INTRODUCTION

In the field of insolvency and bankruptcy law, the Essar Steel Case is a seminal ruling that
established the preeminence of the financial creditors in the Committee of Creditors in
circumstances of claim distribution. One of the oldest cases now undergoing the IBC process,
it lasted for roughly 900 days. The distribution of the funds from AMIPL’s 42,000 crore offer
to the creditors was decided by the Committee of Creditors, and the Supreme Court
overturned the NCLAT verdict. This significant case mainly resolves the law around
insolvency and bankruptcy.

BACKGROUND
An order1 made on August 2, 2017 by the National Company Law Tribunal, Ahmedabad
Bench (NCLT), approving an application presented by Standard Chartered Bank (Standard
Chartered) and the State Bank of India, subjected financial creditors of Essar Steel to
insolvency proceedings. Both of the initial resolution plans submitted by Numetal Limited
(Numetal) and AMIPL India Private Limited (AMIPL) were found to be ineligible under
Section 29A of the IBC by a resolution expert. A second invitation was issued, and then
Vedanta Limited presented a resolution proposal.

In the ensuing legal proceedings, the Supreme Court determined that AMIPL and Numetal
were ineligible resolution petitioners under Section 29A of the IBC by its ruling 2 of October
4, 2018. The Supreme Court granted AMIPL and Numetal two weeks from the date of the
ruling to pay off the non-performing assets (NPAs) of their related corporate creditors in
order to redress their ineligibility. The committee of creditors (CoC) for Essar Steel was
therefore required to study and deliberate on the resolution plans offered (including the plan
submitted by Vedanta). No plan would have been accepted by the CoC with the required
majority, and Essar Steel would have gone into liquidation.

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After making payments in accordance with the aforementioned Supreme Court ruling, it was
found that AMIPL was the successful resolution applicant for Essar Steel when the CoC
approved their resolution plan on October 25, 2018.

OBSERVATION ON THE RESOLUTION PLAN

AMIPL's resolution plan left the mechanism of allocating funds among the secured financial
creditors up to the CoC's discretion. The AMIPL resolution plan comprised a 42,000 crore
upfront payment and an 8,000 crore equity infusion. It was necessary to pay about 4% of the
unsecured creditors' admitted claims. Operational creditors with claims totaling less than INR
1 crore were obligated to pay all labourers in full. No payments were to be made to
operational creditors who submitted claims totaling INR 1 crore or more.

The plan also stated that upon payment to the financial creditors, all security documents
would be deemed to have been assigned to AMIPL and any documents that could not be so
assigned would be terminated, with the exception of any corporate or personal guarantees
offered by the former promoter group in connection with Essar Steel's loans. In addition,
upon the NCLT's acceptance of the resolution plan, all claims by any guarantor owing to
subrogation under any guarantees asserted before to the resolution plan's effective date would
be presumed to be barred. However, the financial creditors were still allowed to use the
corporate or individual guarantees as leverage against the former promoter group.

OBSERVATION OF THE NCLT

Before the NCLT, Numetal and AMIPL contested the Resolution Professionals' judgement.
By its order dated April 19, 2018, the NCLT upheld the Resolution Professionals' judgement.
The NCLT decided that the start date of the corporate debtor's corporate insolvency
resolution professionals would be the date on which a person would be excluded. However,
the NCLT gave the resolution petitioners a chance to do so by making past-due payments in
accordance with the proviso of Section 29A of the Code. On the grounds that the Resolution
Professionals should have presented both alternatives to the Committee of Creditors for their
consideration, the NCLT remitted the matter back to the Committee of Creditors and the
Resolution Professionals. The NCLT ordered that the bids from resolution applicants that
were filed in response to the updated call for proposal not be unsealed while the case is being
decided.
OBSERVATION OF THE NCLAT
The Committee of Creditors was instructed by the NCLAT to hold a meeting and render a
decision in accordance with the NCLT's directives in an interim order 3 dated March 20, 2019.
In accordance with this directive, the Committee of Creditors allowed in proportion
distribution of cash to all secured financial creditors, with the exception of Standard
Chartered, and (ii) an ex-gratia payment of INR 1,000 crore to operational creditors with
claims exceeding INR 1 crore.

