Facts

A section 7 application filed by State Bank of India and Standard Chartered against Essar Steel India Ltd.(ESIL) for a default of Rs. 45,000 crores was admitted by NCLT and Mr. Satish Kumar Gupta was appointed as the IRP. In response to the invitation for expression of interest, ArcelorMittal(AM) India on 11^th October 2017 and an entity called Numetal Ltd. on 20^th October 2017 submitted their interest. The resolution plans were submitted on 12^th February 2018. On the apprehension that the RP might find it ineligible under Section 29A, Numetal filed an application before the NCLT to declare it eligible on 20^th March 2018. However, on 23^rd March the RP found both the resolution applicants to be ineligible. In his report he stated the reasons for declaring both the Ras ineligible. 

AM Netherlands holds 29.05% shareholding in Uttam Galva and has been classified as a promoter by the way of a co-promoter agreement dt. 4^th September 2004. AM Netherlands and AM India are connected persons as mentioned in the resolution plan. The account of Uttam Galva was classified as NPA for a period more than 1 year till 2^nd August 2017. AM Netherlands sold its shareholding to the other promoters on 7^th February 2018 and applied before NSE and BSE for declassification as a promoter as per SEBI regulations. As on the submission date of the resolution plan, AM Netherlands has not been declassified as a promoter of Uttam Galva and is hence ineligible under Section 29A(c). The plan was rejected and was not placed before the COC. 

Numetal as on the date of submission of expression of interest, was reliant on Essar Communications, one of its shareholders to comply with the eligibility requirements concerning tangible net worth in the EOI. On the date of submission of the resolution plan, it was reliant on Crinium Bay to comply with these regulations. Numetal was incorporated as a joint venture between Crinium Bay and Aurora Enterprises. Since Numetal relied on its shareholders for meeting the eligibility criteria at various stages, the RP decided to take into scrutiny the joint venture holders themselves to check the eligibility of the RA. Aurora Enterprises is comptletely held by Rewant Ruia and he comes within the scope of immediate relatives being the son of the promoter of ESIL, which was declared an NPA for over a year prior to the commencement of CIRP. Rewant Ruia was deemed to be acting in consort with his father Ravi Ruia and hence declared ineligible. 

Issues

1. Whether purposive interpretation of Section 29A is to be adopted on both the text and the context of the enacted provision?
2. Whether the text of the provision evinces persons acting in consort to the persons in management and control as stated under Section 29A?
3. Whether management, control and promoter are all to be met with for ineligibility under the section?
4. Whether the timeline provided under Section 12 read with 33 are mandatory and cannot be extended?
5. Whether the corporate veil is to be lifted for determining the eligibility under Section 29A of the Code?
6. Whether Section 29A(c) applies as on date of commencement of CIRP or as on the date of submission of the resolution plan?

Ratio

The court held that the provision should be interpreted to mean de facto position of the persons so as to include persons who are actually in control whether jointly or in concert. It is imperative to find the real individuals for the submission of a resolution plan. For the purpose of this provision if the persons are acting jointly then establishing an element of a joint venture is also not required. The court held that for persons to be acting in concert, an understanding (even if it is informal and indirect) to exercise over a target entity must be decided depending upon the facts of the case. 

The court stated that the ineligibility shall be applicable from the date of submission of the resolution plan as made clear by the statute itself in the opening words of the provision. 

Elucidating on the requirements of persons in management or control or promoters an NPA, the court held that any one of these elements needs to be proved for the RA to be ineligible. Both control and being a promoter of the NPA shall include de jure and de facto position while management refers to only de jure position as provided under the Companies Act. This ineligibility can be removed only if the persons falling under these categories make all the overdue payments before the submission of the resolution plan. The court emphasised on this aspect to avoid letting persons who are in charge of the corporate debtor to regain control without paying off its debts. But this interpretation does not extend to promoters of the companies with PUFE transactions. Even the complete payment of PUFE amounts cannot make them eligible again. 

The timeline given under Section 12(1) is mandatory and if no resolution plans are received or if they are rejected then the corporate debtor needs to be liquidated. It is of utmost importance for all the authorities to follow the model timeline. 

