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IBCInsolvency & Bankruptcy CodeRights And Liabilities Of Parties Involved In CIRP

June 20, 2019by GLC & Partners

In the case of Arcelormittal India Pvt. Ltd vs. Satish Kuamr Gupta & Ors.[ CIVIL APPEAL No. 94029405 of 2018] the question before the Hon’ble Supreme Court revolves around the ineligibility of resolution applicants to submit resolution plans after the introduction of Section 29A into the Insolvency and Bankruptcy Code, 2016 (“Code”). The main objective of the Code is to facilitate adoption of a resolution plan for the Corporate Debtor by initiating insolvency proceedings. According to Section 5 (26) of the code, a resolution plan is a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern and section 5 (25) of the Code defines a ‘Resolution Applicant’ as any person who submits a resolution plan to the resolution professional. The definition of the Resolution Applicant does not prescribe any specific criteria or qualification, due to which any party including the promoters of the corporate debtor or any related party could propose a resolution plan. This scheme of things was criticized on the basis that the wide scope permitted by the Code.

In the present case, ArcelorMittal & Numetal submitted an ‘Expression of Interest’ for the resolution process of Essar Steel. The Resolution Professional found that both ArcelorMittal and Numetal to be ineligible under Section 29A. ArcelorMittal Netherlands is related party of ArcelorMittal India and was the promoter in the company Uttam Galva whose account was classified as Non-Performing Assets. It is also a promoter in management & control KSS Petron. KSS Petron also has Non-Performing Assets for more than 1 yr. Numetal is newly incorporated and was the promoter of ESIL whose account was classified as a Non-Performing Asset. Rewant Ruia (who is acting jointly with the other shareholders of Numetal for the purposes of submission of the Resolution Plan) is also considered ineligible under Section 29A.

The questions raised in the Court were:

  • whether a Resolution Application is eligible to take advantage under the 2nd provision to Section 30 (4)?
  • Whether Sec 29A should have literal interpretation or the text or context should inform its interpretation?
  • Whether ‘acting jointly’ includes ‘joint ventures agreement’ and the meaning of ‘person acting in consort’?

The Hon’ble Supreme Court addressed two concepts in this case, “Person acting in Consort” and ‘lifting of corporate veil’. According to Section 29A (c), any person whose account has been declared as a Non-Performing Asset and at least a period of one year and has been lapsed from the date of such classification till the date of commencement of Insolvency Resolution Process is considered ineligible for application of resolution plan. Unless, the person has paid all the overdue amounts and interests relating to the Non-Performing Asset Accounts within 30 days of initiation of the Resolution Process as provided under Section 30(4).

Further, the section also states that persons acting jointly or in consort with a person who is disqualified is also ineligible. The term ‘acting in consort’ has created ambiguity in this case. The Court explained the term under Sub-Clause (j) of Section 29A as, any person who is a ‘connected person’ and who is disqualified under sub clauses (a) to (i) shall also be disqualified. The explanation provides for a connected person as a person who is a ‘promoter’ or in ‘management or control’ of the resolution applicant or for a corporate debtor during the implementation of the resolution plan. The explanation further states that a subsidiary company or a holding company or an associate company or a related party to such person would also be considered as connecting party.

The court further analyzed the ‘principle of lifting of corporate veil’ as when the statue itself contemplates the same expressly by providing implication on people acting jointly or in consort with people disqualified are ineligible, it should be taken as a de facto interpretation and not de jure. Further, it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan.