  may be modified by social  policy  on priorities  and  give  way  to  the  prerogatives  pertaining  to holders of  claims or interests that  arise,  for  example,  by operation  of  law,  it  retains  its  significance by UNCITRAL Legislative Guide on Insolvency Law ensuring

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that the priority accorded to the claims of a similar class affects all members of the class in the same manner. The policy of equitable treatment permeates many aspects of an insolvency law, including the application of the stay or suspension, provisions to set aside acts and transactions and recapture value for the insolvency estate, classification of  claims,  voting  procedures  in  reorganisation  and distribution mechanisms. An insolvency law should address problems of fraud and favouritism that may arise in cases of financial distress by providing, for example, that acts and transactions detrimental to equitable treatment of creditors can be avoided.”

77.  NCLAT has, while looking into viability and feasibility of resolution  plans  that  are  approved by  the  Committee  of Creditors, always gone into whether operational creditors are given roughly the same treatment as financial creditors, and  if  they  are  not,  such  plans  are  either  rejected  or modified  so  that  the  operational  creditors'  rights  are safeguarded. It may be seen that a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless  a  minimum  payment  is  made  to  operational creditors, being not less than liquidation value. Further, on 5-10-2018, Regulation 38 has been amended. Prior to the amendment, Regulation 38 read as follows:

“38. Mandatory contents of the resolution plan.—(1) A resolution plan shall  identify  specific  sources of  funds that will be used to pay the—

(a) insolvency resolution process costs and provide that the  insolvency  resolution  process  costs,  to  the  extent unpaid, will be paid in priority to any other creditor;

(b)  liquidation  value  due  to  operational  creditors  and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days  after  the  approval  of  a  resolution  plan  by  the adjudicating authority; and

(c) liquidation value due to dissenting financial creditors and  provide  that  such  payment  is  made  before  any recoveries are made by the financial creditors who voted in favour of the resolution plan.” Post amendment, Regulation 38 reads as follows:

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“38. Mandatory contents of the resolution plan.—(1) The  amount  due  to  the  operational  creditors  under  a resolution  plan  shall  be  given  priority  in  payment  over financial creditors.

(1-A) A resolution plan shall include a statement as to how  it  has  dealt  with  the  interests  of  all  stakeholders, including  financial  creditors  and  operational  creditors,  of the corporate debtor.” The aforesaid Regulation further strengthens the rights of operational  creditors  by  statutorily  incorporating  the principle  of  fair  and  equitable  dealing  of  operational creditors'  rights,  together  with  priority  in  payment  over financial creditors.”

     (emphasis supplied)

56. By reading paragraph 77  de hors the earlier paragraphs, the

Appellate Tribunal has fallen into grave error. Paragraph 76 clearly

refers  to  the  UNCITRAL Legislative  Guide  which  makes  it  clear

beyond any doubt that equitable treatment is only of similarly situated

creditors. This being so, the observation in paragraph 77 cannot be

read to mean that financial and operational creditors must be paid the

same amounts in any resolution plan before it can pass muster. On

the  contrary,  paragraph  77  itself  makes  it  clear  that  there  is  a

difference  in  payment  of  the  debts  of  financial  and  operational

creditors, operational creditors having to receive a minimum payment,

being not less than liquidation value, which does not apply to financial

creditors. The amended Regulation 38 set out in paragraph 77 again

does  not  lead  to  the  conclusion  that  financial  and  operational

creditors, or secured and unsecured creditors, must be paid the same

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amounts,  percentage wise,  under the resolution plan before it  can

pass muster. Fair and equitable dealing of operational creditors’ rights

under the said Regulation involves the resolution plan stating as to

how it has dealt with the interests of operational creditors, which is

not the same thing as saying that they must be paid the same amount

of  their  debt  proportionately.  Also,  the  fact  that  the  operational

creditors are given priority in payment over all financial creditors does

not lead to the conclusion that such payment must necessarily be the

same  recovery  percentage  as  financial  creditors.  So  long  as  the

provisions of the Code and the Regulations have been met, it is the

commercial  wisdom of  the  requisite  majority  of  the  Committee  of

Creditors which is to negotiate and accept a resolution plan, which

may  involve  differential  payment  to  different  classes  of  creditors,

together with negotiating with a prospective resolution applicant for

better  or  different  terms  which  may  also  involve  differences  in

distribution of amounts between different classes of creditors.   

57. Indeed,  by  vesting  the  Committee  of  Creditors  with  the

discretion of accepting resolution plans only with financial creditors,

operational  creditors  having  no  vote,  the  Code  itself  differentiates

between  the  two  types  of  creditors  for  the  reasons  given  above.

Further,  as  has  been  reflected  in  Swiss  Ribbons (supra),  most

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financial  creditors  are  secured  creditors,  whose  security  interests

must be protected in order that they do not go ahead and realise their

security in legal proceedings, but instead are incentivised to act within

the  framework  of  the  Code  as  persons  who  will  resolve  stressed

assets  and  bring  a  corporate  debtor  back  to  its  feet.  Shri  Sibal’s

argument  that  the  expression  “secured  creditor”  does  not  find

mention in Chapter II  of the Code, which deals with the resolution

process, and is only found in Chapter III, which deals with liquidation,

is for the reason that secured creditors as a class are subsumed in

the class of financial creditors, as has been held in Swiss Ribbons

(supra). Indeed, Regulation 13(1) of the 2016 Regulations mandates

that  when  the  resolution  professional  verifies  claims,  the  security

interest of secured creditors is also looked at and gets taken care of.

Similarly, Regulation 36(2)(d) when it provides for a list of creditors

and the amounts claimed by them in the information memorandum

(which is to be submitted to prospective resolution applicants), also

provides for the amount of claims admitted and security interest in

respect  of  such  claims.  Under  Regulation  39(4),  the  compliance

certificate  of  the  resolution  professional  as  to  the  CIRP  being

successful is contained in Form H to the Regulations. This statutory

form, in paragraphs 6 and 7, states as under:

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“6.  The  Resolution  Plan  includes  a  statement  under regulation 38(1A) of the CIRP Regulations as to how it has dealt  with the interests of  all  stakeholders in compliance with the Code and regulations made thereunder.

7.  The amounts provided for  the stakeholders under  the Resolution Plan is as under:

                              (Amount in Rs. Lakh)

Sl. No.

Category  of Stakeholder

Amount Claimed

Amount Admitted

Amount Provided under the Plan

Amount Provided to  the Amount Claimed (%)

1 Dissenting Secured Financial Creditors

2 Other  Secured Financial Creditors

3 Dissenting Unsecured Financial Creditors

4 Other Unsecured Financial Creditors

5 Operational Creditors Government Workmen Employees …

4 Other  Debts and Dues

Total  

Quite  clearly,  secured  and  unsecured  financial  creditors  are

differentiated when it comes to amounts to be paid under a resolution

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plan,  together with what dissenting secured or unsecured financial

creditors are to be paid. And, most importantly, operational creditors

are separately viewed from these secured and unsecured financial

creditors in S.No.5 of paragraph 7 of statutory Form H. Thus, it can

be seen 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.

58. However,  Shri  Sibal  relied  strongly  upon  a  judgment  of  this

Court being  Mihir R. Mafatlal v. Mafatlal Industries Ltd. (1997) 1

SCC 579,  and in  particular  paragraph 28 thereof,  which stated as

follows:

“28. …On a conjoint reading of the relevant provisions of Sections 391 and 393 it  becomes at  once clear that  the Company Court which is called upon to sanction such a scheme  has  not  merely  to  go  by  the  ipse  dixit  of  the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but  the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or

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arrangement which is required to receive the imprimatur of a court of law. No court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of  shareholders  or  creditors  for  whom  it  is  meant. Consequently  it  cannot  be  said  that  a  Company  Court before whom an application is moved for sanctioning such a  scheme  which  might  have  got  the  requisite  majority support of the creditors or members or any class of them for  whom  the  scheme  is  mooted  by  the  company concerned, has to act merely as a rubber stamp and must almost  automatically  put  its  seal  of  approval  on  such  a scheme.  It  is  trite  to  say  that  once  the  scheme  gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court  while putting its seal  of  approval  on the scheme concerned placed for its sanction. It is, of course, true that so far as the Company Court is concerned as per the statutory provisions of Sections 391 and 393 of the Act the question of  voidability of  the scheme will  have to be judged subject  to the rider that  a scheme sanctioned by majority  will  remain  binding  to  a  dissenting  minority  of creditors or members, as the case may be, even though they have not  consented to  such a  scheme and to  that extent absence of their consent will have no effect on the scheme. It can be postulated that even in case of such a scheme  of  compromise  and  arrangement  put  up  for sanction  of  a  Company  Court  it  will  have  to  be  seen whether the proposed scheme is lawful and just and fair to the  whole  class  of  creditors  or  members  including  the dissenting minority to whom it is offered for approval and which has been approved by such class of persons with requisite majority vote.”

The very next paragraph, however, states as follows:

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“29. However further question remains whether the Court has  jurisdiction  like  an  appellate  authority  to  minutely scrutinise  the  scheme  and  to  arrive  at  an  independent conclusion whether the scheme should be permitted to go through  or  not  when  the  majority  of  the  creditors  or members  or  their  respective  classes  have  approved the scheme as required by Section 391 sub-section (2). On this aspect the nature of compromise or arrangement between the company and the creditors  and members has to  be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who  have  ratified  the  Scheme by  the  requisite  majority. Consequently  the  Company  Court's  jurisdiction  to  that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.”

In  Mihir  Mafatlal  (supra),  the Court  was dealing with schemes of

amalgamation under Section 391 of the Companies Act, 1956. Under

Section  392  of  the  said  Act,  the  High  Court  is  vested  with  a

supervisory jurisdiction, which includes the power to give directions

and  make  modifications  in  such  schemes,  as  it  may  consider

necessary, for the proper working of the said Schemes. This power in

Section  392  is  conspicuous  by  its  absence when it  comes to  the

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Adjudicating  Authority  under  the  Code,  whose  jurisdiction  is

circumscribed  by  Section  30(2).  It  is  the  Committee  of  Creditors,

under Section 30(4) read with Regulation 39(3), that is vested with

the power to approve resolution plans and make modifications therein

as the Committee deems fit.  It  is  this vital  difference between the

jurisdiction of the High Court under Section 392 of the Companies

Act, 1956 and the jurisdiction of the Adjudicating Authority under the

Code that must be kept in mind when the Adjudicating Authority is to

decide on whether a resolution plan passes muster under the Code.

When  this  distinction  is  kept  in  mind,  it  is  clear  that  there  is  no

residual jurisdiction not to approve a resolution plan on the ground

that it is unfair or unjust to a class of creditors, so long as the interest

of each class has been looked into and taken care of. It is important

to note that even under Sections 391 and 392 of the Companies Act,

1956,  ultimately  it  is  the commercial  wisdom of  the parties  to  the

scheme,  reflected  in  the  75% majority  vote,  which  then  binds  all

shareholders and creditors. Even under Sections 391 and 392, the

High Court cannot act as a court of appeal and sit in judgment over

such commercial wisdom.

The  constitution  of  a  sub-committee  by  the  Committee  of Creditors    

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59. A large part of Shri Sibal’s submission was centered around the

fact that the Committee of Creditors delegated its functions to a sub-

committee,  which  delegation  is  impermissible.  As  a  result  of  this

delegation,  the  sub-committee  secretly  made  negotiations  with

ArcelorMittal,  which  secret  negotiations  then  produced  a  wholly

inequitable result in that Standard Chartered Bank, though a financial

creditor, was only paid 1.74% of its admitted claim of INR 3487 crores

as opposed to other financial creditors who were paid 74.8% of what

was claimed by them.  

60. Under  Section  21(8)  of  the  Code,  all  decisions  by  the

Committee of Creditors can be taken by a 51% majority vote, unless,

a higher percentage is required under other specific provisions of the

Code.  