RP is required to examine the resolution plans and shall submit only the complete resolution plans before the COC. This provision does not empower the RP to decide if a resolution plan is in contravention with the law or not but he is required to form a prima facie opinion cornering its legal compliance. Though it is not a statutory requirement, it is advised that the RPs attach a due diligence report to each resolution plan stating its compliance of law or lack thereof. It was held by the Apex Court that RA does not have a vested right to have his plan be considered so a rejection by the RP cannot be challenged before the AA. Since no right is being affected a writ to this effect is also not maintainable. RA can approach the NCLT only if its plan has been considered by the COC after its voting. 

The rejection of a resolution plan by COC on the basis of ineligibility under Section 29A is not final and can be determined by the AA after hearing both the parties. If however the plan gets approved by both the COC and the AA, then the appellate tribunal may be approached for adjudication.

Both the RAs were held to be ineligible but the continuation of the CD as a going concern is in the best interests of all stakeholders so every effort was to be made in that respect. Since the law on Section 29A was laid down for the first time the court permitted the resolution applicants another opportunity to submit their resolution plans if they pay off their NPAs within two weeks. Then the COC may consider all the plans before it accept the best one with requisite majority or the CD will be liquidated. 

The post Applicability and Interpretation of Section 29A appeared first on LexForti .

Facts

Numerous writ petitions have been filed before the SC challenging the constitutionality of the amendment of 2018. This amendment made deem allottees of a real estate project to be financial creditors, enabling them to trigger CIRP against the real estate developers under Section 7 of the Code. The amendment additionally entitles them to be represented at the COC through ARs. 

Explanation given under Section 5(8)(f) clarified that the real estate allotees also come within the scope of financial debt as it falls under the category of forward sale or purchase agreement with the commercial effect of a borrowing. Respective changes have also been introduced under Section 21(6A)(b) to include allottees in the constitution of the COC and under Section 25A to lay out provisions concerning authorised representatives. 

Issues

1. Whether the funds raised under a real estate project from allottees has the commercial effect of a borrowing?
2. Whether the provisions of RERA and IBC may be read harmoniously after the amendment?
3. Whether the distinction made between operational creditors and real estate allottees is based on intelligible differentia?
4. Whether the amendment made the allotees of a real-estate project financial creditors, entitled to be represented in the COC by an AR?
5. Whether deeming fiction can be adopted to include allotees under the scope of Section 5(8)(f) of the Code?
6. Whether the explanation given under this provision enlarges the scope of it?

Ratio

The allottees entered into assured returns/committed returns agreements with the developers, whereby the developers agree to pay a certain amount to the allottees on a monthly basis from the date of execution of the agreement till handing over the possession of the property. The amount raised by the developers by the assured returns scheme was shown as “commitment charges” under the head “financial costs”. This indicates that the funds raised have the commercial effect of a borrowing. A financial debt means a debt along with interest, which disbursed against the consideration of time value of money. The promoter was asked to provide a declaration that he undertakes to complete the project within a certain time period and that 70% of the funds raised from allotees under this project from time to time shall be deposited into a separate account spent only to defray the cost of construction of that particular project. The courts have included home buyers as financial creditors in cases where the agreement includes an assured returns policy. In some cases they have been categorised as “creditors other than financial or operational creditors”. By not giving them the status of either financial creditors or operational creditors they are being deprived of:

The right to initiate CIRP 

1. The right to be a part of COC
2. The guarantee of receiving at least the liquidation value under a resolution plan. 

The money disbursed by the home buyers was in relation to a future asset and these funds amount to a significant portion of the funds that are used to finance the real estate projects. It was held that even if not all forward sale or purchase agreements are financial transactions, if they are structured as a tool or means for raising finance then it shall be classified as a financial debt. 

The non obstante clause under Section 88 of RERA came into effect on 1^st May 2016 and Section 238 of IBC came into effect on 1^st December 2016. It was contended on behalf of the real estate developers that, RERA is a special enactment and IBC is a general law, hence RERA is to be given precedence. It was held that, the fact that the amendment drew the definition of allottees from RERA implies that the drafting committee was aware of the existence of the enactment and taken into consideration of all of the applicable provisions. The provisions under RERA are in addition to and not in derogation of the provisions of IBC. The remedies laid out under RERA are intended to be additional remedies and not exclusive remedies. Moreover it is to be noted that the authorities to be set up under RERA are to come into effect from 1^st May 2017 succeeding the provisions of the code that came into effect on 1^st December 2016 itself. 

