# COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY v. SATISH KUMAR GUPTA & ORS

- **Citation:** [2019] 16 S.C.R. 275
- **Court:** Supreme Court of India
- **Decided:** 2019-11-15
- **Case number:** Civil Appeal No. 8766-67 of 2019
- **Bench:** R. F. Nariman, Surya Kant, V. Ramasubsramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/committee-of-creditors-of-essar-steel-india-limited-through-authorised-33910
- **Pages:** 149

## Headnote

Insolvency and Bankruptcy Code, 2016 - Corporate
Insolvency Resolution Process - Power of Committee of creditors
to approve resolution plan - On facts, resolution plans for
Corporate debtor-Essar Steel India Limited - In CIRP of corporate
debtor, ArcelorMittal India was successful resolution applicant -
Resolution plan of ArcelorMittal specifically providing for an
upfront payment of INR 35,000 crores in order to resolve debts
amounting to INR 42,213 crores - Approval of final resolution plan
of Arcelor Mittal by Committee of Creditors - Initiation of several
proceedings - NCLT allowed the resolution plan - Challenge to,
before NCLAT - NCLAT held that there can be no difference
between a financial creditor and operational creditor in the matter
of payment of dues; thus, NCLAT 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;
NCLAT directed 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; that operational creditors with a claim of equal to or more
than INR 1 crore be paid 60.268% of their admitted claims; that
Committee of Creditors not empowered to decide the manner of
distribution to be made between one or other creditors; that s. 53
cannot be applied during the corporate resolution process but will
apply only at the stage of liquidation; and that the claims decided
by the resolution professional and affirmed by the Adjudicating
Authority or the Appellate Tribunal are final and binding on all
creditors - On appeal, held: Order by NCLAT which substitutes its
wisdom for the commercial wisdom of the Committee of Creditors
 [2019] 16 S.C.R. 275
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and also directs the admission of a number of claims which was
done by the resolution applicant, is set aside - CIRP of the
corporate debtor 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
s. 30(2) and Regulation 38 of the Code.
Insolvency and Bankruptcy Code, 2016 - Resolution
professional - Role of, in the revival of the corporate debtor -
Held: Role of resolution professional is not adjudicatory but
administrative - Resolution professional manages the affairs of the
corporate debtor as a going concern from the stage of admission
of an application u/ss. 7, 9 or 10 - He appoints and convenes
meetings of the Committee of Creditors - He collects, collates and
finally admit claims of all creditors, which must then be examined
for payment, by the resolution applicant and be finally negotiated
and decided by the Committee of Creditors.
Prospective resolution applicant - Role of - Explained.
Insolvency and Bankruptcy Code, 2016 - Committee of
creditors - Role of, in the corporate resolution process - Held:
Committee of Creditors decides on whether or not to rehabilitate
the corporate debtor by means of acceptance of a particular
resolution plan - 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 feasibility and viability,
and various other requirements as may be prescribed by the
Regulations - Ultimately it is the commercial wisdom of the
Committee of Creditors which operates to approve the best
resolution plan, which is finally accepted after negotiation of its
terms by such Committee with prospective resolution applicants -
Furthermore, the Committee of Creditors does not act in any
fiduciary capacity to any group of creditors, on the contrary, it is
to take a business decision based upon ground realities by a
majority, which then bi

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COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA
LIMITED THROUGH AUTHORISED SIGNATORY
v.
SATISH KUMAR GUPTA & ORS.