61. In Pradyat Kumar Bhose v. The Hon’ble the Chief Justice of

Calcutta High Court (1955) 2 SCR 1331 at page 1345-1346, this

Court,  when  dealing  with  the  Chief  Justice  of  the  High  Court  of

Calcutta’s administrative powers held:

“The further subordinate objections that have been raised remain to be considered. The first objection that has been urged is that  even if  the Chief  Justice had the power to dismiss, he was not, in exercise of that power, competent to delegate to another Judge the enquiry into the charges but should have made the enquiry himself. This contention proceeds on a misapprehension of the nature of the power.

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As  pointed  out  in Barnard v. National  Dock  Labour Board [(1953)  2  QB 18,  40]  at  p.  40,  it  is  true  that  “no judicial  tribunal  can  delegate  its  functions  unless  it  is enabled to do so expressly or by necessary implication”. But  the  exercise  of  the  power  to  appoint  or  dismiss  an officer  is  the  exercise  not  of  a  judicial  power  but  of  an administrative power. It is nonetheless so, by reason of the fact  that  an  opportunity  to  show  cause  and  an  enquiry simulating judicial standards have to precede the exercise thereof.  It  is  well-recognised  that  a  statutory  functionary exercising such a power cannot be said to have delegated his  functions  merely  by  deputing  a  responsible  and competent  official  to  enquire  and  report.  That  is  the ordinary  mode  of  exercise  of  any  administrative  power. What  cannot  be  delegated  except  where  the  law specifically so provides — is the ultimate responsibility for the exercise of such power. As pointed out by the House of Lords in Board of Education v. Rice [(1911) AC 179, 182] , a functionary who has to decide an administrative matter, of the nature involved in this case, can obtain the material on which he is to act in such manner as may be feasible and convenient, provided only the affected party “has a fair opportunity  to  correct  or  contradict  any  relevant  and prejudicial  material”.  The  following  passage  from  the speech  of  Lord  Chancellor  in Local  Government Board v. Arlidge [(1915)  AC  120,  133]  is  apposite  and instructive: “My  Lords,  I  concur  in  this  view  of  the  position  of  an administrative body to which the decision of a question in dispute between parties has been entrusted. The result of its inquiry must, as I have said, be taken, in the absence of directions in the statute to the contrary, to be intended to be reached by its ordinary procedure. In the case of the Local Government Board it is not doubtful what this procedure is. The  Minister  at  the  head  of  the  Board  is  directly responsible  to  Parliament  like  other  Ministers.  He  is responsible not  only for what he himself  does but for all that  is  done  in  his  department.  The  volume  of  work entrusted to him is very great and he cannot do the great bulk of it  himself.  He is expected to obtain his materials vicariously through his officials, and he has discharged his duty  if  he sees  that  they  obtain  these materials  for  him properly. To try to extend his duty beyond this and to insist

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that  he  and  other  members  of  the  Board  should  do everything  personally  would  be  to  impair  his  efficiency. Unlike a Judge in a Court he is not only at liberty but is compelled to rely on the assistance of his staff.” In  view  of  the  above  clear  statement  of  the  law  the objection to the validity of the dismissal on the ground that the delegation of the enquiry amounts to the delegation of the  power  itself  is  without  any  substance  and  must  be rejected.”

Likewise,  in  High  Court  of  Judicature  at  Bombay  through  its

Registrar v. Shirishkumar Rangrao Patil & Anr. (1997) 6 SCC 339,

this Court, in dealing with the constitution of various committees for

the administration of the High Court, when dealing with question of

delegation held:

“10. It  would  thus  be  settled  law  that  the  control  of  the subordinate judiciary under Article 235 is vested in the High Court. After the appointment of the judicial officers by the Governor,  the  power  to  transfer,  maintain  discipline  and keep control over them vests in the High Court. The Chief Justice of the High Court is first among the Judges of the High Court. The action taken is by the High Court and not by the Chief Justice in his individual capacity, nor by the Committee  of  Judges.  For  the  convenient  transaction  of administrative business in the Court, the Full Court of the Judges  of  the  High  Court  generally  passes  a  resolution authorising  the  Chief  Justice  to  constitute  various committees  including  the  committee  to  deal  with disciplinary matters pertaining to the subordinate judiciary or  the  ministerial  staff  working  therein.  Article  235, therefore, relates to the power of taking a decision by the High Court against a member of the subordinate judiciary. Such a decision either to hold an enquiry into the conduct of  a judicial  officer,  subordinate or  higher  judiciary,  or  to have the enquiry conducted through a District or Additional District Judge etc. and to consider the report of the enquiry officer for taking further action is of the High Court. Equally, the decision to consider  the report  of  the enquiry  officer

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and  to  take  follow-up  action  and  to  make  appropriate recommendation  to  the  Disciplinary  Committee  or  to  the Governor, is entirely of the High Court which acts through the Committee of the Judges authorised by the Full Court. Once a resolution is passed by the Full Court of the High Court, there is no further necessity to refer the matter again to the Full Court while taking such procedural steps relating to control of the subordinate judiciary.”

62. We find, that when it comes to the exercise of the Committee of

Creditors’ powers on questions which  have a  vital  bearing  on the

running  of  the  business  of  the  corporate  debtor,  Section  28(1)(h)

provides that though these powers are administrative in nature, they

shall not be delegated to any other person, meaning thereby, that the

Committee of Creditors alone must take the decisions mentioned in

Section 28 and not any person other than such Committee. When it

comes to approving a resolution plan under Section 30(4), there is no

doubt whatsoever that this power also cannot be delegated to any

other body as it is the Committee of Creditors alone that has been

vested with this important business decision which it  must take by

itself.  However, this does not mean that sub-committees cannot be

appointed for the purpose of negotiating with resolution applicants, or

for the purpose of performing other ministerial or administrative acts,

provided such acts are in the ultimate analysis approved and ratified

by the Committee of  Creditors.  We find,  having gone through the

minutes of all the important creditors’ meetings that were held, that

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every single administrative decision qua approving and administering

the resolution plan submitted by ArcelorMittal was in fact done by the

requisite  majority  of  the  Committee  of  Creditors  itself,  the  sub-

committee  having  been  used  only  for  purposes  of  initiating

proceedings  and  negotiating  with  ArcelorMittal,  which  ultimately

culminated in the resolution plan as finally negotiated, being passed

by the requisite majority of creditors on 23.10.2018. In point of fact,

Standard Chartered Bank voted in favour of the constitution of a sub-

committee on the 12th committee of creditors meeting of 02.05.2018,

as also, in favour of decisions of the Committee of Creditors finalizing

drafts of sub-committees on eligibility of resolution applicants at the

13th Committee  of  Creditors  meeting  on  05.05.2018.   Also,  as  a

matter  of  fact,  on  31.05.2018,  at  the  16th Committee  of  Creditors

meeting, a request was made by Standard Chartered Bank to be a

member of  the sub-committee,  which request was later withdrawn.

We  also  find  that  in  the  authorisation  to  the  sub-committee  to

negotiate  with  ArcelorMittal,  mooted  at  the  20th Committee  of

Creditors meeting on 19.10.2018, a request was made by Standard

Chartered Bank for  inclusion in  the said  sub-committee.  However,

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

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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

63. Shri Gopal Subramanium and Shri Rakesh Dwivedi have also

appealed against the extinguishment of the rights of creditors against

guarantees that were extended by the promoters/promoter group of

the corporate debtor. According to them, this was done by a side wind

by the Appellate Tribunal without any reasons for the same.   

64. Shri Prashant Ruia a promoter/director of the corporate debtor

in  his  personal  guarantee dated 28.09.2013,  specifically  stated as

follows:

“7. The obligations of the Guarantor under this Guarantee shall not be affected by any act, omission, matter or thing that,  but  for  this  Guarantee,  would  reduce,  release  or prejudice  any  of  its  obligations  under  this  Guarantee (without limitation and whether or not known to it  or any Secured Party) including :

xxx xxx xxx

(g) any insolvency or similar proceedings.”

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Also, under the caption “terms of settlement”, the final resolution plan

dated 02.04.2018, as approved on 23.10.2018, specifically provided:

“Financial Creditors:

Pursuant  to  the  approval  of  this  Resolution  Plan  by  the Adjudicating Authority, each of the Financial Creditors shall be  deemed  to  have  agreed  and  acknowledged  the following terms:

  The  payment  to  the  Financial  creditors  in  accordance with this Resolution Plan shall be treated as full and final payment of all outstanding dues of the Corporate Debtor to each of  the Financial  Creditors as of  the Effective Date, and all agreements and arrangements entered into by or in favour of each of the Financial Creditors, including but not limited to loan agreements and security agreements (other than corporate or personal guarantees provided in relation to the Corporate Debtor by the Existing Promoter Group or their  respective affiliates) shall  be deemed to have been (i) assigned / novated to the Resolution applicant, or any Person nominated by the Resolution applicant, with effect from  the  effective  Date,  with  no  rights  subsisting  or accruing to the Financial Creditors for the period  prior to such  assignment  or  novation;  and  (ii)  to  the  extent  not legally  capable  of  assigned  or  novated-  terminated  with effect  from the effective Date,  with no rights accruing or subsisting to the Financial Creditors  for the period prior to termination.

 In relation to the loan and financial assistance provided to the Corporate Debtor; each of the Financial Creditors, as the case maybe, shall:

- Assign/ novate all security given (including but not limited to  Encumbrance  over  assets  of  the  Corporate  Debtor, pledge  of  shares  of  the  Corporate  Debtor  (other  than corporate guarantees and personal guarantees) related in any  manner  to  the  Corporate  Debtor)  to  the  Resolution Applicant  and /or its Connected Persons, and /or banks or financial institutions designated by the Resolution Applicant

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in this regard, pursuant to the Acquisition Structure, with effect from the Effective Date;

- Issue  such  letters  and  communications,  and  take  such other actions, as may be required or deemed necessary for the release, assignment or novation of (i) the Encumbrance over the assets of the Corporate Debtor; and (ii) the pledge over  the  shares  of  the  Corporate  Debtor;  within  5(five) Business Days from the Effective Date; and

- Be deemed to have waived all claims and dues (including interest  and  penalty,  if  any)  from  the  Corporate  Debtor arising on and from the insolvency Commencement Date, until the effective Date.”

65. Shri Rohatgi, learned senior advocate appearing on behalf of

Shri  Prashant  Ruia,  also  pointed  out  Section  XIII  (1)(g)  of  the

resolution plan dated 23.10.18, in which it is stated as follows:  

“Upon  the  approval  of  the  Resolution  Plan  by  the Adjudicating Authority in relation to guarantees provided for and  on  behalf  of,  and  in  order  to  secure  the  financial assistance  availed by  the Corporate  Debtor,  which have been  invoked  prior  to  the  Effective  Date,  claims  of  the guarantor  on  account  of  subrogation,  if  any,  under  any such  guarantee  shall  be  deemed to  have  been  abated, released, discharged and extinguished.

It is hereby clarified that, the aforementioned clause shall not apply in any manner which may extinguish/affect the rights of  the Financial  Creditors to enforce the corporate guarantees  and  personal  guarantees  issued  for  and  on behalf of the Corporate Debtor by Existing Promoter Group or  their  respective  affiliates,  which  guarantees  shall continue to be retained by the Financial Creditors and shall continue to be enforceable by them.”

(emphasis supplied)

We  were  also  informed  by  the  learned  senior  counsel  that  the

personal guarantees of the promoter group have been invoked and

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legal proceedings in respect thereof are pending. It has been pointed

out to us that Shri Prashant Ruia and other members of the promoter

group,  who  are  guarantors,  are  not  parties  to  the  resolution  plan

submitted by ArcelorMittal and hence, the resolution plan cannot bind

them to take away rights of subrogation, which they may have if they

are ordered to pay amounts guaranteed by them in the pending legal

proceedings.  

66. 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. In State Bank of India v. V. Ramakrishnan, 2018 (9) SCALE

597, this Court relying upon Section 31 of the Code has held:

“22. Section 31 of the Act was also strongly relied upon by the  Respondents.  This  Section  only  states  that  once  a Resolution  Plan,  as  approved  by  the  Committee  of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, Under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor,  without  the  surety's  consent,  would  relieve  the guarantor from payment.  Section 31(1),  in fact,  makes it clear  that  the  guarantor  cannot  escape  payment  as  the Resolution  Plan,  which  has  been  approved,  may  well include  provisions  as  to  payments  to  be  made  by  such guarantor. This is perhaps the reason that Annexure VI(e) to  Form 6  contained  in  the  Rules  and  Regulation  36(2)

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referred  to  above,  require  information  as  to  personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him.”

Following  this  judgment,  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.

67. For the same reason, the impugned NCLAT judgment in holding

that claims that may exist apart from those decided on merits by the

resolution  professional  and  by  the  Adjudicating  Authority/Appellate

Tribunal can now be decided by an appropriate forum in terms of

Section  60(6)  of  the  Code,  also  militates  against  the  rationale  of

Section  31  of  the  Code.  A successful  resolution  applicant  cannot

suddenly be faced with “undecided” claims after the resolution plan

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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, as has been

pointed  out  by  us  hereinabove.  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

68. 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  –  see  Clause  7  of  the  first  addendum to  the  RFP dated

08.02.2018. 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  

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69. In Swiss Ribbons (supra) this Court was at pains to point out,

referring, inter alia, to various American decisions in paras 17 to 24,

that the legislature must be given free play in the joints when it comes

to  economic  legislation.  Apart  from  the  presumption  of

constitutionality which arises in such cases, the legislative judgment

in economic choices must be given a certain degree of deference by

the courts. In para 120 of the said judgment, this Court held:  

“120. The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, “trial” having  led  to  repeated  “errors”,  ultimately  led  to  the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that  have been pointed out by the petitioners, passes constitutional muster. To stay experimentation  in  things  economic  is  a  grave responsibility,  and  denial  of  the  right  to  experiment  is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by  the  Central  Government  by  Expert  Committees  that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.”

It  is  in  this  background  that  the  constitutional  challenge  to  the

Amending Act of 2019 will have to be decided.

70. Closely on the heels of the impugned NCLAT judgment which

was delivered on 04.07.2019, a representation dated 17.07.2019 was

written  by  the  Deputy  Secretary  General,  FICCI  to  the  Secretary,

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Ministry  of  Corporate  Affairs,  pointing out  the flaws of  the NCLAT

judgment  and  suggesting  that  the  Government  may  consider

amendment of the Code to reinstate the law as it was and should be.

This representation stated:

“A case in point is the recent NCLAT judgment which, in effect, places Secured and unsecured Financial Creditors as well as Financial and Operational Creditors on an equal footing,  thus  virtually  erasing  the  distinction  specifically carved  between  these  two  classes  of  creditors  by  the provisions  of  the  Code.  It  may  be  noted  that  the consequences of this order stretch beyond this particular case.  

The  doctrine  that  secured  creditors  shall  rank  ahead  of unsecured creditors is a core principle of banking. It allows banks to lend to companies and individuals at lower rates of  interest  in  a secured lending because they know that their  loan is  secured and in  the eventuality  of  a default, their losses would be mitigated. By virtue of this order, the borrowing rates for all  classes would go up in the future because banks can’t be sure of protecting their losses. The fundamental  principles  of  credit  analysis  and  rating  no longer hold true. This would also result in unjust enrichment for  some  creditors  who,  knowing  that  they  don’t  have benefit  of  the  security,  lent  at  a  much  higher  rate  as compared  to  the  secured  lenders.  Besides  earning  far more money than secured creditors, due to higher interest rate  during the pre  insolvency stage they now have the benefit of higher share in the plan value, at the expense of secured creditors.  In  fact  the ruling puts in  question the very  concept  of  security  –  what  is  the  use  of  a charge/security  if  it  is  meaningless  in  insolvency?  Even other statutes, including the Companies Act, 2013 clearly lay  down  a  distinction  between  secured  and  unsecured creditors and if  both are treated at  par it  will  be a huge disincentive for secured creditors…In fact, in its judgement on  the  constitutionality  of  the  IBC  earlier  this  year,  the Supreme  Court  had  justified  the  difference  between

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financial  and  operational  creditors.  The  NCLAT  order effectively  negates  that  distinction,  which  is  against  the fundamental theme of the IBC. If the distinction between secured  and  unsecured  financial  creditors  and  between financial  and  operational  creditors  is  not  maintained, bankers would be reluctant to use the IBC provisions for resolution  of  stressed  assets,  and  would  prefer  for  the companies to enter liquidation, which is certainly not  the intent of the Code. The decision may also open the flood- gates for reopening of previously concluded cases as well as filing of fresh applications and appeals by operational creditors,  alleging  discrimination  and  seeking  parity  with financial  creditors  and  also  by  unsecured  financial creditors,  alleging  discrimination  and  seeking  parity  with secured financial creditors.  

xxx xxx xxx

We would like to draw your attention to Sections 30 and 31 of  the  Code  which  contain  detailed  provisions  on submission  and  approval  of  the  resolution  plan.  As  per section 31(1),  once the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors  meets  the  requirements  of  section  30,  it  shall approve  the  resolution  plan.  The  Insolvency  and Bankruptcy Board of India has also prescribed rules and regulations on mandatory requirements of resolution plan. The  statute  thus  clearly  empowers  the  committee  of creditors  to  decide  the  distribution  of  funds.  It  also recognizes  that  as  long  as  the  resolution  plan  is  in conformity  with  law,  the  Adjudication  Authority  must approve the resolution plan, as is evidenced by the usage of the word ‘shall’ in section 31(1). In K. Sashidhar case the Supreme Court has clearly held that commercial decisions of  the  committee  of  creditors  are  not  open  to  judicial review.  We  would  like  to  clarify  that  the  fundamental principle  that  there  should  be  no discrimination  between similarly situated creditors is not being questioned by the industry. The question is whether we can redefine class to mean  all  financial  creditors  irrespective  of  inter-creditor arrangement or their security. Such a finding is a complete rewrite of laws, practices and the agreement and bargain of

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parties at the time of financing (or when goods or services were provided).  

We therefore strongly suggest  that  the Government  may consider amendment of the Code to expressly clarify the distinction between secured and unsecured creditors and between financial and operational creditors. Also, decisions of resolution applicant,  as accepted by the committee of creditors should be considered final unless they are found to be contrary to law. This would avoid any confusion; be in line with the global practices and held India retain its status of preferred investment destination.”

71. Pursuant to this and representations from Banks and industry,

the Amending Act of 2019 was then made. Sections 4 and 6 of the

Amending Act of 2019 read as under:

“4. Amendment of section 12.  

In section 12 of the principal Act, in sub-section (3), after the  proviso,  the  following  provisos  shall  be  inserted, namely:––

“Provided further that  the corporate insolvency resolution process shall mandatorily be completed within a period of three  hundred  and  thirty  days  from  the  insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this  section  and  the  time  taken  in  legal  proceedings  in relation to such resolution process of the corporate debtor:  

Provided also that where the insolvency resolution process of  a  corporate  debtor  is  pending  and  has  not  been completed  within  the  period  referred  to  in  the  second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the  Insolvency  and  Bankruptcy  Code  (Amendment)  Act, 2019.”

xxx xxx xxx

6. Amendment to section 30.  

In section 30 of the principal Act,––

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(a) in sub-section (2), for clause (b), the following shall be substituted, namely:—  

“(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than––  

(i) the amount to be paid to such creditors in the event  of  a  liquidation  of  the  corporate  debtor under section 53; or  (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution  plan  had  been  distributed  in accordance  with  the  order  of  priority  in  sub- section (1) of section 53,  

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of  the  resolution  plan,  in  such  manner  as  may  be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with  sub-section (1)  of  section 53 in  the event  of  a liquidation of the corporate debtor.

Explanation 1.––For the removal of doubts, it is hereby clarified  that  a  distribution  in  accordance  with  the provisions of this clause shall be fair and equitable to such creditors. Explanation 2.––For the purposes of this clause, it is hereby  declared  that  on  and  from  the  date  of commencement  of  the  Insolvency  and  Bankruptcy Code (Amendment)  Act,  2019,  the provisions of  this clause  shall  also  apply  to  the  corporate  insolvency resolution process of a corporate debtor––

(i) where a resolution plan has not been approved or rejected by the Adjudicating Authority;

(ii)  where  an  appeal  has  been  preferred  under section 61 or section 62 or such an     appeal is not time barred under any provision of law for the time being in force; or

(iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;”

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b)  in  sub-section  (4),  after  the  words  “feasibility  and viability,”, the words, brackets and figures “the manner of distribution  proposed,  which  may  take  into  account  the order  of  priority  amongst  creditors  as  laid  down in  sub- section (1) of section 53, including the priority and value of the  security  interest  of  a  secured  creditor”  shall  be inserted.”

72. The frontal attack of Shri Sibal on Sections 4 and 6 of the

Amending Act of 2019 is that it was tailor-made to do away with the

judgment of the NCLAT in this very matter.  This being so, such

legislation would be clearly outside the bounds of the legislature as

the legislature cannot interfere with a particular judgment and set it

aside.  

73. There is no doubt that the Amending Act of 2019 consists of

several Sections which have been enacted/amended as difficulties

have arisen in the working of the Code. While it is true that it may

well  be that  the law laid down by the NCLAT in this  very case

forms the basis for some of these amendments, it cannot be said

that  the  legislature  has  directly  set  aside  the  judgment  of  the

NCLAT. Since an appeal against the judgment of the NCLAT lies to

the Supreme Court, the legislature is well within its bounds to lay

down laws of general application to all persons affected, bearing in

mind what it considers to be a curing of a defective reading of the

law by an Appellate Tribunal. There can be no doubt whatsoever

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that  apart  from the present case the amendments made by the

Amending Act of 2019 apply down the board to all persons who are

affected by its provisions. Also, it is settled law that bad faith, in the

sense of  improper  motives,  cannot  be ascribed  to  a  legislature

making  laws.  This  is  settled  law  ever  since  the  celebrated

judgment of B.K. Mukherjea,J. In K.C. Gajapati Narayan Deo and

Others v. State of Orissa 1954 SCR 1. This was felicitously laid

down as follows:

“…As the question is of some importance and is likely to be  debated  in  similar  cases  in  future,  it  would  be necessary to examine the precise scope and meaning of what is known ordinarily as the doctrine of “colourable legislation”.

It may be made clear at the outset that the doctrine of colourable legislation does not involve any question of bona fides or mala fides on the part of the legislature. The whole doctrine resolves itself  into the question of competency  of  a  particular  legislature  to  enact  a particular law. If the legislature is competent to pass a particular law, the motives which impelled it  to act are really  irrelevant.  On  the  other  hand,  if  the  legislature lacks competency, the question of motive does not arise at all. Whether a statute is constitutional or not is thus always  a  question  of  power  [  Vide Cooley's Constitutional  Limitations,  Vol  1 p 379]  .  A distinction, however,  exists  between a legislature  which is  legally omnipotent  like  the  British  Parliament  and  the  laws promulgated by it which could not be challenged on the ground of incompetence, and a legislature which enjoys only  a  limited  or  a  qualified  jurisdiction.  If  the Constitution of a State distributes the legislative powers amongst different bodies, which have to act within their respective  spheres  marked  out  by  specific  legislative entries,  or  if  there  are  limitations  on  the  legislative

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authority in the shape of fundamental rights, questions do arise as to whether the legislature in a particular case has or has not, in respect to the subject-matter of the statute or in the method of enacting it, transgressed the limits of its constitutional powers.”