The Committee of Creditors determined that Standard Chartered was in a different position
than the other secured financial creditors because it was not a direct lender to Essar Steel
because Essar Steel had granted it a guarantee for the debt of an offshore subsidiary;
additionally, its debt was secured by a pledge over shares of the offshore subsidiary owned by
Essar Steel, and the fair value of those shares was minimal in comparison to the debt; and
finally, it was not a charge over the project assets of Essa. Based on the kind and value of the
security held by Standard Chartered, the Committee of Creditors was expected to pay
Standard Chartered approximately INR 61 crore, or 1.7% of the recovery.

The decision made by the NCLAT on July 4, 2019 was:

(i) AMIPL’s resolution plan was approved,

(ii) It changed the distribution of funds so that all creditors—secured, unsecured, and
operational—were treated proportionate4,
(iii) increased the admitted claims of operational creditors to almost four times the
original amount,
(iv) gave operational creditors the freedom to launch or maintain legal actions against
Essar Steel after its bankruptcy resolution procedure was complete if their claims
had not been acknowledged by the NCLT or the NCLAT.
(v) ruled that the guarantees for Essar Steel's debt expire once the underlying debt has
been paid off.5

ISSUES
Issue 1: Whether the resolution applicant's stage of ineligibility under Section 29A(c) of the
Code attaches on the day the Corporate Insolvency Resolution Professionals begin their work
or when the resolution applicant submits their resolution plan?
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Issue 2: Does the resolution applicant have the right to contest the Resolution Professional’s
rejection of the resolution plan?

Issue 3: Whether the NCLAT was correct to rule that Numetal was qualified to submit the
resolution plan in line with Section 29A of the Code and AMIPL was not?

RELEVANT PROVISION
In the case at hand, Section 29A(c) of the Insolvency and Bankruptcy Code (Amendment)
Act, 2017, which took effect retroactively on November 23, 2017, states that a person is
ineligible to submit a resolution plan if they, or any other person acting jointly or in concert
with them, have an account, or an account of a corporate debtor under their management or
control, or of whom they are the beneficiary. Between the date of such classification and the
start of the corporate debtor's Corporate Insolvency Resolution Professionals, at least a year
has passed. However, if the person pays off all past-due sums, plus interest, and fees
associated with non-performing asset accounts before submitting the resolution plan, they
will be qualified to submit one.

ARGUMENTS
AMIPL contended that a straightforward interpretation of Section 29A(c) of the Code
establishes that the requirements listed in Section 30 (Submission of Resolution Plan) of the
Code must be met in order for a person to be ineligible with respect to the submission of a
resolution plan. It argued that responding to preliminary inquiries, or expressing interest, is
not the topic of a resolution plan, hence the moment at which a resolution plan is submitted is
significant. Furthermore, it claimed that the June 2018 change to Section 29A, which
explicitly stated that the moment at which a resolution plan was submitted was significant,
was clarifying in nature.

According to Numetal, the beginning of the corporate insolvency resolution professionals can
be considered the time at which Section 29A(c) of the Code can be deemed to be in effect
because Section 29A of the Code is not yet altered. Numetal maintained that AEL could not
be deemed to be exercising "control" under the terms of the Companies Act, 2013, because
AEL only had a 25% interest in Numetal. It is impossible to refer to Numetal as a joint
venture between its stockholders. Additionally, AEL was not a shareholder of Numetal at the
time the new resolution plan was submitted, so it was exempt from Section 29A of the Code.
OBSERVATION OF THE SUPREME COURT
Issue 1: The Supreme Court pointed out that Section 29A of the Code's first sentence states
that "a person shall not be qualified to submit a resolution plan..." In light of this, it is evident
that the stage of ineligibility attaches when the resolution applicant submits the resolution
plan, not when the corporate insolvency resolution professionals begin their work.
Additionally, the verb "has" in Section 29A(c) is in praesenti, in contrast to the verb "has
been" in Sections 29A(d) and 29A(g) of the Code, which relates to an earlier point in time.
Additionally, an addition from 2018 later provided clarification.