(Civil Appeal No. 8766-67 of 2019)
NOVEMBER 15, 2019
[R. F. NARIMAN, SURYA KANT AND
V. RAMASUBSRAMANIAN, JJ.]
Insolvency and Bankruptcy Code, 2016 - Corporate
Insolvency Resolution Process - Power of Committee of creditors
to approve resolution plan - On facts, resolution plans for
Corporate debtor-Essar Steel India Limited - In CIRP of corporate
debtor, ArcelorMittal India was successful resolution applicant -
Resolution plan of ArcelorMittal specifically providing for an
upfront payment of INR 35,000 crores in order to resolve debts
amounting to INR 42,213 crores - Approval of final resolution plan
of Arcelor Mittal by Committee of Creditors - Initiation of several
proceedings - NCLT allowed the resolution plan - Challenge to,
before NCLAT - NCLAT held that there can be no difference
between a financial creditor and operational creditor in the matter
of payment of dues; thus, NCLAT 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;
NCLAT directed 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; that operational creditors with a claim of equal to or more
than INR 1 crore be paid 60.268% of their admitted claims; that
Committee of Creditors not empowered to decide the manner of
distribution to be made between one or other creditors; that s. 53
cannot be applied during the corporate resolution process but will
apply only at the stage of liquidation; and that the claims decided
by the resolution professional and affirmed by the Adjudicating
Authority or the Appellate Tribunal are final and binding on all
creditors - On appeal, held: Order by NCLAT which substitutes its
wisdom for the commercial wisdom of the Committee of Creditors
 [2019] 16 S.C.R. 275
275
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and also directs the admission of a number of claims which was
done by the resolution applicant, is set aside - CIRP of the
corporate debtor 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
s. 30(2) and Regulation 38 of the Code.
Insolvency and Bankruptcy Code, 2016 - Resolution
professional - Role of, in the revival of the corporate debtor -
Held: Role of resolution professional is not adjudicatory but
administrative - Resolution professional manages the affairs of the
corporate debtor as a going concern from the stage of admission
of an application u/ss. 7, 9 or 10 - He appoints and convenes
meetings of the Committee of Creditors - He collects, collates and
finally admit claims of all creditors, which must then be examined
for payment, by the resolution applicant and be finally negotiated
and decided by the Committee of Creditors.
Prospective resolution applicant - Role of - Explained.
Insolvency and Bankruptcy Code, 2016 - Committee of
creditors - Role of, in the corporate resolution process - Held:
Committee of Creditors decides on whether or not to rehabilitate
the corporate debtor by means of acceptance of a particular
resolution plan - 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 feasibility and viability,
and various other requirements as may be prescribed by the
Regulations - Ultimately it is the commercial wisdom of the
Committee of Creditors which operates to approve the best
resolution plan, which is finally accepted after negotiation of its
terms by such Committee with prospective resolution applicants -
Furthermore, the Committee of Creditors does not act in any
fiduciary capacity to any group of creditors, 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 - Thus, commercial wisdom of this majority of creditors
is important 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 -ss. 21, 24, 28,
29, 30 and 31.
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Insolvency and Bankruptcy Code, 2016 - National Company
Law Tribunal- Adjudicating Authority and National Company Law
Appellate Tribunal-Appellate Tribunal under - Jurisdiction of, qua
resolution approved by Committee of Creditors - Held: Adjudicating
Authority's jurisdiction is circumscribed by s. 30(2) and Appellate
Tribunal's jurisdiction is circumscribed by s. 32 rw s. 61(3) -
Adjudicating Authority cannot interfere on merits with the
commercial decision taken by the Committee of Creditors, the
limited judicial review available is to see 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 said 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
said parameters - Reasons given by the Committee of Creditors
while approving a resolution plan may be looked at by the
Adjudicating Authority only from this point of view, and once it is
satisfied that Committee of Creditors has paid attention to these
key features, it must then pass the resolution plan, other things
being equal.
Insolvency and Bankruptcy Code, 2016 - Secured and
unsecured creditors - Equality principle - Held: Secured and
unsecured financial creditors are differentiated when it comes to
amounts to be paid under a resolution plan, together with what
dissenting secured or unsecured financial creditors are to be paid
- 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, 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.
COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LTD.
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Insolvency and Bankruptcy Code, 2016 - s. 21(8), 28 -
Constitution of a sub-committee by the Committee of Creditors -
Permissibility of - Plea that the Committee of Creditors delegated
its functions to a sub-committee, as a result of which, the subcommittee secretly made negotiations with ArcelorMittal - Held:
Section 28(1)(h) provides that though the powers of Committee of
Creditors are administrative in nature, they shall not be delegated
to any other person - Power of approval of resolution plan u/s.
