Several major dilemmas are affecting the sacrosanct 270-day limit to resolve corporate insolvency, says Shardul Shroff
The newspapers, electronic media, and social media have all been awash with the on-going dilemmas in companies like Essar Steel, Binani Cement, Jaypee Infratech, Electrosteel Ltd and Bhushan Power and Steel Ltd, where the Insolvency and Bankruptcy Code, 2016 (IBC) is being severely tested.
With effect from 23 November 2017, Section 29A of the IBC introduced the concept of ineligible Resolution Applicants (RAs) and set out ten different conditions of ineligibility. It also extended the concept of ineligibility to other persons acting jointly or in concert with the RA, and defined a connected person in that context.
Section 29A(c) was the most critical of the ineligibility conditions as it disqualified a promoter who held the account of a corporate debtor as a non-performing asset for a period of at least one year from the date of classification till the date of commencement of the corporate insolvency resolution process.
Participating RAs in the case of Electrosteel were put to the test of ineligibility under Section 29A by Renaissance Steel, and the case is pending before the National Company Law Appellate Tribunal (NCLAT). Numetal and Arcelor Mittal are contesting each other’s eligibility as RA, for Essar Steel.
UltraTech Ltd, who was a losing bidder in the Binani Cement case, came forth with a revised proposal acting jointly or in concert with a disqualified promoter, Binani Industries Ltd, which is pending before the National Company Law Tribunal (NCLT), Kolkata. This case will test the Central Vigilance Commission guidelines applicable to banks and to a losing bidder’s fresh proposal after the winning bidder is declared.
The third instance of an interesting dilemma pertains to the submission of a resolution plan after the notified filing date but before the date of approval by the Committee of Creditors. Liberty House, in the case of Bhushan Power and Steel Ltd, has pipped Tata Steel Ltd to the post. The Principal Bench of the NCLT has delivered a recent judgement in this connection.
The saga of home buyers who are petitioners before the Supreme Court of India has created the fourth dilemma, where the promoter of Jaypee Infratech has been directed to pay into the Supreme Court monies to protect the interests of home buyers in a situation where Section 29A(c) of the IBC entitles the promoter to participate with a resolution plan on payment of the overdue amounts, costs, charges and interest of the Non-Performing Asset (NPA).
Jaypee Infratech promoters are excluded from the IBC resolution process contrary to the statutory provisions of Section 29A(c) of the IBC due to the equitable jurisdiction of the Supreme Court. Can the statutory provision, expressly enabling a promoter to propose a resolution plan merely by payment of overdue amounts, be overridden by the equitable jurisdiction of the Supreme Court and its constitutional powers under Article 142 of the Constitution of India?
A recent report of the Injeti Srinivas Committee, constituted by the Ministry of Corporate Affairs, has recommended that home buyers should be classified as financial creditors, albeit unsecured financial creditors, but has not suggested any change to the basic theme of Section 29A(c) of the IBC.
Fifthly, Lanco Infratech is a non-performing asset of the value of over `50,000 crores. The highest offer made by Triveni Earthmovers is a sum of `1400 crores in cash and liability for `38,000 crores of debt at the subsidiary level, as per an ET Bureau report. The lenders of Lanco Infratech have rejected the resolution plan as only 16% voted in its support. The deadline for resolution expired on 4 May, 2018 and this could result in liquidation orders resulting in severe unemployment and loss of value of the company, at a time when employment is of paramount importance to the nation, and unemployment is an election issue for 2019.
Lastly, the dilemma and conflict of Section 424 of the Companies Act, 2013 as amended to extend to the IBC, the Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority) Rules, 2016 (IBC Rules) and Rule 10 thereof and its reconciliation with Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) and Rule 11 of the National Company Law Appellate Rules, 2016 (NCLAT Rules) is affecting the on-going NCLT proceedings for approval of a resolution plan, providing for exemptions.
Section 239 (2)(c) to (f) of the IBC empowers the IBBI to make rules in relation to some of the processes and forms under Section 7, 8, 9 and 10 of the IBC; as the forms under the NCLT Rules were not IBC-specific. Rule 10 makes certain rules of the NCLT Tribunal Rules applicable.
This IBC Rules are consistent with Section 239(2) of the IBC referred above; but, despite the provisions of Section 424 of the Companies Act, 2013, the rules and procedure of the NCLT and the NCLAT have been brought into conflict as a matter of interpretation to proceedings under Section 30/31 and Section 60 of the IBC. Specific rules under the IBBI-made Rules oust the general rules applicable to NCLT and the NCLAT but, in the absence of inconsistency, the NCLT Rules govern those matters which are not specifically excluded by the IBBI.
In a resolution plan, certain inherent powers of the NCLT are invoked to meet the ends of justice. The judgement of the NCLAT in Lokhandwala Kataria’s case rejected the view that the inherent power could not be utilized for permitting a withdrawal or compromise in view of the Rules, even though Rule 11 of the NCLT Rules and NCLAT Rules provides that the power of the Tribunal is not limited to make such orders as may be necessary for meeting the ends of justice.
The limitation of utilizing inherent powers was warranted as there was a direct exclusion under Rule 8 of the IBC Rules pertaining to withdrawal request only before the admission.
The applicability of specific IBBI rules for applications made under Sections 7, 9 and 10 of the IBC, which relate to specific forms, does not exclude the inherent powers under Rule 11 of either the NCLT Rules or the NCLAT Rules in view of the amended Section 424 of the 2013 Act, as it is not excluded.
These major dilemmas are affecting the sacrosanct 270-day limit to resolve corporate insolvency. The legislature needs to intervene urgently by ordinance.
Shardul S Shroff is Chairman, CII National Committee on Legal Services and Arbitration, and Executive Chairman, Shardul Amarchand Mangaldas & Co. The views expressed are personal.