The NCLT, Ahmedabad just reserved its judgment in the fresh round of litigation in the seemingly interminable Essar Steel insolvency. Among other issues, it will decide on an application by Essar’s former directors to set aside the approval of Essar’s Committee of Creditors (CoC) to ArcelorMittal’s resolution plan. The directors complain that they were not provided copies of Arcelor’s resolution plan before it was discussed by the CoC. This plea would not have a ghost of a chance of success, had it not been for the Supreme Court’s drastic Order in the Ruchi Soya case, passed on January 31 this year. The Supreme Court set aside the approval of Adani Wilmar’s resolution plan by Ruchi Soya’s CoC on the sole ground that Ruchi Soya’s earlier directors had not been provided a copy of the resolution plan before it was discussed by the CoC.

Nowhere does it say, in either the IBC or the Regulations, that the former directors are entitled to get copies of resolution plans before attending meetings of the CoC. Section 24(4) merely says that the former directors “may attend” the meetings of the CoC but shall not have the right to vote. Even this right to attend is diluted by a proviso that says that the absence of the directors shall not invalidate the proceedings of any meeting. How, then, did the Supreme Court upturn Ruchi Soya’s entire resolution process to uphold the right of directors to get copies of the plans? Let us examine its reasoning.

Disregarding the “Notes on Clauses” 

“Notes on Clauses” contain the draftsman’s explanation for the clauses in a bill before it is passed into binding legislation. In its earlier decision in Mobilox Innovations (also authored by Justice Nariman, who wrote this judgment) while examining the IBC, the Court had called the Notes on Clauses “extremely important”. In the present case, it was pointed out that the Notes on Clauses for Section 24 explained the presence of the former directors at CoC meetings as being for the purpose of giving an opportunity to the “committee of creditors and the resolution professional to seek information that they may require to assess the financial position of the corporate debtor and prepare a resolution plan.” This suggests that the purpose of inviting the former directors was as information providers for the CoC, and not for the directors’ own benefit. Based on the Notes, therefore, it is hard to accept that the directors could be entitled to copies of the resolution plans if the CoC did not want to share the plans with them.

However, unlike in Mobilox, this time the Court disregarded the Notes on Clauses, on two grounds. One was that the Notes said that the opportunity to seek information from directors at the CoC meetings was given not just to the CoC but also to the resolution professional – who obviously has no role to play at meetings of the CoC. The inclusion of the term “resolution professional” in the Notes was, the Court suggested, an incongruity. With respect, I think this is nitpicking, and ought not to have impacted the Court’s analysis. The words “resolution professional” could easily have been ignored.

The other reason was that, as per the Court, the CoC had to get information that would enable it to assess the financial position of the company before it met, and not during the meeting. It is hard to read the Code as laying down such a bar on receiving information. While the members of the CoC are equipped with an information memorandum on the company before their meetings, they would be perfectly entitled to discuss the financial position of the company with other persons attending CoC meetings, and further assess the financial position of the company based on these discussions.

An incomplete reading of the BLRC Report

The Court “in passing” cited the Bankruptcy Law Reforms Committee Report of November 2015 (which led to the legislation of the IBC), referring in particular to a sentence from that seminal text, which says “The law must enable access to this information to third parties who can participate in the resolution process, through the regulated professional.” If only the Court had considered the heading of the section where this sentence appears – “The Code will enable symmetry of information between creditors and debtors.” The reason to enable access by third party participants to information is so that they can help reduce the informational asymmetry that the CoC is bound to face. This, I am sure you have noticed, is what the Notes on Clauses also try to say.

Misreading the Regulations

In a complete shocker, the Court read Regulation 39(5) of the Insolvency Resolution Process Regulations to mean that the participants (obviously including the directors) in a meeting of the CoC were entitled to a copy of the resolution plan after it has been decided upon by the NCLT. Based on this reading (or should I say misreading), the Supreme Court observed, “Obviously, such copy can only be sent to participants because they are vitally interested in the outcome of such resolution plan…”

Actually – and this makes all the difference – the Regulation says that participants are to be sent a copy of the order of the NCLT approving or rejecting a resolution plan, not the resolution plan itself. The Code therefore deems them interested not in the resolution plan, but in the order passed on that plan.

Conflating Guarantors and Directors

A lot of importance was also attached to the fact that the rights of guarantors were likely to be affected by the outcome of the CoC’s discussions, and directors “are often guarantors”. The question, however, is that can the Code be deemed to have given directors the right to receive copies of the resolution plans in advance only because some of them may be guarantors? At the very least, this is an odd inference for the Court to have drawn.

Where the Court got it right

This whole case could have been decided on the basis of Regulation 21(3)(iii), which clearly entitles all participants at CoC meetings to “copies of all documents relevant to the matters to be discussed and the issues to be voted upon at the meeting”. The Court was right in relying on this regulation.

The sweeping nature of the judgment

The Court’s conclusion, that directors, as participants should be provided copies of resolution plans before they participate in CoC meetings, is a possible one, by virtue of Regulation 21(3)(iii). However, given the fact that the presence of directors at the meeting of the CoC is for the benefit of the creditors and not the directors, I do not think that a failure to provide them a copy of the resolution plan in advance is fatal to the plan approval process. It is at most an irregularity, and the Court would have done better to lay down the law for future CoC meetings, rather than upending not just Ruchi Soya’s resolution process, but also that of Essar Steel, and heaven knows how many others.