LEGAL UPDATE | IBC | NCLAT DECISION IN ESSAR STEEL INSOLVENCY PROCEEDINGS

The National Company Law Appellate Tribunal (NCLAT) has recently on 4 July 2019 laid down important principles on the corporate insolvency resolution process in Standard Chartered Bank v Satish Kumar Gupta which related to the insolvency proceedings of Essar Steel India Limited (Corporate Debtor) under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Committee of Creditors of the Corporate Debtor approved the resolution plan that was submitted by Arcelor Mittal India Private Limited and this resolution plan was also approved by the National Company Law Tribunal, Ahmedabad (NCLT) with certain modifications. This was challenged by some operational creditors, employees and the Government.

In its decision, NCLAT laid down the following principles:

• Once the debt secured by a guarantee is paid pursuant to payments to the lenders under a resolution plan, the guarantee ceases to have effect.
  
  
• In this case, the successful resolution applicant had left it to the Committee of Creditors to decide the distribution of payments pursuant to the resolution plan to the various creditors. NCLAT held that this was not in consonance with Section 30 of the IBC read with Regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The Committee of Creditors cannot decide the distribution of payments to the various creditors pursuant to a resolution plan and such distribution must be decided by the resolution applicant alone. The only role of the Committee of Creditors is to decide on the viability and feasibility of the resolution plan and whether the resolution applicant is ineligible under Section 29A of the IBC. Further, the Committee of Creditors cannot delegate these powers to a sub-committee as was done in this case.
  
  
• There was a huge disparity in the distribution of amounts under the resolution plan to the various stakeholders. The financial creditors had been given up to approximately 91% of the amounts outstanding from the Corporate Debtor and the operational creditors had in most cases not been allotted any amount. This was contrary to the IBC and the principles laid down by the Supreme Court. All stakeholders under the IBC including the financial creditors and the operational creditors must be treated equitably in the distribution of amounts pursuant to a resolution plan. The manner of distribution of amounts to the financial creditors and operational creditors must be done based on the following formula:
  
  Amount offered in the resolution plan   x   100   =   %   due to each creditor*
  Total amount due to creditors*
  
  *includes both financial creditors and operational creditors
  
  Based on this formula it was held that the financial creditors and operational creditors were each entitled to 60.7% of the outstanding dues.
  
  

MHCO Comment: The decision of the NCLAT is interesting and seems to be in line with the IBC. The Committee of Creditors for the Corporate Debtor had clearly determined the distribution of amounts under the resolution plan in an arbitrary and self-serving manner. The NCLAT was right to step in and hold that all stakeholders must be treated equitably. The NCLAT went further to determine the distribution of amounts under the resolution plan of the Corporate Debtor, which is certainly an activist approach. The decision of the NCLAT has already been challenged before the Supreme Court by the financial creditors of the Corporate Debtor who pursuant to the NCLAT decision would be forced to take a much bigger haircut on the amounts due to them than what had originally been laid down by the Committee of Creditors. The main argument of the financial creditors is that Section 30 of the IBC does not preclude the Committee of Creditors from determining the distribution of amounts under a resolution plan. This argument does not seem to hold much water since Section 30 clearly provides that the resolution plan must provide for payments to the operational creditors which should not be less than the liquidation value. If the Supreme Court upholds NCLAT`s decision there would be a significant impact on the manner in which resolution plans are prepared by resolution applicants and evaluated by the Committee of Creditors. Resolution applicants would need to ensure that the interests of operational creditors are also adequately protected in the resolution plan.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.

UPDATE | ARBITRABILITY OF CHIT FUND DISPUTES

The Bombay High Court recently held in the case of Dinesh Jaya Poojary v Malvika Chit Funds Private Limited that disputes relating to chit business can only be adjudicated upon by the Registrar within the meaning of Section 2(o) of the Chit Funds Act, 1982 (Chit Funds Act). This legal provision cannot be varied by an independent arbitration agreement.

Facts of the case:

• One Mr Harish Poojary (Subscriber) was a member of a chit group of the Respondent for the chit amount of Rs 3 crores with a monthly subscription of Rs. 15 lacs commencing on 28 June 2010 (Chit Fund Scheme).
  
  
• The Petitioner, on 13 August 2012 entered into a separate agreement of guarantee, to the extent of Rs 65 lacs with the Respondent (Guarantee) to guarantee the amounts dues from the subscriber. The Guarantee contained an arbitration clause, which provided for adjudication of disputes by a sole arbitrator to be appointed by the Respondent.
  
  
• The Subscriber defaulted in the payment of Rs 93,34,100 under the Chit Fund Scheme. On the said default, the Respondent, under the Guarantee, called upon the Petitioner to pay 60 lacs which was within the extent of the Guarantee. Denying the averments in the notice, the Petitioner also alleged forgery, fabrication and cheating on the part of the Respondent.
  
  
• The Respondent however, appointed a sole arbitrator and commenced the arbitration proceedings by filing the statement of claim. The jurisdiction of the arbitral tribunal was contested by the Petitioner under Section 16 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). However, this application was rejected by the arbitrator. The arbitrator passed an award directing the Petitioner to pay the entire amount of Rs. 93,34,100 with interest and cost (Award).
  
  
• The Petitioner challenged the Award under Section 34 of the Arbitration Act.

Arguments of the Parties and Findings of the Court:

• The Respondent pleaded that the Guarantee was an independent agreement, because it was entered into subsequent to the crystallization of liability of the Subscriber. Therefore, the dispute was not one relating to the chit business.
  
  
• The Petitioner pleaded that the term Guarantor has not been defined under the Chit Funds Act. Therefore the definition from the Indian Contract Act, 1872 has to be imported. In view of the same, under Section 64(1)(b) of the Chit Funds Act, a dispute with a surety of the Subscriber has to be adjudicated upon by the Registrar under the Chit Funds Act only.
  
  
• The Hon’ble Bombay High Court held that:
  
  
  • The present dispute was one between a foreman and the surety of a subscriber. It could thus only be entertained by the Registrar under the Chit Funds Act. The Registrar as provided under Section 64(1) of the Chit Funds Act is an exclusive remedy.
  • In view of the non-obstante clause in Section 64 of the Chit Funds Act, the Chit Funds Act is a special Act and would therefore prevail over the Arbitration Act. Therefore, no agreement for arbitration entered contrary to and inconsistent with Section 64 of the Chit Funds Act can be acted upon. In the circumstances, the petition was allowed.

MHCO Comment: The aforesaid judgment clarifies the applicability of the Arbitration Act to any dispute on the management of a chit business. It lays down that any agreement which creates an overlapping remedy of arbitration under the Arbitration Act cannot be enforced in relation to the chit business which is governed by the Chit Funds Act. Arbitration before the Registrar as provided under Section 64(1) of the Chit Funds Act is the only available remedy.


The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.