30(4), also cannot be delegated to any other body - However, subcommittees can be appointed for the purpose of negotiating with
resolution applicants, or for performing other ministerial or
administrative acts, provided such acts are in the ultimate analysis
approved and ratified by the Committee of Creditors - On facts,
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 - Standard
Chartered Bank voted in favour of the constitution of a subcommittee and also requested for inclusion of its name in subCommittee, however, when the Standard 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, thus, plea was not bonafide and is rejected.
Insolvency and Bankruptcy Code, 2016 - s. 31(1) -
Extinguishment of Personal Guarantees and Undecided Claims -
Held: s. 31(1) makes it clear that once a resolution plan is
approved by the Committee of Creditors it shall be binding on all
stakeholders, including guarantors - It cannot be said 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 - A successful resolution applicant cannot
suddenly be faced with "undecided" claims after the resolution plan
submitted by him has been accepted as this would lead to
uncertainty regarding amounts payable by a prospective resolution
applicant who successfully took over the business of the corporate
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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 - Successful
resolution applicant does on a fresh slate.
Insolvency and Bankruptcy Code (Amendment) Act, 2019 -
ss. 4 and 6 - Constitutional Validity of - Held: As regards s. 4 of
the Amendment Act, it is clear that as per s. 12 of the principal
Act, the Corporate Insolvency Resolution proceedings should be
mandatorily completed within a period of 330 days including any
extension and legal proceedings related to resolution process of
corporate debtor - Further grace period of 90 days is given,
failing which corporate debtor shall be sent into liquidation - While
leaving the provision otherwise intact, the word "mandatorily" is
struck down as being manifestly arbitrary under Article 14 of the
Constitution 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 - As regards, the substitution of s.
30(2)(b) by s. 6 of the Amending Act of 2019, it is constitutionally
valid since the substituted s. 30(2)(b) is in fact a beneficial
provision in favour of operational creditors and dissentient
financial creditors as they are 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 -
Furthermore, Explanation 1 and 2 as also sub-clause (b) of s. 6
of the Amending Act of 2019, is constitutionally valid.
Disposing of the appeals and the writ petitions, the Court
HELD:
Role of the resolution professional
1. 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 Insolvency and Bankruptcy Code, 2016 till a
resolution plan is approved by the Adjudicating Authority, but
is also a key person who is to appoint and convene meetings of
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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 decided by the Committee of Creditors.
In Arcelor Mital India case, it is made clear that the role of
resolution professional is not adjudicatory but administrative.
[Para 27] [329-F-G; 330-A-B]
ArcelorMittal India Private Limited v. Satish Kumar
Gupta (2019) 2 SCC 1 : [2018] 12 SCR 362 - relied
on.
Role of the prospective resolution applicant
2.1 Under the Insolvency 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). 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. Regulation 37
states that 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. [Para 29] [333-H; 334A-B; 335-B-C]
2.2 Regulation 38 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 (Regulation
38(1)). Such plan must also include provisions as to how to deal
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with the interests of all stakeholders including financial creditors
and 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. [Para 30] [335-B-C]
Role of the committee of creditors in the corporate
resolution process
3.1 Since it is the commercial wisdom of the Committee
of Creditors 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 said 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). [Para 31] [336-D-F]
3.2 In order to trigger application of the Code, a neat
division has been made between financial creditors and
operational creditors. 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. [Para
32] [337-B-C]
3.3 Section 24 of the Code deals with meetings of the
Committee of Creditors. Though voting on the approval of a
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resolution plan is only with the financial creditors who form the
Committee of Creditors, yet the resolution professional is to
conduct the said 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 (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 (Section 24(6)) of the Code. [Para
35] [340-G-H; 341-A]
3.4 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. 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 feasibility and viability, and various other
requirements as may be prescribed by the Regulations. [Para
36] [341-B; 342-G-H; 343-A]
3.5 Regulation 18 to 26 of the 2016 Regulations deal with
meetings to be conducted by the Committee of Creditors.
