The Gathering Storm
One of the unique characteristics of the Essar Steel case was that Section 29A of the Insolvency and Bankruptcy Code (which as we have seen, makes persons who control a company which has been classified as an NPA ineligible to submit bids) came into force a month or so after ArcelorMittal and Numetal (incorporated as a front for the Ruias) had submitted their Expressions of Interest. The gathering storm of Section 29A appears to have only been sighted by Arcelor and the Ruias a few days after their EOIs were on record, and a few days before the Section was to come into force. Both parties had therefore already shown their hand and it was clear who was the driving force behind each of them.
The Ruias with their giant NPA of Essar Steel, and ArcelorMittal with Uttam Galva and KSS Petron, had no place to hide.
In a desperate, and decidedly unedifying scramble, both parties tried to get out of being disqualified by Section 29A – Arcelor transferred its shareholding in KSS Petron and Uttam Galva at a huge discount. Numetal made repeated shifts in its ownership structure to hide the presence of Rewant Ruia, till he was invisible (even though the Rs. 500 crores deposited towards earnest money on behalf of Numetal by one of his companies remained, a fact that the Supreme Court noted with emphasis).
Regardless of how they might have achieved it, on the date that parties submitted their resolution plan, 29th March 2018, ArcelorMittal no longer owned KSS Petron and Uttam Galva, directly or indirectly, and Numetal could not be shown to have been owned by any member of the Ruia family. Based solely on their ownership structures, they were now eligible to submit bids, and were not affected by Section 29A.
An Inscrutable Interpretation
As per the Insolvency and Bankruptcy Code, eligibility is to be checked only at the time that the plan is submitted. The Supreme Court held as much, saying that this was “clear”. It would therefore follow that ArcelorMittal and Numetal were not hit by Section 29A(c). However, in a remarkable twist that can only be explained by the fact that the judges were put off by the Machiavellianism of the parties before them in that case, the Court held that both parties were ineligible.
Why should this be?
The Supreme Court’s answer to this question is both surprising and portentous for future litigation. According to the Court, “antecedent facts” which were “reasonably proximate” to the date of submission of the resolution plan could be seen to determine eligibility. The purpose of such an enquiry into the past of a bidder, according to the Supreme Court, was so that the bidder did not try to get out of the consequences of the proviso to Section 29A(c), which states that even a person with an NPA would be eligible to submit a bid if such person makes payment of all overdue amounts with interest.
This interpretation is regrettably contrary to the language of Section 29A(c), which makes it clear that the relevant time for assessing the eligibility of a builder is the time of submission of the bid. Imagine the frustrating complexity this could give rise to before the Tribunals, who will now have to inspect the past of every bidder before them, even if the bidder was perfectly eligible as on the date of submission of its bid. The dead hand of the past, it seems, is to project into the future.
The Supreme Court’s interpretation is also unsound on a doctrinal level: why insist that the bidder should throw good money after bad by clearing other NPAs, thereby reducing the amount that the bidder would be willing to spend on the target company? This is both bad law and bad economics.
Further, this is money that bidders are expected to shell out even before knowing whether they are going to succeed or not. The pool of eligible bidders will naturally shrink dramatically, resulting in under-recoveries by creditors.
It is unfair to only blame the Supreme Court, however, as the legislature is responsible for bringing in Section 29A in the first place.
The Ghost of Section 29A
My big hope was that this judgment would make Section 29A’s place in IBC law something like that of the ghost of Hamlet’s father: significant, but unimportant to the main story. With this judgment, the ghost is risen, a fact that will only become more clear as more companies have to face up to the suffocating (and contradictory) new interpretation that the Supreme Court has given to Section 29A(c).
In the concluding part of this three-part analysis of the Supreme Court’s judgment in Essar Steel, I will look into its ‘purposive interpretation’ of the IBC, and attempt to analyse how effective its attempt to expedite the insolvency resolution process is likely to be.