Likewise, a 7-Judge Bench in STO v. Ajit  Mills Ltd. (1977) 4 SCC

98, has also clearly stated as follows:

“16. Before  scanning  the  decisions  to  discover  the principle  laid  down  therein,  we  may  dispose  of  the contention which has appealed to the High Court based on  “colourable  device'.  Certainly,  this  is  a  malignant expression  and  when  flung  with  fatal  effect  at  a representative  instrumentality  like  the  legislature, deserves  serious  reflection.  If,  forgetting  comity,  the Legislative  wing  charges  the  Judicature  wing  with “colourable” judgments, it will be intolerably subversive of  the  rule  of  law.  Therefore,  we  too  must  restrain ourselves from making this charge except in absolutely plain cases and pause to understand the import of the doctrine  of  colourable  exercise  of  public  power, especially  legislative  power.  In  this  branch  of  law, “colourable” is not “tainted with bad faith or evil motive' ; it  is  not  pejorative  or  crooked.  Conceptually, “colourability” is bound up with incompetency. “Colour', according to Black's Legal Dictionary, is “an appearance, semblance  or simulacrum,  as  distinguished  from  that which  is  real  ...  a  deceptive  appearance  ...  a  lack  of reality'.  A thing  is  colourable  which  is,  in  appearance only and not in reality, what it purports to be. In Indian terms,  it  is maya.  In  the  jurisprudence  of  power, colourable exercise of or fraud on legislative power or, more  frightfully,  fraud  on  the  Constitution,  are expressions which merely mean that  the legislature is incompetent to enact a particular law although the label of competency is stuck on it,  and then it  is colourable legislation.  It  is  very  important  to  notice  that  if  the legislature is competent to pass the particular law, the motives  which  impel  it  to  pass  the  law  are  really irrelevant. To put it more relevantly to the case on hand, if  a legislation, apparently enacted under one Entry in

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the List, falls in plain truth and fact, within the content, not  of  that  Entry  but  of  one  assigned  to  another legislature, it can be struck down as colourable even if the motive were most commendable. In other words, the letter  of  the law notwithstanding,  what  is  the pith  and substance  of  the  Act?  Does  it  fall  within  any  entry assigned to that legislature in pith and substance, or as covered by the ancillary powers implied in that Entry? Can the legislation be read down reasonably to bring it within  the  legislature's  constitutional  powers?  If  these questions can be answered affirmatively, the law is valid. Malice  or  motive  is  beside  the  point,  and  it  is  not permissible to suggest parliamentary incompetence on the score of mala fides.”

It is clear therefore for all these reasons that Sections 4 and 6 of the

Amending Act of 2019 cannot be struck down on this score.

74. So far as Section 4 is concerned, it  is clear that the original

timelines  in  which  a  CIRP  must  be  completed  have  now  been

extended to 330 days, which is 60 days more than 180 plus 90 days

(which is equal to 270 days). But this 330-day period includes the

time taken in legal proceedings in relation to such resolution process

of the corporate debtor. This provision is to get over what is stated in

the judgment in ArcelorMittal India (supra) at paragraph 86, that the

time taken in legal proceedings in relation to the corporate resolution

process must be excluded from the timeline mentioned in Section 12.

Secondly, the third proviso added to the Section also mandates that

where the period of 330 days is over on the date of commencement

of the Amending Act of 2019, a further grace period of 90 days from

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such  date  is  given,  within  which  such  process  shall  either  be

completed or the corporate debtor be sent into liquidation.  

75. The raison d’être for this provision comes from the experience

that  has  been  plaguing  the  legislature  ever  since  SICA  was

promulgated. The problems of SICA and other successor enactments

was stated in graphic detail in  Madras Petrochem Limited v. BIFR

(2016) 4 SCC 1 at paragraphs 17 to 23. It will be seen from these

paragraphs that though SICA, the Recovery of Debts Act of 1993 and

the  Securitisation  and  Reconstruction  of  Financial  Assets  and

Enforcement of Securities Interest Act, 2002 (hereinafter referred to

as “SARFAESI Act”) all  provided for expeditious determination and

timely  detection  of  sickness  in  industrial  companies,  yet,  legal

proceedings  under  the  same dragged on  for  years  as  a  result  of

which all  these statutory measures proved to be abject  failures in

resolving stressed assets. It is for this reason that the BLRC Report

of 2015 stated:

“In  limited  circumstances,  if  75  %  of  the  creditors committee decides that the complexity of a case requires more time for a resolution plan to be finalised, a onetime extension  of  the  180  day  period  for  up  to  90  days  is possible with the prior approval of the adjudicator. This is starkly different from certain present arrangements which permit  the debtor  /  promoter  to  seek extensions beyond any limit.

This approach has many strengths:  

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• Asset stripping by promoters is controlled after and before default.

• The promoters can make a proposal that involves buying back the company for a certain price, alongside a certain debt restructuring.  

• Others in the economy can make proposals to buy the company  at  a  certain  price,  alongside  a  certain  debt restructuring.  

•  All  parties  knows  that  if  no  deal  is  struck  within  the stipulated period, the company will go into liquidation. This will help avoid delaying tactics. The inability of promoters to steal from the company, owing to the supervision of the IP, also helps reduce the incentive to have a slow lingering death.

• The role of the adjudicator will be on process issues: To ensure  that  all  financial  creditors  were  indeed  on  the creditors  committee,  and  that  75%  of  the  creditors  do indeed support the resolution plan.

xxx xxx xxx

Speed is of essence

Speed  is  of  essence  for  the  working  of  the  bankruptcy code, for two reasons. First, while the „calm period  can‟ help keep an organisation afloat, without the full clarity of ownership  and  control,  significant  decisions  cannot  be made.  Without  effective  leadership,  the  firm  will  tend  to atrophy and fail. The longer the delay, the more likely it is that  liquidation  will  be  the  only  answer.  Second,  the liquidation  value  tends  to  go  down  with  time  as  many assets suffer from a high economic rate of depreciation.  

From  the  viewpoint  of  creditors,  a  good  realisation  can generally be obtained if the firm is sold as a going concern. Hence,  when  delays  induce  liquidation,  there  is  value destruction.  Further,  even in liquidation, the realisation is lower when there are delays. Hence, delays cause value destruction.  Thus,  achieving  a  high  recovery  rate  is primarily  about  identifying and combating the sources of delay. This same idea is found in FSLRC’s treatment of the failure of  financial  firms.  The most important  objective in

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designing a legal framework for dealing with firm failure is the need for speed.

Identifying and addressing the sources of delay

Before  the  IRP  can  commence,  all  parties  need  an accurate and undisputed set of facts about existing credit, collateral  that  has been pledged,  etc.  Under the present arrangements,  considerable  time  can  be  lost  before  all parties obtain this information. Disputes about these facts can take up years to resolve in court. The objective of an IRP that is completed in no more than 180 days can be lost owing to these problems.

Hence, the Committee envisions a competitive industry of „information  utilities  who  hold  an  array  of  information‟ about  all  firms  at  all  times.  When  the  IRP commences, within  less  than  a  day,  undisputed  and  complete information would become available to all persons involved in the IRP and thus address this source of delay.

The  second  important  source  of  delays  lies  in  the adjudicatory  mechanisms.  In  order  to  address  this,  the Committee recommends that  the National  Company Law Tribunals  (for  corporate  debtors)  and  Debt  Recovery Tribunals (for individuals and partnership firms) be provided with all the necessary resources to help them in realising the objectives of the Code.

xxx xxx xxx

Conclusion

The  failure  of  some  business  plans  is  integral  to  the process  of  the  market  economy.  When  business  failure takes place, the best outcome for society is to have a rapid renegotiation between the financiers, to finance the going concern using a new arrangement of liabilities and with a new management team. If this cannot be done, the best outcome  for  society  is  a  rapid  liquidation.  When  such arrangements can be put into place, the market process of creative  destruction  will  work  smoothly,  with  greater competitive vigor and greater competition.”

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76. The speech of the Hon’ble Minister on the floor of the House of

the Rajya Sabha also reflected the fact that with the passage of time

the original  intent  of  quick  resolution of  stressed assets  is  getting

diluted.  It  is  therefore  essential  to  have  time-bound  decisions  to

reinstate this legislative intent. It was also pointed out on the floor of

the House that the experience in the working of the Code has not

been encouraging. The Minister in her speech to the Rajya Sabha

gives the following facts and figures:

“Now,  regarding  the  Corporate  Insolvency  Resolution Process (CIRP), under the Code, I want to give you data again  as  of  30th  June,  2019.  First,  I  will  talk  about  the status  of  CIRPs.  Number  of  admitted  cases  is  2162; number of cases closed on appeal, which I read out about, is  174;  number  of  cases  closed  by  withdrawal  under Section 12A, is 101, I have given you a slightly later data; number  of  cases closed by resolution is  120;  closed by liquidation, 475; and ongoing CIRPs are 1292. So, now, I would  like  to  mention  the  number  of  days  of  waiting.  I would  like  to  mention  here  the  details  of  the  ongoing CIRPs, along with the timelines. Ongoing CIRPs are 1,292, the figure just now I gave you. Over 330 days, 335 cases; over 270 days, 445 cases; over 180 days and less than 270 days, 221 cases; over 90 days but less than 180 days, 349 cases; less than 90 days, 277 cases. The number of days'  pending  includes  time,  if  any,  excluded  by  the tribunals. So, that gives you a picture on what is the kind of wait and, therefore, why we want to bring the Amendments for this speeding up.”

Mrs.  Madhvi  Divan  also  pointed  out  that  the  Hon’ble  Minister’s

speech  had  also  adverted  to  the  strengthening  of  the  NCLT  as

follows:

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“In  view  of  the  increasing  number  of  cases,  the Government  has  increased  the  number  of  benches  of NCLT from 10 to 15, during just the last one year. In one year, we have increased it from 10 to 15. The number of members has also been increased in a phased manner. Recently, 26 new members have joined bringing the total number of members to 52. Sir, more than one court has been operationalised in the benches where a large number of cases are pending, such as, in Mumbai, Delhi, Chennai and Kolkata. The projects like e-governance and e-courts have  also  been  implemented  for  faster  and  speedier disposal of the cases.”

77. Shri Sibal vehemently objected to any reliance on the speech of

the Minister and cited K.P. Varghese v. ITO (1982) 1 SCR 629 and

K.S. Paripoornan v. State of Kerala (1994) 5 SCC 593. In Varghese

(supra) this Court held, at page 645, as follows:

“…Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting  a  statutory  provision  is  being  debated  are inadmissible  for  the purpose  of  interpreting  the statutory provision but  the speech made by the Mover  of  the Bill explaining the reason for  the introduction of  the Bill  can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object  and  purpose  for  which  the  legislation  is  enacted. This is in accord with the recent trend in juristic thought not only  in  western  countries  but  also  in  India  that interpretation  of  a  statute  being  an  exercise  in  the ascertainment  of  meaning,  everything  which  is  logically relevant  should  be admissible.  In  fact  there are  at  least three  decisions  of  this  Court,  one  in Loka  Shikshana Trust v. CIT [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : 101 ITR 234 :  1976 LR 1]  ,  the other  in Indian Chamber  of Commerce v. Commissioner of Income Tax [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : 101 ITR 796 : 1976 Tax LR 210] and  the  third  in Additional  Commissioner  of  Income Tax v. Surat  Art  Silk  Cloth  Manufacturers' Association [(1980) 2 SCC 31 : 1980 SCC (Tax) 170 : 121

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ITR 1]  where the speech made by the Finance Minister while  introducing  the  exclusionary  clause  in  Section  2, clause (15) of the Act was relied upon by the Court for the purpose  of  ascertaining  what  was  the  reason  for introducing that clause.”  

