Landmark supreme court judgment in Essar Steel case

The Supreme Court of India, on 4 October 2018, in ArcelorMittal India Private Limited v Satish Kumar Gupta & Ors, delivered a judgment on the interpretation of section 29A, which was introduced into the Insolvency and Bankruptcy Code, 2016, on 23 November 2017, and subsequently amended by the legislature with effect from 6 June 2018. This is the first judgment on the import and ambit of section 29A, which has been a subject of intense scrutiny and of litigation.

Section 29A prescribes a series of disqualifications for resolution applicants, persons acting jointly or in concert with such persons, and their connected persons. The term “connected person” is a defined term and covers a wide range of persons, from those who are promoters, or who manage or control the resolution applicant, or the business of the corporate debtor, during the implementation of the resolution plan, to holding companies, subsidiaries, related parties and associate companies of such persons.

Inter alia, section 29A disqualifies resolution applicants, persons acting jointly or in concert with such persons, and their connected persons if such persons have an account, or an account of a corporate debtor under their control, or of which such persons are promoters, classified as a non-performing asset under the relevant guidelines of the Reserve Bank of India, or of a financial sector regulator under any other law, and a period of at least one year has lapsed from the date of such classification.

The key findings of the Supreme Court are summarized below:

Meaning of ‘management’ and ‘control’. The term “management” appearing in section 29A has been held to refer to de jure management, which would ordinarily vest in the board of directors and would include managers, managing directors and officers as defined in the Companies Act, 2013. “Control” has been held to be de jure or de facto proactive or positive control, and not merely negative control. For example, the power to appoint directors on the board of a company would amount to control as it is a positive power, however the power to veto certain actions taken by the board or shareholders would not.

Meaning of ‘jointly’ and ‘in concert’. Whether a person is acting jointly or in concert with a resolution applicant is to be seen from the facts of each case, and any understanding, even if it is informal, and even if it is to indirectly co-operate to exercise control over a target company, will be included.

Stage of ineligibility. The eligibility of a resolution applicant under section 29A is to be tested at the time of submission of the resolution plan by the resolution applicant.

Consideration of reasonably proximate facts. Despite the applicability of the section 29A eligibility test at the time of submission of the resolution plan by the resolution applicant, “antecedent facts reasonably proximate to this point of time” are also to be considered, and if it can be proved that at a reasonably proximate point of time prior to the submission of the resolution plan (which is when the test in section 29A kicks in), the affairs of a resolution applicant, or persons acting jointly or in concert with the resolution applicant, have been arranged in such a way as to avoid the disqualification of section 29A, such resolution applicant will still be covered by section 29A.

Distinct roles of the resolution professional and the committee of creditors. Under the provisions of the code, the resolution professional is only to ensure or confirm that a resolution plan is complete in all respects (including compliance with section 29A) and conduct a due diligence for such purpose. It is the committee of creditors that may disapprove a resolution plan on the grounds that it is in violation of section 29A of the code. Its decision is not final and is open to challenge before the National Company Law Tribunal, followed by the National Company Appellate Tribunal (NCLAT).

Mandatory nature of prescribed timelines and exclusion of period of litigation. The code prescribes a time of 180 days (extendable once by 90 days) for completion of the insolvency resolution process of a corporate debtor. In answering the question of whether challenges can be made at various stages of the corporate insolvency resolution process, the supreme court reiterated its position that such a timeline is mandatory.

It has also re-affirmed the position taken by the NCLAT, the appellate authority constituted under the code, that the time taken in litigation should be excluded from such period as actus curiae neminem gravabit. In addition, the supreme court has also directed all concerned authorities to follow the comprehensive timeline for a corporate insolvency resolution process laid down under Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, as closely as possible.

Shardul S Shroff is executive chairman, and Roma Das is a senior associate at Shardul Amarchand Mangaldas.