Issue 2: The Supreme Court noted that Section 30(2)(e) of the Code does not give the
Resolution Professional the authority to "decide" whether the resolution plan violates the law
or not in response to a challenge to the Resolution Professional's rejection of the plan
submitted by the concerned resolution applicant. When combined with Section 25(2)(i) and
the second proviso of Section 30(4) of the Code, the aforementioned provision would
demonstrate that the Resolution Professional is required to verify that the resolution plans
submitted by different applicants are complete in every way before submitting them to the
Committee of Creditors. Before the submitted resolution plans are presented to the
Committee of Creditors, which may or may not accept them, the Resolution Professional
must check that they are complete in every way. The Resolution Professional is not required
to make any decisions in this regard. Although the Resolution Professional is not required to
provide justification when submitting a resolution plan to the Committee of Creditors, it
would be appropriate if he did so and provided a brief explanation of why each resolution
plan does or does not comply with the law in an appendix to the due diligence report he
conducted on each of the resolution plans in question.

Issue 3: The Supreme Court noted that for a period of at least one year from the date of such
classification until the date of the start of the corporate insolvency resolution professionals,
any person who either has an account that has been classified as an NPA, or who is a
promoter of, or in the management or control of, a corporate debtor that has an account, is
ineligible to submit a resolution plan under Section 29A(c) of the Code. To apply the
ineligibility provisions of Section 29A(c) of the Code, in other words, any one of the three
things, which are disjunctive, needs to be established:

(a) the corporate debtor may be under the management of the person referred to in Section
29A;
(b) the corporate debtor may be a person under the control of such person; or

(c) the corporate debtor may be a person of whom such person is a promoter.

The Supreme Court noted that "management" would refer to de jure management of a
corporate debtor for the purposes of interpreting Section 29A(c) of the Code. According to
the definitions of "manager," "managing director," and "officer" of the company provided by
the Companies Act of 2013, a board of directors would typically hold the de jure
management of a corporate debtor. De jure control and de facto control are the two ways in
which the term "control" is defined in Section 2(27) of the Companies Act, 2013. De jure
control involves the authority to choose the majority of a company's directorsA individual or
group of people could be considered to be "in control" as long as they can successfully
influence management or policy decisions in any way, whether directly or indirectly. Only
positive control is meant by the term "control" in Section 29A(c) of the Code. It implies that
merely having the ability to veto special company resolutions does not constitute "control."
The first few words of Section 29A of the Code are a "see through provision," allowing one
to identify the people who are genuinely in "charge," whether alone or with others. The
Companies Act of 2013 defines the term "promoter" in detail.

In the first clause of Section 29A of the Code, the phrase "operating jointly" should not be
confused with "joint venture agreements." The phrase "acting jointly" only indicates whether
a group of people have come together and are acting "jointly" in the sense of acting together.
The Supreme Court noted that group corporations are subject to the corporate veil-piercing
theory in order to examine the group's economic entity as a wholeThe definition of "in
concert" under the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011 ("Takeover Regulations") shall apply to the phrase. Any
understanding, even if it is informal and even if it is to indirectly cooperate to exercise
control over a target organisation, is included when interpreting the phrase "in concert." The
fact that if individuals act jointly or in concert with the "person" who submits a resolution
plan, all such individuals are subject to Section 29A of the Code, is extremely important.

The Supreme Court stated that the first proviso to sub-section (c) of Section 29A's purpose,
as well as the larger objective, must be upheld if it is shown, on facts, that at a reasonably
proximate point of time prior to the submission of the resolution plan, the affairs of the
persons referred to in Section 29A are so arranged, as to avoid paying off the debts of the
non-performing asset concerned.
The Supreme Court noted that the transfer of AEL's shareholding in Numetal to other
shareholders does not qualify Numetal as an eligible entity when considering its eligibility
under Section 29A(c) of the Code. The Supreme Court cited two reasons for this: the earnest
money credited to the corporate debtor's account and taking into account the reasonably
proximate state of affairs prior to the submission of the resolution plan, starting with
Numetal's initial corporate structure and continuing with the changes made to this day, it was
obvious that the goal of all transactions that have occurred since Section 29A came into effect
was unquestionably to avoid the application.