In Paripoornan (supra), the Court held as follows:

“77. In support of the construction placed on Section 23(1- A) of the principal Act and Section 30(1) of the amending Act in Zora Singh [(1992) 1 SCC 673] the learned counsel for the claimants have referred to the Statement of Objects and Reasons appended to the Bill in 1982 as well as the Bill of 1984 and have submitted that the said Statement of Objects and Reasons show that the object underlying the enactment of Section 23(1-A) was to remove the hardship to  the  affected  parties  on  account  of  pendency  of acquisition  proceedings  for  a  long  time  which  renders unrealistic the amounts of compensation offered to them. Our attention has also been invited to the speeches made by members at the time when the Bill was considered and was  adopted  by  Parliament.  It  has  been  urged  that  a construction  which  advances  the  said  object  must  be adopted.  We  are  unable  to  accept  this  contention.  As regards the Statement of Objects and Reasons appended to the Bill the law is well settled that the same cannot be used except for the limited purpose of understanding the background  and  the  state  of  affairs  leading  to  the legislation  but  it  cannot  be  used  as  an  aid  to  the construction  of  the  statute.  (See Aswini  Kumar Ghosh v. Arabinda Bose [1953 SCR 1, 28 : AIR 1952 SC 369] ; State of W.B. v. Subodh Gopal Bose [1954 SCR 587, 628 : AIR 1954 SC 92] per Das, J.; State of W.B. v. Union of India [(1964) 1 SCR 371, 383 : AIR 1963 SC 1241] .) Similarly, with regard to speeches made by the members in the House at  the time of  consideration of  the Bill  it  has been held that they are not admissible as extrinsic aids to the  interpretation  of  the  statutory  provisions  though  the speech of the mover of the Bill may be referred to for the purpose of finding out the object intended to be achieved by the Bill. (See State of Travancore-Cochin v. Bombay Co. Ltd. [1952  SCR  1112  :  AIR  1952  SC  366]  and Aswini Kumar v. Arabinda Bose [1953 SCR 1, 28 : AIR 1952 SC

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369] .) On a perusal of the Bills of 1982 and 1984 we find that  they did not  contain the provisions found in Section 23(1-A)  of  the  principal  Act  and  Section  30(1)  of  the amending Act.  These provisions were inserted when the 1984 Bill was under consideration before Parliament. The Statement  of  Objects  and  Reasons  does  not,  therefore, throw  any  light  on  the  circumstances  in  which  these provisions were introduced.”

As the speech of the Hon’ble Minister on the floor of the House only

indicates the object for which the amendment was made and as it

contains certain data which it is useful to advert to, we take aid from

the speech not in order to construe the amended Section 12, but only

in order to explain why the Amending Act of 2019 was brought about.

78. 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.

79. In Atma Ram Mittal v. Ishwar Singh Punia (1988) 4 SCC 284,

this Court applied the maxim to time taken in legal proceedings under

the  Haryana Urban (Control of Rent and Eviction) Act, 1973, holding:

“8. It is well-settled that no man should suffer because of the fault of the court or delay in the procedure. Broom has stated  the  maxim “actus  curiae  neminem gravabit” — an act  of  court  shall  prejudice  no  man.  Therefore,  having regard to the time normally consumed for adjudication, the

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ten years' exemption or holiday from the application of the Rent Act would become illusory, if the suit has to be filed within that  time and be disposed of  finally.  It  is  common knowledge that  unless a  suit  is  instituted soon after  the date  of  letting  it  would  never  be  disposed  of  within  ten years and even then within that time it may not be disposed of. That will make the ten years holiday from the Rent Act illusory and provide no incentive to the landlords to build new houses to solve problem of shortages of houses. The purpose of legislation would thus be defeated. Purposive interpretation  in  a  social  amelioration  legislation  is  an imperative irrespective of anything else.”

Likewise,  in  Sarah  Mathew  v.  Institute  of  Cardio  Vascular

Diseases,  (2014) 2 SCC 62, this Court held that for the purpose of

computing  limitation  under  Section  468  of  the  Code  of  Criminal

Procedure, 1973 the relevant date is the date of filing of the complaint

and not the date on which the Magistrate takes cognizance, applying

the aforesaid maxim as follows:

“39. As we have already noted in reaching this conclusion, light can be drawn from legal maxims. Legal maxims are referred to in Bharat Kale [Bharat Damodar Kale v. State of A.P.,  (2003)  8  SCC  559  :  2004  SCC  (Cri)  39]  , Japani Sahoo [Japani Sahoo v. Chandra Sekhar Mohanty, (2007) 7  SCC  394  :  (2007)  3  SCC  (Cri)  388]  and Vanka Radhamanohari [Vanka Radhamanohari v. Vanka Venkata Reddy, (1993) 3 SCC 4 : 1993 SCC (Cri) 571]. The object of the criminal law is to punish perpetrators of crime. This is in tune with the well-known legal maxim nullum tempus aut locus occurrit regi, which means that a crime never dies. At the  same time,  it  is  also the policy  of  law to  assist  the vigilant and not the sleepy. This is expressed in the Latin maxim vigilantibus  et  non  dormientibus,  jura  subveniunt. Chapter XXXVI CrPC which provides limitation period for certain  types  of  offences  for  which  lesser  sentence  is provided draws support from this maxim. But, even certain offences  such  as  Section  384  or  465  IPC,  which  have

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lesser punishment may have serious social consequences. The provision is, therefore, made for condonation of delay. Treating date of filing of complaint or date of initiation of proceedings as the relevant date for computing limitation under Section 468 of the Code is supported by the legal maxim actus  curiae  neminem  gravabit which  means  that the act of court shall prejudice no man. It bears repetition to state  that  the  court's  inaction  in  taking  cognizance  i.e. court's inaction in applying mind to the suspected offence should  not  be  allowed  to  cause  prejudice  to  a  diligent complainant. Chapter XXXVI thus presents the interplay of these three legal maxims. The provisions of this Chapter, however, are not interpreted solely on the basis of these maxims. They only serve as guiding principles.”

Both these judgments have been followed in Neeraj Kumar Sainy v.

State of Uttar Pradesh (2017) 14 SCC 136 at paragraphs 29 and 32.

Given  the  fact  that  the  time  taken  in  legal  proceedings  cannot

possibly  harm  a  litigant  if  the  Tribunal  itself  cannot  take  up  the

litigant’s case within the requisite period for no fault of the litigant, a

provision which mandatorily requires the CIRP to end by a certain

date  -  without  any  exception  thereto  -  may  well  be  an  excessive

interference  with  a  litigant’s  fundamental  right  to  non-arbitrary

treatment under Article 14 and an excessive, arbitrary and therefore

unreasonable restriction on a litigant’s fundamental right to carry on

business under Article 19(1)(g) of the Constitution of India. This being

the case, we would ordinarily have struck down the provision in its

entirety. However, that would then throw the baby out with the bath

water, inasmuch as the time taken in legal proceedings is certainly an

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important factor which causes delay, and which has made previous

statutory experiments fail as we have seen from Madras Petrochem

(supra). Thus, while leaving the provision otherwise intact, we strike

down  the  word  “mandatorily”  as  being  manifestly  arbitrary  under

Article 14 of the Constitution of India and as being an excessive and

unreasonable restriction on the litigant’s right  to carry on business

under Article 19(1)(g) of the Constitution. The effect of this declaration

is that ordinarily the time taken in relation to the corporate resolution

process of the corporate debtor must be completed within the outer

limit of 330 days from the insolvency commencement date, including

extensions and the time taken in legal proceedings. However, on the

facts of a given case, if it can be shown to the Adjudicating Authority

and/or Appellate Tribunal under the Code that only a short period is

left for completion of the insolvency resolution process beyond 330

days, and that it would be in the interest of all stakeholders that the

corporate debtor be put back on its feet instead of being sent into

liquidation and that the time taken in legal proceedings is largely due

to factors owing to which the fault cannot be ascribed to the litigants

before the Adjudicating Authority and/or Appellate Tribunal, the delay

or a large part thereof being attributable to the tardy process of the

Adjudicating Authority and/or the Appellate Tribunal itself, it may be

open in such cases for  the Adjudicating Authority and/or  Appellate

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Tribunal to extend time beyond 330 days.  Likewise, 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.  

80. When it comes to the validity of the substitution of Section 30(2)

(b)  by Section 6 of  the Amending Act  of  2019,  it  is  clear that  the

substituted  Section  30(2)(b)  gives  operational  creditors  something

more  than  was  given  earlier  as  it  is  the  higher  of  the  figures

mentioned in sub-clauses (i) and (ii) of sub-clause (b) that is now to

be paid as a minimum amount to operational  creditors.  The same

goes for the latter part of sub-clause (b) which refers to dissentient

financial creditors. Mrs. Madhavi Divan is correct in her argument that

Section  30(2)(b)  is  in  fact  a  beneficial  provision  in  favour  of

operational creditors and dissentient financial  creditors as they are

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now to be paid a certain minimum amount, the minimum in the case

of operational creditors being the higher of the two figures calculated

under sub-clauses (i) and (ii) of clause (b), and the minimum in the

case of dissentient financial creditor being a minimum amount that

was not earlier payable. As a matter of fact, pre-amendment, secured

financial creditors may cramdown unsecured financial creditors who

are dissentient, the majority vote of 66% voting to give them nothing

or next to nothing for their dues. In the earlier regime it may have

been  possible  to  have  done  this  but  after  the  amendment  such

financial creditors are now to be paid the minimum amount mentioned

in sub-section (2). Mrs. Madhavi Divan is also correct in stating that

the order of priority of payment of creditors mentioned in Section 53 is

not engrafted in sub-section (2)(b) as amended. Section 53 is only

referred to in order that a certain minimum figure be paid to different

classes  of  operational  and  financial  creditors.  It  is  only  for  this

purpose that Section 53(1) is to be looked at as it is clear that it is the

commercial  wisdom of  the  Committee  of  Creditors  that  is  free  to

determine what amounts be paid to different classes and sub-classes

of creditors in accordance with the provisions of the Code and the

Regulations made thereunder.  

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81. As has been held in this judgment, it is clear that Explanation 1

has only been inserted in order that the Adjudicating Authority and the

Appellate Tribunal cannot enter into the merits of a business decision

of the requisite majority of the Committee of Creditors. As has also

been held in this judgment, there is no residual equity jurisdiction in

the Adjudicating Authority or the Appellate Tribunal to interfere in the

merits of a business decision taken by the requisite majority of the

Committee of  Creditors,  provided that  it  is  otherwise in  conformity

with the provisions of the Code and the Regulations, as has been laid

down by this judgment.

82. Equally,  Explanation  2  applies  the  substituted  Section  to

pending proceedings either at the level of the Adjudicating Authority

or the Appellate Authority or in a Writ or Civil Court. As has been held

in  Swiss  Ribbons  (supra)  and  ArcelorMittal  India (supra)  (see

paragraph 97 of  Swiss Ribbons (supra) and paragraph 82, 84 of

ArcelorMittal India (supra)), no vested right inheres in any resolution

applicant to have its plan approved under the Code. Also, the Federal

Court in Lachmeshwar Prasad Shukul v. Keshwar Lal Chaudhuri

AIR 1941 FC 5 and later, this Court in Shiv Shakti Coop. Housing

Society, Nagpur v. Swaraj Developers & Ors. (2003) 6 SCC 659 (at

paragraphs 16 and 17) have held that an appellate proceeding is a

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continuation of an original proceeding. This being so, a change in law

can always be applied to an original or appellate proceeding. For this

reason also,  Explanation 2 is constitutionally valid,  not  having any

retrospective operation so as to impair vested rights.

83. 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

84. The resolution plan submitted by ArcelorMittal  on 02.04.2018

proposed  an  upfront  payment  of  INR  35,000  crores  towards

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resolution of the debt of INR 49,213 crores of financial creditors. This

was  buttressed  by  a  letter  of  commitment  from  Credit  Agricole

Corporate  and  Investment  Bank.  From this  upfront  cash  recovery,

unsecured  financial  creditors  were  to  be  paid  only  an  aggregate

amount of 5% of their  admitted claims. Apart from this, INR 8,000

crores of upfront fresh capital infusion for improving operations and

enhancing  revival  prospects  of  the  corporate  debtor  was  also

proposed.  So  far  as  operational  creditors  were  concerned,  it  was

proposed  that  workmen  and  employees  were  to  be  paid  INR  18

crores  in  full  against  their  admitted  claims,  and  out  of  other

operational creditors, those small trade creditors defined as “having

admitted claims of less than INR 1 crore” were to be paid in full, as

opposed to trade and government creditors of over INR 1 crore, who

were to be paid aggregate amount INR 196 crores. Other operational

creditors were to be given nothing, liquidation value being payable to

operational  creditors  as  a  class  being  in  any  case  nil  (INR  3339

crores were the aggregate admitted claims of all operational creditors

as a class). Under the caption “Treatment of various stake holders”

the plan provided as follows:-

“VIII.    Treatment of Various Stakeholders”

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Stakeholder Proposed Treatment

Financial Creditors

As per the Liquidation Value of the  Corporate  Debtor,  the Secured  Financial  Creditors would  realize  amounts  which were  lower  than  the  current outstandings on a cumulative basis.  However,  the Resolution  Applicant recognizes  the  sacrifices already made by the Financial Creditors till date and the fact that  debt  restructuring attempts  by  the  Financial Creditors  have  failed  in  the past. The Resolution Applicant is  proposing  to  pay  the Secured  Financial  Creditors, the  amounts  stated  under Section V which is significantly higher  than  the  reconvenes that  the  Secured  Financial Creditors  as  a  class  would realize  in  case  of  liquidation. The payments proposed to be made  by  the  Resolution Applicant  to  the  unsecured Financial   Creditors  is  also higher than the recoveries that the  unsecured  Financial Creditors  as  a  class  would realize  in  case  of  liquidation, since  the  Liquidation  Value realizable  by  unsecured Financial Creditors is nil.

