Last Thursday, the Supreme Court passed what is, viewed from any angle, the most significant judgment in the short history of the Insolvency and Bankruptcy Code. I am referring to the decision in Arcelormittal India v. Satish Kumar Gupta. Of the many big companies that find themselves in the clutches of the IBC, Essar Steel is the biggest, with a loan default of almost Rs. 50,000 crores and suitors like ArcelorMittal, Numetal (a front for Essar Steel’s old owners, the Ruias) and Vedanta Steel.
From the very beginning of the bidding war, Arcelor and the Ruias have accused each other of being disqualified from even submitting a bid due to a badly drafted and insufficiently thought out section of the Code called Section 29A, which renders bidders ineligible to submit a bid on various grounds. Obviously, they have litigated and litigated, splurging on expensive lawyers and clogging the Tribunals with their various applications. The issues involved in this one case are a microcosm of the ills that have beset the IBC – 29A nit-picking and the scourge of constant appeals to the Tribunals, both of which have delayed not just this, but several other insolvencies, and made the strict 270 dat timeline prescribed by the Code look like well-intentioned naïveté.
Justice Nariman to the Fore
The few IBC cases that have wended their way up to the Supreme Court have met with the formidable figure of the learned Justice Rohinton Fali Nariman, whose rulings on the Code have thus far been impeccable. Justice Nariman had to decide this case on the back of his judgements in two other landmark cases: Section 377, in which his judgement on that Victorian fossil features a reference to the unjust trial of Oscar Wilde; and the Sabarimala case, in which his opinion constitutes a mini-thesis on historical prejudice against menstruating women, basing itself on a reading of the Scriptures of various religions. His next task was Essar Steel.
The scene was therefore perfectly set for a judgment to end all judgments. Well, not quite. This is a deeply disappointing ruling. Like Oscar Wilde’s The Importance of Being Earnest, it is set in three parts. Here is my analysis of all three.
What Exactly is “Control”? We May Never Know
This particular case centred around sub-section (c) of Section 29A, which invalidates the bids of any bidder that has an account which is an NPA, or (relevantly in this case) an account under its management or control which has been classified as an NPA. Arcelor had to worry about its connections to two NPAs, Uttam Galva and KSS Petron, which amounted to Rs. 7,000 crores in dues owed to banks. Numetal, through the Ruias, was allegedly linked to Essar Steel itself, the largest NPA of them all (till IL&FS). Both parties denied that these accounts were under their management or control. The Supreme Court’s main task was therefore to interpret the meaning of the term “under the management or control”.
As per Justice Nariman, ‘management’ means the Board of Directors and other officers acting in a managerial capacity. ‘Control’, on the other hand, referred to positive control and not negative control (positive control being the power to get a company to act and negative control being the power to block resolutions and such). It means, as per a judgment that Justice Nariman relied on, to be in the driving seat of the company and control “the steering, accelerator, the gears and the brakes”. To have an NPA under one’s management or control, therefore meant to have proactive and not reactive control of that NPA. This is no doubt correct, and a good way to protect persons who have only a tangential connection to an NPA from being disqualified under the IBC.
The analysis goes off the rails when the Supreme Court applies this meaning of the word ‘control’ to Arcelor’s relationship with the NPA KSS Petron. From the facts recorded in the judgment itself, Arcelor indirectly controlled about a third of the shares of KSS Petron, had the right to appoint a third of its directors and had “affirmative voting rights” on certain matters with respect to its parent company. (Affirmative voting rights are granted to minority shareholders, and give them veto powers over certain situations in which their interests might be opposed to the majority, such as a takeover.)
You will have noticed that Arcelor’s ‘control’ of KSS Petron at the most extended to blocking certain acts, and it could not be considered to be in the ‘driving seat’ of that company. Yet, the Supreme Court held that KSS Petron was under the control of Arcelor. My prediction is that lawyers will have a field day with this one for a long time to come. (On a side note, the Supreme Court seems to have disregarded a fact it had before it, namely that DJ Khambatta, a leading Bombay counsel, had advised the Resolution Professional of Essar Steel against disqualifying Arcelor for its connection with KSS Petron on the ground that it did not exercise positive control over it.)
Oh, there’s more
For anyone interested in the IBC, this judgment is *huge*. It needs a little more breaking down. In the next two pieces, we will take a closer look at the implications of the Supreme Court’s finding that antecedent events can be looked at to see if a person is ineligible under Section 29A, its interpretation of the proviso to Section 29A(c), which allows even a person who has an NPA to submit a bid if he can pay off the NPA, and its ‘purposive interpretation’ of the IBC, to prevent constant applications and appeals from being filed. See you there.