Regarding AMIPL's eligibility, the Supreme Court dismissed AMIPL's contention that
AMNLBV was not a promoter of Uttam Galva because AMNLBV had sold all of its shares
in the company before submitting the resolution plan. By breaching the corporate veil and
using the logic that Shri L. N. Mittal manages and controls both AMIPL and AMNLBV, the
Supreme Court concluded that these two entities were acting together under the Takeover
Regulations. As a result, the Supreme Court came to the conclusion that AMNLBV promoted
Uttam Galva. The Supreme Court also noted that there was no question in its mind that
AMNLBV's shares in Uttam Galva were sold only to avoid the ineligibility specified in
Section 29A(c) of the Code, and as a result, the proviso thereto, after considering the
reasonable proximity of the facts.

LEGAL DEVELOPMENTS
A number of the NCLAT Order's provisions, including the role of the Committee of Creditors
and the scopes of authority of the NCLT and NCLAT, were the subject of appeals before the
Supreme Court. While these appeals were still pending, the Insolvency and Bankruptcy Code
(Amendment) Act, 2019, which was adopted on August 6 with retroactive effect, was
presented. The IBC Amendment Act contains provisions that had a direct bearing on the
issues raised in this case, therefore in addition to hearing writ petitions challenging the
NCLAT Order, the Supreme Court also heard challenges to those sections.

The IBC Amendment Act required that when determining the minimum payment to
operational creditors under a resolution plan, the amount that would be paid to such creditors
in the event of liquidation and the amount that would be paid to such creditors if the
resolution amount was distributed in accordance with Section 53 of the IBC should be taken
into account as the higher of the two amounts,6 the committee of creditors may approve a

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resolution plan after considering the way funds would be distributed under the plan, taking
into account the relative priority of creditors under Section 53(1) of the IBC, and ensuring
that any financial creditors who disagree with the plan are paid at least as much as they would
receive in the event of liquidation (including the priority and value of security of a secured
creditor). A distribution established in accordance with Section 30(2)(b) of the IBC was
explained, making it abundantly apparent that such a distribution would be regarded as ‘fair
and equitable’.

One more provision of the IBC Amendment Act was that all corporate insolvency resolution
processes be ‘mandatorily’ completed within 330 days of the insolvency beginning date. For
the resolution procedures already in motion, a grace period of 90 days was provided
following the commencement of this IBC Amendment Act (including those that were the
focus of litigation).

JUDGEMENT OF THE SUPREME COURT

The Supreme Court ruled that the moment the resolution applicant submits the resolution
plan, the stage of ineligibility attaches. In addition, the Supreme Court decided that the
resolution applicant could not contest the Settlement Professional's rejection of the resolution
plan. The Supreme Court, however, also ruled that the RP lacks the authority to reject the
resolution plan and ordered him to bring all plans to the Committee of Creditors for their
consideration. The Supreme Court ruled that Numetal and AMIPL were unqualified to submit
their resolution plans because they were both resolution applicants and had not paid their
respective NPAs before to doing so, violating Section 29A of the Code. The Supreme Court
granted the resolution applicants one more chance to resubmit their resolution plans
following payment of their respective NPAs at the Committee of Creditors’ request.

EQUITABLE TREATMENT OF ALL CREDITORS

The NCLAT Order was reversed by the Supreme Court when it determined that it was
impossible to interpret the term "equality" to mean that all creditors (regardless of their
security interests or status as operational or financial creditors) should get an equal recovery
under a resolution plan.

The Supreme Court also decided that differentiating treatment based on the value of the class
of secured financial creditors' security would be allowed. If the security interests of the
creditors were disregarded during the CIRP, the Supreme Court observed that many creditors
would be persuaded to choose liquidation over settlement. In this case, the IBC's primary
objective—to ensure the resolution of the distressed asset—would be unsuccessful.