The Resolution Applicant has empowered the Committee of Creditors  to  decide  the manner in which the financial

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package being offered by the Resolution  Applicant  to  the Financial  Creditors  will  be distributed  to  the  Secured Financial  Creditors.  All  such allocations  to  the  Financial Creditors will be binding on all stakeholders.

The  unsecured  Financial Creditors  (including  those Secured  Financial  Creditors who  may  have  claims admitted  against  unsecured instruments)  i.e.  Standard Chartered Bank. The Bank of New  York  Mellon,  London Branch,  AXIS  bank,  ICICI Bank.  Bank  of  Baroda,  SBI Rupee  Notes  and  Individual Rupee  Notes  to  Melwani Gopal  Thrumal  and  /or Melwani Vinod, Mr. Arvinlal N Shah & Mrs. Indumati A Shah, Mr.  jiwat  k  Dansanghani  and Mrs.  Neetu  J  Dhansanghani and  Nathu  Ram Verma,  who have Admitted claims as of 28 February  2018  (based  on document  2.5.8  uploaded  on VDR on 6 March 2018 which provides Breakup of  Secured and  Unsecured  financial Creditors),  shall  be  paid  an aggregate  amount  of  5%  of their Admitted Claims.

Furthermore,  in  accordance with  the  RFP,  it  is  clarified that:

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a) any  surplus  cash being  the  positive difference  between actual working capital of the Corporate Debtor as on  Plan  Approval  Date and normalized working capital  as  at  31 December  2017,  shall be  added  to  upfront cash  recovery  as  a closing  adjustment under  the  Resolution Plan; and  b) the  EBITDA generated  by  the Corporate  Debtor between  the  Plan Approval  Date  and  the date  on  which  the Financial  Creditors  are paid  the  up-front  cash amount  shall  be available  to  the Financial  Creditors over and  above  the  upfront cash recovery under the Resolution Plan.

However,  notwithstanding anything  stated  herein,  a Dissenting  Financial  Creditor will be entitled to only receive Liquidation Value realizable by such  Financial  Creditor  in case  of  liquidation  of  the Corporate Debtor, which shall be paid out of the upfront cash recovery  amount  being offered.

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Operational Creditors (other than Workmen, Employees and Governmental Operational Creditors)

The  Resolution  Applicant recognizes  the  role  that  the various  Trade Creditors  have played in connection with the business  of  the  Corporate Debtor.  Whilst  Operational Creditors  as  a  class  of Creditors  would  receive  nil returns  on  liquidation  of  the Corporate  Debtor,  the Resolution  Applicant  has agreed  to  settle  part  of  the Admitted Claims to the extent set  out  in  Section  V  above. Without  prejudice  to  the above,  the  Resolution Applicant is desirous of setting aside  amounts  under  the financial  package to  settle  at least part of the Claims of the small  Trade  Creditors.  This class  of  Trade  Creditors  are being provided such payments since the Resolution applicant understands  that  these Persons  typically  form a part of  small  scale/medium sector enterprises, which enterprises play a  key role  in  the Indian economy and given their scale of operations may not be in a position  to  weather macroeconomic  and  financial shocks.

The identified Trade Creditors are  being  paid  out  on  the assumption  that  they  will continue  their  arrangements with the Corporate Debtor and shall in no manner commit any acts or omissions which would adversely impact the business

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of  the  Corporate  Debtor. Acceptance  of  payments  by the  Trade  Creditors  shall  be considered as an acceptance of the above condition.

The  Resolution  Applicant recognizes  and  understands that  additional  payment  to certain  Operational  Creditors may  have  to  be  made  as  a part  of  revitalising  the business  and  is  prepared  to do  so,  on  a  case  by  case basis.

Governmental Operational Creditors

The Resolution Applicant aims at establishing a good working relationship  between  the Governmental Authorities and the Corporate Debtor and will cause the Corporate Debtor to duly  pay  the  statutory  dues that  will  be  incurred  by  the Corporate  Debtor  going forward  from  the  Plan Approval  Date  in  a  timely manner.  The  revival  of  the Corporate  Debtor  will  also enhance the tax collection by the  Governmental  Authorities in the geographies where the Corporate Debtor operates.

85. On  22.10.2018,  various  changes  were  made  in  the  original

resolution plan as follows:

“The representatives of AM India of AM India thanked the RP.  Thereafter,  they  presented  a  brief  summary  of  the revisions  made  to  the  financial  proposal.  They  informed that  as  per  the  directives  of  the  CoC,  AM  India  had deliberated  and  negotiated  with  the  Sub-Committee.

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Thereafter,  the  representative  highlighted   certain  key revisions  made  to  the  resolution  plan,  which  inter  alia included revisions in relation to (a) upfront cash recovery available to secured and unsecured financial  creditors of ESIL;  (b)  upfront  fresh  capital  infusion;  (c)  process  of closing adjustment, which included provision of audit. He further added that they had not provided how the upfront cash would be distributed and the same has been left at the  discretion  of  the  CoC.  He  further  added  that  the business plan has not undergone any substantial changes and  the  negotiations  were  largely  around  the  financial proposal and that AM India is committed to implement the plan, as agreed. Thereafter, the representative of AM India also deliberated with the members of  the CoC regarding the revised financial proposal and responded to the queries raised in relation thereto.”  

It was stated that the value and quality of security should be the basis

on  which  proceeds  should  be  distributed  by  most  of  the  secured

financial creditors. This amended resolution plan was approved by a

majority of 92.24% of financial creditors. The sharing ratio between

secured financial  creditors  having charge on project  assets  of  the

corporate  debtor  was  99.86%  as  opposed  to  0.14%,  so  far  as

Standard Chartered Bank was concerned, which only had a charge

on the pledge of shares of ESOL, being an offshore subsidiary of the

corporate debtor. The upfront payment to secured financial creditors

on the effective date would now be INR 41,909.29 crores and INR

60.71 crores to Standard Chartered Bank. It was pointed out that this

was based on the worth of those shares as security, being only INR

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24.86  crores.  The  reasons  given  for  acceptance  of  this  amended

resolution plan was stated as follows:

“By majority consensus of COC (except Standard Chartered Bank and SREI), it was agreed that fairness of distribution would  be reflected  only  if  distribution be  made based on underlying security value and quality of security. Based on a comparison  of  the  two  suggested  options  based  on  fair value  and  liquidation  value,  in  the  interest  of  all  stake holders and with the objective of the Code it is proposed to the COC to accept the sharing ratio as per the Liquidation Valuation Report  and also to  Secured Financial  Creditors having Charge on Project Asset of ESIL for taking a sacrifice of Rs.37.76 Crores (for adopting the sharing ratio as per the Liquidation  Valuation  Report  instead  of  fair  value)  which shall  be  allocated  to  Secured  Financial  Creditors  having Charge on Pledge of Shares of ESOL.  

While allocation of the Resolution Amount it is pertinent to note  that  the  Committee  of  creditors  has  the  widest discretion  to determine the terms of the resolution plan.

A.  At  the  outset  it  is  important  to  be  noted  that  the legislature  in  their  wisdom  under  the  provisions  of  the Insolvency and Bankruptcy Code,  2016 (Code)  have left the  decision-making  in  respect  of  commercial  matters completely  in  the  domain of  the Committee of  Creditors (COC).  In  fact  even  the  Bankruptcy  Law  Reforms Committee  report  (which  formed  the  basis  for  the enactment  of the Code) specifically notes the deliberate scheme of the Code, where the law does not prescribe any particular manner of insolvency resolution and leaves this commercial decision making process to the COC without the interference  of the legislature as well as judiciary.

B. Further, pro rate distribution cannot be the only method of distribution of assets, as it would lead to the disastrous consequences  where  the  creditors  would  lose  their freedom to restructure the debt as they deem fit. This an important  commercial  decision  which  is  required   to  be made by the Code and a strait jacket formula for all cases would result in dilution of the provisions of the Code and

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would   incentivize  all  secured  creditors  to  liquidate  the company rather than opt for resolution. It was noted that generally all secured financial creditors are prudent entities which grant  loans after  exercising due-diligence and are presumed to be able to evaluate their  interest  and risks sufficiently.  Moreover  it  may negatively  impact  the credit market and discourage banks and other financial creditors from granting large project loans which are more often than not granted against property or other valuable collateral.

C. The Report of the Insolvency Law Committee provides valuable insights on the principles governing inter-creditor agreements  and  their  relevance  to  distribution arrangements. In practice, subordination agreements inter- se creditors were respected in practice. This was also the stated position in insolvency resolution proceedings other jurisdiction and in other developed countries.  

D. The Hon’ble National Company Law Appellate Tribunal has held that the COC has the discretion to approve any resolution  plan  and  its  decision  to  approve  the  same cannot be interfered with by the Adjudicating Authority or the Appellate Authority, except for in terms of Section 31(1) to examine compliance of Section 30(2) read with relevant regulations. (See  Kannan Tiruvengandram Vs. M.K. Shah Exports Ltd. & Ors. in and Darshak Enterprise Pvt. Ltd. and Ors. v. Chhaparia Industries Pvt. Ltd. and Ors.

E. The Code specifically provides the COC with the power under section 30(4) of the Code, to approve a resolution with  requisite  majority  as  set  out  thereunder.  It  is  an accepted  position  in  law,  and  as  enunciated  in  various pronouncements of the Supreme Court of India that where a power is conferred or a duty is imposed by a statute, and there  is  nothing  expressly  inhibiting  the  exercise  of  the power or the performance of the duty by any limitations or restrictions it is reasonable to hold that it carries with it all power of doing all such acts or employing all such means as are reasonably necessary for its execution. The below mentioned provisions of the Code and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process

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for Corporate Persons). Regulation 2016 (CIR Regulations) set out the powers of the COC in this regard:

Section 31 of the Code (Approval of Resolution Plan):

“(1)  If  the  Adjudicating  Authority  is  satisfied  that  the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the  corporate  debtor  and  its  employees,  members, creditors, guarantors and other stakeholders involved in the resolution plan.

Regulation 39 of the CIR Regulations, 2016;

“(2) The resolution professional shall present all resolution plans that meet the requirements of the Code and these Regulations to the Committee for its consideration.   (3)   The committee may approve any resolution plan with such modifications as it deems fit

xxx xxx xxx

K. It is a recognized principle of insolvency law that creditor rights  and  ranking  of  priority  claims  existing  before commencement  of  insolvency  must  be  recognized  and respected  in  the  insolvency  proceedings.  Recognition  of such  ranking  of  priorities  of  existing  and  post- commencement  creditor  claims  provide  predictability  to lenders  and  ensure  consistent  application  of  the  rules, create  confidence  in  the  proceedings  and  enable participants to adopt appropriate measures to manage risk. At macro level, it helps create certainty in the market and facilitate the provision of credit, in particular with respect to the rights and priorities of secured creditors. It is also well established that best practices require that priority to claims that  are  not  based  on  commercial  bargains  should  be minimalized. This principle  is unequivocally  articulated in the United Nations Commission on International Trade Law (UNCITRAL)  Legislative  Guide   on  Insolvency  law (hereinafter,  the  “UNCITRAL Guide”)  in  the  chapter  that

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recommends the policy and legislative design of the “key objectives  and  structure  of  an  effective  and  efficient insolvency law”

L. Further, in recognition of the principle that creditor rights and  ranking  of  priority  claims  existing  before commencement  of  insolvency  must  be  recognised  and expected in the insolvency proceedings. To protect/respect the creditor rights and ranking of priority claims, the IBC does  not  in  any  manner  impose  any  prescription, mandatory  or  otherwise  on  the  resolution  applicant  that would be disruptive of the creditor rights and priority claims of the secured creditors as on insolvency commencement date. If this rule was not to be recognised, it will lead to a free-for-all  situation,  no short  of  chaos,  as any rights on differential security interest would then be ignored.