Regulation 39(3) 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. [Para 37,
38] [343-B-E]
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3.6 The importance of the majority decision of the
Committee of Creditors is then stated in Section 31(1) of the
Code. What is left to the majority decision of the Committee of
Creditors is the "feasibility and viability" of a resolution plan,
which obviously takes into account all aspects of the plan,
including the manner of distribution of funds among the various
classes of creditors. The commercial wisdom of this majority of
creditors is important 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. [Para
40] [346-B-C; B-F]
K. Sashidhar v. Indian Overseas Bank (2019) SCC
Online SC 257 - referred to.
Jurisdiction of the Adjudicating Authority and the
Appellate Tribunal
4.1 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. 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. 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. 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 case. [Para 41,
42] [347-A-D; 353-B]
Innoventive Industries Ltd. v. ICICI Bank, (2018) 1
SCC 407 : [2017] 8 SCR 33 ; Macquarie Bank Ltd v.
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Shilpi Cable Technologies Ltd. (2018) 2 SCC 674
[2017] 13 SCR 751 ; K. Sashidhar v. Indian Overseas
Bank (2019) SCC Online SC 257 - relied on.
4.2 It was submitted that K. Sashidhar case missed a very
vital provision of the Code which is contained in Section 60(5)
of the Code; 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 is rejected. [Para 43]
[353-G-H; 354-A-B]
4.3 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, 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. Ultimately, the
Committee decided against any amendment to be made to the
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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. However, 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 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. [Para 44, 45] [354-C-D; 356-E-G]
4.4 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 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
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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 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 said
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 said 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. [Para 46] [358A-H; 359-A]
Secured and unsecured creditors; the equality principle
5.1 There is no doubt that even under the 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, protecting creditors from
each other is also important. 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. [Para 49]
[365-G-H]
American Jurisprudence 2d, Volume 9 - referred to.
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5.2 The World Bank Report of 2010, titled "A Global View
of Business Insolvency Systems" is an earlier report, which
opined on the basis of the French system, that creditors are
divided into two separate classes without any further subclassification and that the advantage of such system is that it
avoids potential conflict of interest among creditors in a particular
class. 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". [Para 52] [369B-E]
IMF paper on Development of Standards for Security
Interest by Pascale De Boeck and Thomas Laryea,
Counsel, IMF Legal Department; World Bank Report
of 2010, titled "A Global View of Business Insolvency
Systems"; Principles of International Insolvency by
Philip R Wood's - referred to.
5.3 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 distressed assets takes
place and only if the same is not possible should liquidation
follow. [Para 54] [370-F-G]
5.4 Financial creditors are in the business of lending
money. 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
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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
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. [Para 55] [370-H;
371-A-E]
5.5 By reading paragraph 77 of the Swiss Ribbons case, 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 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
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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.
[Para 56] [375-D-H; 376-A-B]
5.6 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. Most 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.
The 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. 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. [Para 57] [376-B-F]
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Swiss Ribbons Private Limited v. Union of India (2019)
4 SCC 17 : [2019] 3 SCR 535 - referred to.
5.7 Secured and unsecured financial creditors are
differentiated when it comes to amounts to be paid under a
resolution 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. [Para 57] [377-D-F]
5.8 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. [Para 58] [379-G-H; 380A]
Mihir R. Mafatlal v. Mafatlal Industries Ltd. (1997) 1
SCC 579 : [1996] 6 Suppl. SCR 1 - referred to.
The constitution of a sub-committee by the Committee of
Creditors
6.1 The submission of the counsel for Standard Chartered
Bank centered around the fact that the Committee of Creditors
delegated its functions to a sub-committee, which delegation is
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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. [Para 59]
6.2 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. 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. Having gone through the minutes of all the important
creditors' meetings that were held, it is found that 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.