A bankruptcy regulation that weakens, delays, or deprioritizes a security following

insolvency would also go against the purpose for which the security was created.

The Supreme Court emphasised that financial creditors and operational creditors cannot
possibly be ranked equally because of their commercial relationships with the corporate
debtor and that the IBC itself views operational creditors as a separate class of creditors. The
IBC provides a number of safeguards, such as priority in repayment, to guarantee the fair and
equitable management of the interests of such operational creditors. The Supreme Court came
to the conclusion that as long as the IBC's provisions were satisfied, the CoC could adopt and
even negotiate for a resolution plan that provided for unequal payment to financial and
operational creditors.

The Committee of Creditors has the only authority to decide how to distribute the debt among
the various classes of creditors, but the Supreme Court ruled that such financial creditors
must also protect the interests of the operational creditors. A conflict of interest is,
nevertheless, inescapable because lenders are primarily motivated to maximise their own
recovery. The Supreme Court’s checks on the committee of creditors indicated above might
not be sufficient to stop this conflict of interest. Operational creditors may or may not be
given voting rights in the committee of creditors, according to the Insolvency Law
Committee’s Report, which may have acknowledged this issue.

ENSURING A FRESH START FOR THE RESOLUTION APPLICANT

The Supreme Court upheld the provision in AMIPL's resolution plan stipulating that there
would be no right of subrogation with respect to any sums paid by the former promoter group
under the guarantees provided for Essar Steel, basing its decision on the notion that a
prospective resolution applicant would need to know the total debt of the corporate debtor
before acquiring it and should be allowed to start the business of the corporate debtor on a
"fresh slate." Even if the claims of the guarantors due to right of subrogation were rejected,
the Supreme Court did not offer a judgement on the merits of the ongoing legal proceedings
brought about by the use of the guarantees provided by the former promoters and promoter
group of Essar Steel.

When deciding how to rule on the question of whether the right to subrogation has expired,
the Supreme Court cited the decision in State Bank of India v. Ramakrishnan. The Supreme
Court determined in that case that personal guarantors would not be subject to the
moratorium under Section 14 of the IBC by citing, among other things, Section 31 of the
IBC. Because the allowed resolution plan may also require payments from the corporate
debtor's guarantors, the Supreme Court claims that Section 31 of the IBC binds them as well.

Similar to the Supreme Court's decision, which was founded on the notion of providing the
successful resolution applicant with a "clean slate," all "undecided" claims of the corporate
debtor would be dropped if a resolution plan was approved. No creditor will therefore be able
to file any claims against the corporate debtor when the CIRP is over.

Now that Section 32A has been added to the IBC, the concept of extinguishment of
culpability for earlier criminal offences has been fully legislated. This clause gives, under
certain circumstances, immunity from accountability to the corporate debtor and its assets for
offences committed by the corporate debtor's previous management prior to the
commencement of the bankruptcy case. While recognising the need for the new management
"to make a clean break with the past and start on a clean slate," the Supreme Court recently
rejected the challenge to the constitutional validity of Section 32A of the IBC in Manish
Kumar v. Union of India.

EXPEDIENCY IN THE INSOLVENCY RESOLUTION PROCESS

The Sick Industrial Companies (Special Provisions) Act of 1985, the Recovery of Debts Act
of 1993, and the Securitization and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act of 2002 all had lengthy legal processes that made it difficult to resolve
stressed assets, according to the Supreme Court. Therefore, the Supreme Court did not think
it was acceptable to invalidate Section 4 of the IBC Amendment Act, which established a
strict deadline for the completion of the CIRP (including any related legal processes). In
accordance with the IBC's objectives, this was done to guarantee that the stressed company's
assets would be fully realised at their value.