M. Therefore in conclusion,  since the Code provides the COC  with  the  power  to  approve  a  resolution  for  the Corporate  Debtor,  the  manner  in  which  such  resolution shall be executed including but not limited to the decision as  to  the  methodology  of  distribution  or  the  amount  a money to be paid to individual stakeholders would also be a  decision  which  the  COC  would  be  permitted  to  take, especially in the absence of any express provision in the Code prohibiting such a decision by the COC. As long as such  decisions are  not  contrary  to  the  provisions  of  the Code.”

86. The final  resolution plan as approved on 23.10.2018 was as

follows - in the place of INR 35,000 crores to be paid on the effective

date as an upfront amount, INR 39,500 crores and INR 2500 crores,

aggregating  INR  42,000  crores  was  to  be  paid.  The  resolution

applicant  agreed  that  the  Committee  of  Creditors  will  decide  the

manner in which the financial package being offered by the resolution

applicant to financial creditors will be distributed to secured financial

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creditors.  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.  

87. At  the  22nd meeting  of  the  Committee  of  Creditors  dated

27.03.2019, the NCLT order of 08.03.2019 was discussed and it was

felt that INR 1,000 crores extra be paid for operational creditors over

and above INR 1 crore each, as follows:

“The  representative  of  EARC  mentioned  that  without prejudice to the appeals, a lump sum amount may be set- aside and put to vote as they are not averse to examining it.  The representative of SBI concurred with the views of the  representative  of  EARC.  He  further  mentioned  that CoC as well as SCB has challenged the NCLT Order. SBI proposed to set aside a capped amount of INR 1,000 Crore for operational creditors (without prejudice to their right to appeal). He requested that a resolution to that effect may be voted upon.

The RP requested the SBI representative to clarify if  the proposed amount of INR 1,000 Crore would be over and above the INR 196 Crore which is already included in the Resolution  Plan  for  operational  creditors.  The  SBI representative confirmed that the same would be over and above the current proposal, however this additional amount will be capped to INR 1,000 crores.”

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Under  the  caption  “discussion  on  the  suggestions  of  the  Hon’ble

NCLT in relation to distribution of amounts proposed to be paid to

financial  creditors”,  the  minutes  of  the  meeting  reflect  that  the

Committee of Creditors had sought for and obtained the opinion of

retired Justice B.N. Srikrishna. This opinion dated 23.03.2019 stated

as follows:

“In view of this peculiar situation, where a financial creditor has advanced money to the corporate debtor assessing the commercial  risk  and covers his  risk  by a charge on the assets of the corporate debtor, there can be no question of his being entitled to the liquidation value or any other fixed value towards his debt. In any event, the plan formulated by the resolution applicant,  has to be placed before the COC  for  its  final  approval.  It  is  at  that  juncture  the commercial  wisdom of  lenders  forming  the  COC comes into play and they are entitled to take a call on either to approve or  not  to approve the resolution plan which the FRP has put forward before the COC for its approval. In my view,  therefore,  the  Approved  Resolution  Plan  would  be fully justified in classifying between secured and unsecured financial creditor, and also according to the value of their securities and apportioning the amounts payable to them in the best manner which is considered reasonable. I might add  here  that  irrespective  of  what  the  RP considers  as reasonable, it is always open to the COC to adjudge the commercial wisdom of the resolution plan while approving it. As pointed out by the Supreme Court in K. Sashidhar vs Indian Overseas Bank & Ors. (Civil  Appeal No. 10673 of 2018) such commercial decision of the COC is not subject to appeal under the Code.

In  the  premises,  I  am  of  the  opinion  that  SCB  was differently placed than other financial creditors in view of the fact it did not have any charge or security on the project assets but had advanced a large amount of loan amounting to  Rs.3000  crores  on  the  basis  of  the  pledge  over  the shares of an offshore company and a corporate guarantee

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extended by the Corporate Debtor. The resolution plan as finally approved by COC was fully justified in treating SCB as differently placed based on the cogent and intelligible differentia that is apparent from the facts of the case. I see nothing in the provisions of the Code of the Regulations which  would  militate  against  the  decision  taken  by  the COC.

I might add here that the commercial wisdom of the lenders who are voting for the resolution of the COC is evidenced by the fact that they had created securities on the project assets  of  the  Corporate  Debtor  after  assessing  the commercial  risk  involved.  In  the  case  of  SCB,  however, there  seems to  have  been  gross  under  security  for  the large  amount  of  Rs.3000  crores  by  merely  seeking  a corporate guarantee from the Corporate Debtor along with a charge only on the shares of the offshore company held by the Corporate Debtor, wherein the liquidation value of such shares is a mere Rs.60.71 crores. In fact, in view of the fact situation, I find it hard to understand whether SCB can really be treated as a secured creditor in the first place. I  am of the opinion that  even if  the corporate guarantee were  to  be  enforced,  SCB  would  at  best  stand  as  a secured  creditor  only  to  the  extent  of  the  value  of  the shares  of  the  offshore  company  as  on  the  date  of enforcement  of  the  guarantee  and  as  an  unsecured creditor with respect to the rest of the loan advanced by it. This  is  an  equally  valid  consideration  which  might  have moved  the  COC while  approving  the  resolution  plan  by which the ultimate discretion for  distribution is left  to the COC with a declaration that such allocation to the financial creditors will  be binding on all  stake holders,  which also would include SCB.

xxx xxx xxx

In the facts and circumstances, I am of the opinion that the manner in which the resolution plan was formulated and approved by the overwhelming majority of 92.24% of the voting creditors, is not only perfectly justified  but is also equitable. As the Supreme Court has pointed out in Swiss Ribbons  (supra),  “equitable”  does  not  mean  equal distribution;  it  means  distribution  which  does  justice  to every stakeholders involved in the process. In my opinion,

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mere equal distribution would definitely do injustice to the large  majority  of  92.24%  shareholders  who  in  their commercial  wisdom  had  ensured  that  the  security  was created  on  project  assets,  while  SCB  was  content  with creating  a  charge  only  on  the  shares  of  the  offshore company  and  seeking  a  corporate  guarantee  from  the Corporate Debtor.”

88. The  aforesaid  opinion  was  shared  with  all  Committee  of

Creditors members including Standard Chartered Bank. Importantly,

the minutes record:

“At this point, the representative from Canara Bank stated that he requires clarity on the following questions before he can  consider  the  revised  apportionment  to  SCB:  (a) Whether  any NOCs were taken from the lenders  before taking corporate guarantee, as it is a financial covenant in the sanctions of the lenders? (b) When SCB had funded Essar Steel Offshore Ltd. (ESOL), whether SCB had not taken security of Trinity coal mines as collateral, and the cash flows and credentials from the assets as security? (c) What  is  the  end-use  of  the  loan  and  was  that  end-use ensured?  At  what  stage  is  the  project?  Were  the  funds really invested in the project?

xxx xxx xxx

The representatives of SCB raised issue of valuation and mentioned  that  value  of  above  INR 24  crores  of  ESOL shares  has  not  been  estimated  appropriately  and  is erroneous.   The  value  has  been  estimated  based  on desktop  valuation  and  the  valuer  has  not  considered valuation of underlying assets.  A valuation report of equity of  Trinity  was  shared  by  RP after  receipt  of  same from Corporate Debtor which shows value in excess of USD 600 mn.  

xxx xxx xxx  

Further,  the  representatives  of  EARC  added  that  they required  clarify  as  to  whether  the  underlying  loans  has been enforced against the principal borrower and whether any  money  has  been  recovered  from  the  principal

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borrower.  SCB representative replied that these questions were not relevant at this time and they were choosing not to answer these questions.   SBI representative pointed out that these questions have been raised earlier and SCB has never replied to these queries.

xxx xxx xxx

After several requests of the lenders, it was noted that SCB declined to share the documents and did not answer any of the questions as asked by the members of the CoC stating that the same were irrelevant at this stage.

xxx xxx xxx

ICICI Bank also stated that it should be recorded that SCB rejected offer  of  INR 200 crores  was not  considered by SCB.    The  representative  of  SBI  mentioned  that  the proposal offered by ICICI Bank in its individual capacity and not by other lenders. The representative of SCB mentioned it is evident that the offer was only hypothetical.   

It was also suggested by EARC that revised distribution to SCB matter as per NCLT Order should also be voted upon and the other lenders concurred with the same.”

   (emphasis supplied)

Finally, the allocation of INR 1,000 crore extra to operational creditors

was approved by a majority of 70.73% of the Committee of Creditors.

89. Given the aforesaid facts, Shri Sibal’s submissions on behalf of

Standard  Chartered  Bank,  that  the  offer  made  by  ArcelorMittal  of

payment  of  INR  42,000  crores  as  upfront  in  order  to  pay  100%

principal outstanding of secured financial creditors of the corporate

debtor cannot be accepted. Given that Standard Chartered Bank was

reclassified as a secured financial  creditor  of  the corporate debtor

only on 10.09.2018 and that the aforesaid upfront payment of INR

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42,000  crores  would  include  the  principal  amount  payable  to

Standard Chartered Bank as well, we have seen how in the course of

negotiation,  the  vast  majority  of  financial  creditors  have  ultimately

decided that Standard Chartered Bank will only get an amount based

on its  security  interest,  which  was  accepted  by  ArcelorMittal.  Shri

Sibal  also argued that  the final  resolution plan ultimately offered a

sum of  INR 39,500 crores  instead of  INR 42,000 crores,  being  a

minimum upfront  payment  from which it  was possible to negotiate

upwards but not downwards. We cannot arrive at the conclusion that

the  acceptance  of  the  resolution  plan  by  the  majority  of  the

Committee of Creditors should be set aside on this score,  inter alia,

for the reason that Shri Sibal assured us that he was not attacking the

acceptance  of  the  revised  plan  but  only  distribution  of  amounts

payable under the said plan. This being so, it is also not possible to

accept the submission of Shri Sibal, that “feasibility and viability” of a

resolution  plan  will  not  include  distribution  of  the  amount  of  debt

under  the  said  plan.  It  is  also  not  possible  to  accept  Shri  Sibal’s

submission that the resolution plan must itself provide for distribution

inter se between secured financial creditors. It is enough that under

the  Code  and  the  Regulations,  the  resolution  plan  provides  for

distribution  of  amounts  payable  towards  debts  based  upon  a

classification of various types of creditors. This both the original plan

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as well as the negotiated plan of ArcelorMittal have already done, as

has been seen by us hereinabove, both plans containing the amount

to be paid to workmen separately, operational creditors of INR 1 crore

and less separately,  operational  creditors of  INR 1 crore and over

separately  and  financial  creditors,  subdivided  into  secured  and

unsecured as sub-classes, separately. All that was left for distribution

by ArcelorMittal  was distribution  inter se between secured financial

creditors which was then done by a majority of 92.24%, as has been

seen  above  based  upon  the  value  of  their  respective  security

interests.  Therefore,  the allegation that  the Committee of Creditors

relieved ArcelorMittal from the solemn offer made before the Supreme

Court  by  reducing  the offer  amount  of  INR 42,000 crores  by INR

2,500 crores so that ArcelorMittal could acquire the debts of OSPIL, is

again a matter for negotiation being a business decision taken by the

Committee of Creditors with ArcelorMittal. In any case ultimately INR

35,000 crores was upped to INR 42,000 crores, it being made clear in

the final resolution plan that upfront payment of INR 42,000 crores is

a committed amount, even if working capital adjustment turns out to

be below INR 2,500 crores.  