Instead, before the deadline, the Supreme Court read down the provision by eliminating the
word "mandatorily" in order to make sure it was constitutional. Therefore, the 330-day
window allotted for the CIRP should frequently be honoured. Additionally, the adjudicating
body may grant exemptions in exceptional cases where failing to meet such deadlines may
not be related to any negligence on the part of the pertinent plaintiffs.
THE RESOLUTION PROFESSIONAL DOES NOT HAVE AN ADJUDICATORY FUNCTION
In order to demonstrate how resolution professionals act as the primary procedural support
system for the CIRP, the Supreme Court went into considerable depth about their
responsibilities. According to the Supreme Court's unambiguous decision, the resolution
professional is only required to gather, compile, and admit claims without acting in an
adjudicative capacity. The Committee of Creditors must finally discuss and decide on these
claims.

While restricting the resolution professional to a non-adjudicatory function may be feasible in

theory, doing so in practise might be difficult. The acceptance or denial of creditors' claims
may not always be straightforward; in many cases, it involves legal concerns that call for a
first evaluation of the claim's legitimacy. It is hardly surprising that other creditors, in
particular operational creditors, have disputed how their claims were treated in this particular
case before the NCLT, NCLAT, and Supreme Court. This subject has become much more
important in light of the 330-day operational window for the judiciary.

The earlier decision by the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India 7,
which acknowledged that while the resolution professional has a purely administrative role,
the decision made by a liquidator under Section 41 of the IBC is of a "quasi-judicial" nature,
serves to highlight this anomaly. Notably, the prerequisites for hiring a liquidator or a
resolution specialist are same.

CRITICAL ANALYSIS
The Supreme Court has placed its trust in the Committee of Creditors and its business
intelligence to evaluate if a resolution plan is possible and practical and how distributions
would be made under it. The SC affirmed that the distinction between several classes of
creditors, such as operational and financial creditors, is mentioned in both the provisions of
the IBC and the general law governing classes of creditors.

The SC has endeavoured to guarantee that creditors belonging to the same category must be
treated equally, despite the fact that the IBC specifies distinct groupings of creditors to be
treated differently. The goal of this judgement is to strengthen the relationship between
operational creditors' claims and financial creditors' claims, which SC has always emphasised
are of paramount importance. The judgement demands payment of the unpaid balances of
operational creditors so that a corporate debtor may continue to conduct its company as a
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going concern. The necessity to balance adhering to the IBC timelines with the danger of
rushing the process and liquidating a bankrupt company was also of utmost importance.

By employing strategies like declassification as a promoter without paying off its unpaid
NPAs, the Supreme Court has made it clear that a person cannot be taken into consideration
as an eligible resolution applicant. The court's decision is significant and will set a sound
precedent by stating that extreme caution must be exercised to make sure that the people in
charge of the corporate debtor for which the resolution plan is created do not reappear in
some other capacity to take back control of the business without first paying off their debts.

CONCLUSION
The Supreme Court correctly reiterated the priority of financial creditors and established the
specific conditions under which courts may interfere in decisions regarding the assets,
liabilities, and operations of the corporate debtor. The Supreme Court correctly applied the
"equality among equals" approach by distinguishing between financial and operational
creditors as well as between secured and unsecured creditors. The Indian banking sector
would have suffered significantly, with more stressed assets being referred for liquidation
rather than resolution through the CIRP, had the NCLAT Order been sustained.

Additionally, it offers much-needed relief to resolution applicants who might otherwise have
been reluctant to engage in insolvent businesses under the IBC due to the possibility of
unpredictable and drawn-out legal proceedings continuing even after acquisition. Another
significant win for resolution seekers is the Supreme Court's decision to dismiss all past
claims (including unresolved claims). Furthermore, the Supreme Court has made an effort to
address the issues that beset the previous legislation governing the resolution of stressed
assets by emphasising the significance of rapid resolution (typically within 330 days). The SC
Judgment, is congruent with the basic economic and financial principles of the banking sector
and offers an efficient way of settlement through the CIRP under the IBC. The Supreme
Court, however, declined the opportunity to provide a conclusive ruling on whether it is
appropriate to rely on guarantees against a corporate bankrupt's previous promoters after the
corporate debtor is bought by a successful resolution applicant. That will require a different
Supreme Court decision.