90. Shri Sibal also made an alternative submission that on the facts

of  this  case,  a  half-way  house  can  be  found  so  that  Standard

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Chartered Bank would get  payment  of  something more above the

value of its security interest. The argument is that, assuming, whilst

denying,  that  classification  amongst  secured  financial  creditors  is

permissible, such classification should be on the liquidation value of

the security enjoyed by the creditor and the balance distributed to all

secured financial creditors pro-rata. This methodology of distribution

has, according to him, been applied in State Bank of India v. Orissa

Manganese and Minerals Ltd.  CA(IB) No. 391/KB/2018,  approved

by the NCLT and not disturbed by the NCLAT. Therefore, it is argued

that,  applying  the  aforesaid  classification,  the  average  liquidation

value of the security in the instant case, is to be as per the report of

DUFF & Phelps and RBSA, being a sum of INR 15,838 crores. This,

according  to  him,  is  the  amount  required  to  be  distributed  to  the

secured financial creditors according to the value of their respective

security  interests  (viz.  first  charge,  second  charge,  subservient

charge, residuary charge, etc.) and the balance to be distributed pro-

rata amongst all financial creditors irrespective of their security. The

sum of INR 42,000 crores offered by ArcelorMittal would therefore,

according to him, be a sum of INR 15,838 crores paid over to the

secured financial creditors according to the value of their security and

the balance amount  of  INR 26,162 crores would  then have to  be

distributed amongst all financial creditors on a pro-rata basis.  

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91. What  is  important  to  note  is  that  when  one  reads  the

abovementioned judgment, it is a majority of 66% of the Committee of

Creditors  who has  exercised  the  discretion  vested  in  it  under  the

Code in this  particular  manner,  which has then correctly  not  been

disturbed  by  the  NCLT and  NCLAT.  Far  from helping  Shri  Sibal’s

client, the principle that is applied in such a case is that ultimately it is

the commercial wisdom of the requisite majority of the Committee of

Creditors  that  must  prevail  on  the facts  of  any given  case,  which

would  include  distribution  in  the  manner  suggested  in  Orissa

Manganese  (supra).  It  is,  therefore,  not  possible  to  accept  the

argument  that  the  Adjudicatory  Authority  and  consequently  the

Appellate Authority would be vested with the discretion to apply what

was applied by the Committee of Creditors in the Orissa Manganese

case  (supra).   This  submission  is  also  devoid  of  merit  and  is,

therefore, rejected.

92. The other argument of Shri Sibal that Section 53 of the Code

would be applicable only during liquidation and not at the stage of

resolving insolvency is correct. Section 30(2)(b) of the Code refers to

Section 53 not in the context of priority of payment of creditors, but

only  to  provide  for  a  minimum  payment  to  operational  creditors.

However, this again does not in any manner limit the Committee of

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Creditors from classifying creditors as financial or operational and as

secured or unsecured. Full freedom and discretion has been given,

as has been seen hereinabove, to the Committee of Creditors to so

classify creditors and to pay secured creditors amounts which can be

based upon the value of their security, which they would otherwise be

able to realise outside the process of the Code, thereby stymying the

corporate resolution process itself.  

93. The  other  argument  based  upon  serious  conflict  of  interest

between secured and unsecured financial creditors, as the majority

may get together to ride roughshod over the minority, is an argument

which flies in the face of the majority of financial creditors being given

complete discretion over feasibility and viability of resolution plans,

which includes the manner of distribution of debts that is contained in

them, subject to following the provisions of the Code relating,  inter

alia, to  dealing  with  the  interests  of  all  stakeholders  including

operational creditors. The Committee of Creditors does not act in any

fiduciary  capacity  to  any  group  of  creditors,  as  is  sought  to  be

suggested by Shri  Sibal.  On the contrary,  it  is  to  take a business

decision based upon ground realities by a majority, which then binds

all stakeholders, including dissentient creditors. It is important to note

that the original threshold required by way of majority was 75%. It is

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during the working of the Code that this was found to be unrealistic

and  therefore  reduced  to  66%  -  see  the  amendments  made  to

Section  28(3)  and  30(4)  of  the  Code  by  the  Insolvency  and

Bankruptcy Code (Second Amendment)  Act  of  2018.  For  all  these

reasons therefore, it is not possible to accept Shri Sibal’s arguments.

94.  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.

95. So far as Civil Appeal No. 6409 of 2019 is concerned, we have

perused paragraphs 70 to 76 of the impugned NCLAT judgment to

the effect that the cheques issued by the corporate debtor due to its

payment obligation towards Bhandar Power Limited were not issued

with a view to secure any payment obligation of the principal borrower

i.e.  EPGL,  is  a  finding  of  fact  which  dislodges  the  claim  of  this

appellant to be regarded as a financial creditor. We find no infirmity in

the aforesaid finding. This appeal is consequently dismissed.  

96. So far as Civil Appeal Diary No. 36838 is concerned, we have

perused the relevant documents and paragraphs 63 and 64 of the

impugned  NCLAT  judgment  and  find  that  the  NCLAT  has  erred

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inasmuch as it has added the claim of this Appellant to the tune of

INR 861.19 crore despite the fact that the claim had already been

admitted by the resolution professional thereby resulting in a double

counting of the debt of this Appellant. This being the position, we find

it necessary to set aside this part of the impugned NCLAT judgment

as well.

97. So  far  as  Civil  Appeal  No.  6266 of  2019,  we have  perused

paragraphs 78 to 81 of the impugned NCLAT judgment and find no

reason to dislodge the finding of the NCLAT that the claim was filed

by the Appellant after the approval of the resolution plan. However,

the NCLAT’s finding that the said claim is subject to arbitration and

that it  was open for the Appellant to pursue the matter in terms of

Section  60(6)  of  the  Code  deserves  to  be  aside  in  terms  of  this

judgment. This Appeal is consequently dismissed.

98. So far as Civil Appeal No. 6269 of 2019 is concerned, we have

perused  paragraphs  83,  84  and  196  of  the  impugned  NCLAT

judgment and find force in the contention of the Appellant that there

has been an error in the impugned NCLAT judgment in as much as it

notes the claim amount, as admitted, as being a sum of INR 124.88

crores, but later in the same judgment notes the said amount as INR

2.47  crores  based  on  a  chart  submitted  by  the  resolution

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professional.  This  chart  submitted  by  the  resolution  professional

specifies  the  amount  of  INR  2.47  crore  (added  after  the  NCLT

judgment dated 08.03.2019),  which is in addition to the amount of

INR 124.88 crores already admitted by the resolution professional.

Therefore, the NCLAT has erred in noting INR 2.47 crore amount as

the amount of the Appellant’s claim, and this part of the judgment also

deserves to be set aside. Thus, the claim of the appellant shall be the

claim as admitted and registered by the resolution professional. This

apart, we find no merit in the submission of the Appellant with respect

to  the  sum  of  INR  121.72  crores  as  the  same  has  been  rightly

rejected by the NCLAT in view of the fact that the said claim was filed

after  the  completion  of  the  CIRP  period.  However,  the  NCLAT’s

judgment inasmuch as it left it open for the Appellant to pursue the

matter in terms of Section 60(6) of the Code deserves to be aside in

terms of this judgment. This Appeal is thus partly allowed.

99. So far as Civil Appeal No. 7266 of 2019 and Civil Appeal No.

7260 of 2019 are concerned, the resolution professional has rejected

the claim of the Appellants on the ground of non-availability of duly

stamped  agreements  in  support  of  their  claim  and  the  failure  to

furnish proof of making payment of requisite stamp duty as per the

Indian Stamp Act despite repeated reminders having been sent by

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the resolution professional.  The application filed  by  the Appellants

before the NCLT came to be dismissed by an order dated 14.02.2019

on  the  ground  of  non-prosecution.  The  subsequent  restoration

application filed by the appellants then came to be rejected by the

NCLT through judgment dated 08.03.2019 on two grounds: one, that

the applications could not be entertained at such a belated stage; and

two, that notwithstanding the aforementioned reason, the claim had

no merit in view of the failure to produce duly stamped agreements.

The impugned NCLAT judgment, at paragraphs 93 and 94, upheld

the finding of the NCLT and the resolution professional. In view of

these  concurrent  findings,  the  claim  of  the  Appellants  therefore

requires no interference.  Further,  the submission of  the Appellants

that they have now paid the requisite stamp duty, after the impugned

NCLAT judgment, would not assist the case of the Appellants at this

belated stage. These appeals are therefore dismissed.

100. So far as Writ Petition (Civil) No. 1064 of 2019 is concerned, we

have  perused  the  relevant  documents  and  paragraph  36  of  the

impugned NCLAT judgment and find force in the contention of the

Writ  Petitioner  that  the  NCLAT has  wrongly  noted  that  the  claim

amount was notionally admitted by the resolution professional at INR

1 only. The resolution professional has admitted the claim of the Writ

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Petitioner to a tune of INR 17.09 crore and the same is recorded in

the list of creditors prepared by the resolution professional. In view of

the same, this part of the NCLAT judgment is thus erroneous and the

claim shall be the claim as admitted and registered by the resolution

professional. The Writ Petition is thus allowed to this extent.

101. So far as Writ Petition (Civil) No. 1049 of 2019 is concerned,

the Petitioner is admittedly the operational creditor of one Wind World

India  Ltd  whose CIRP proceedings  are  pending  before  the  NCLT,

Ahmedabad. The Petitioner has  inter  alia  sought for  permission to

raise various issues arising out of the facts of its own case (which has

been raised before us herein) in the matter pending before the NCLT.

In view of the fact that this judgment has not opined on the merits of

the case of the Writ Petitioner pending before the NCLT, it is open to

the Writ Petitioner to raise all contentions as permissible under the

applicable law before the NCLT in the pending proceedings. This Writ

Petition is thus allowed to this extent.

102. So far as Dakshin Gujarat Vij Co. (Respondent No. 11 in Civil

Appeal Diary No. 24417 of 2019), State Tax Officer (Respondent No.

12  in  Civil  Appeal  Diary  No.  24417  of  2019),  Gujarat  Energy

Transmission Corporation Ltd.  (Respondent  No.  17 in  Civil  Appeal

Diary  No.  24417  of  2019)  and  Indian  Oil  Corporation  Ltd.

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(Respondent No. 18 in Civil  Appeal Diary No. 24417 of  2019) are

concerned,  the  resolution  professional  admitted  the  claim  of  the

abovementioned respondents notionally at INR 1 on the ground that

there were disputes pending before various authorities in respect of

the said amounts.  However,  the NCLT through its  judgment  dated

08.03.2019 directed the resolution professional to register the entire

claim of the said respondents. The NCLAT in paragraphs 43 and 196

of the impugned judgment upheld the order passed by the NCLT as

aforesaid  and  admitted  the  claim  of  the  abovementioned

respondents.  We  therefore  hold  that  this  part  of  the  impugned

judgment deserves to be set aside on the ground that the resolution

professional  was  correct  in  only  admitting  the  claim  at  a  notional

value of INR 1 due to the pendency of disputes with regard to these

claims.

103. 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. Insofar as Civil Appeal No. 6266

of 2019 and Civil Appeal No. 6269 of 2019 is concerned, the Appeals

are partly allowed in terms of this judgment. The Writ Petitions are

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disposed of in terms of the judgment. It is made clear that the CIRP of

the corporate debtor in this case will take place in accordance with

the resolution plan of  ArcelorMittal  dated 23.10.2018,  as amended

and accepted by the Committee of Creditors on 27.03.2019, as it has

provided for amounts to be paid to different classes of creditors by

following Section 30(2) and Regulation 38 of the Code.  

                                             ……..………….……………..J. (R.F. Nariman)

……..………….……………..J. (Surya Kant)

……..………….……………..J. (V. Ramasubramanian)

New Delhi; November 15, 2019

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