RERA and IBC function into compltetely different fields and the code deals with proceedings in rem which focuses on rehabilitation of the corporate debtor. On the other hand RERA seeks to protect the interests of the individual investors so that they are not left in a lurch by ensuring that they are compensated or reimbursed to the extent of their payment towards the allotted property. Hence both the enactments can co-exist and to the extent of any inconstancy, RERA is to give way to IBC. 

It was contended by the counsels for the real estate developers that the classification of allottees as financial creditors is discriminatory as it treats unequals equally and equals unequally without any intelligible differentia having any nexus with the objects of the Code. It was contended that the real estate developers were being discriminated against as they are not being treated equal to other entities that supply goods and services. If the allottees are treated as financial creditors, then all they have to do is to produce evidence indicating that a debt is due to him irrespective of any disputes, while an operational creditor would fall outside the purview of code in case of a dispute. This discrimination was to have infracted Article 14 of the Constitution. The Apex Court held that equal protection under law, does not necessarily invalidate any classification made by law. It was elucidated that the reasonable classification includes “all who are similarly situated and none who are not”. It was held that the legislature is at liberty to experiment with economic legislations in public interest and any practical considerations that hurt a few cannot be helped. It was concluded that the contentions by the real estate developers were not successful in establishing that the classification of real estate developers is not based upon intelligible differentia that distinguishes them from other operational creditors. 

Supplementary contentions that this categorisation also infringes article 19(1)(g) and 300A was also put forth by the real estate developers. The court held that the language of the provisions is unambiguous and clear, hence the contentions raised by the Petitioners do not stand. 

In the light of the deliberations under the preceding issues, the Apex court adjudged allottees under real estate projects to be financial creditors and hence have a right to have representation in a COC meeting. Homebuyers and debenture holders can be numerous so the committee was of the opinion that the only feasible mode of accommodating all these financial creditors in a COC meeting was through an authorised representative. Such an authorised representative can be appointed either by the way of the debt agreement or by the NCLT for each such class of creditors.

It was contended by the Petitioner that the definition under Section 5(8)(f) was to be an exhaustive provision and to be read noscitur a sociis (an unclear or ambiguous word must be read in its context). It was argued that this provision cannot be stretched to include allottees. The primary argument by the petitioner is concerning the existence of a debt. The court held that noscitur a sociis is a mere rule of construction and words with wide scope have been deliberately used in residuary power to subsume instances that do not fall under the scope of the sub-clauses to fit within the umbrella of Section 5(8)(f). For the existence of a debt, a liability or an obligation in respect of a claim must be due. It was held by the court that a claim is defined as a right to payment or a right to remedy even if it arises out of a breach of contract. The disbursal under this provision refers to the payment of instalments by the allottees against consideration of time value of money. The real estate developers have an obligation to use the funds raised in the construction of the project and it being at a discounted value from the perspective of the allottee as he is having to lesser by the way of instalments than if he were to pay the complete amount after the completion of the project. Further the phrase “commercial effect of a borrowing” has a wide bearing on any other transactions that that inflicts financial indebtedness. It is clear that the allottees fall within the scope of this provision owing to the nature of the financial arrangement between them and the developers at various stages of construction. 

The introduction of deeming fiction is necessitated where the Parliament requires the subject matter to be treated as real. It was held by the Supreme Court that the deeming fiction has been taken into account only to the extent necessary to provide clarification on the true legal position. After the purpose of the statutory fiction has been ascertained, it must be carried to its logical conclusion and assume all such other necessary facts for it to operate. Thus the explanation uses deeming fiction only to put it beyond doubt that the allottees also fall within the scope of Section 5(8)(f) of the Code. 

It was held by the court that the explanation inserted by the amendment does not enlarge the scope of the provision. It merely clarifies the doubts concerning the status of allottees under real estate projects. The allottees are being subsumed under the provisions as it originally stood. The court resorted to creative interpretation of the provision for the purpose of a beneficial legislation. 

The post SC on Status of Homebuyers under the Waterfall mechanisms appeared first on LexForti .

Facts

Appellant is a multi product manufacturing company in diverse sectors. It started going into losses in 2012 and failed to meet with the requirements of 19 of its financial creditors (banking entities). It then proposed a corporate debt restructuring and the financial creditors formed a consortium led by the Central Bank and a restructuring plan was approved in 2014. According to the aforementioned restructuring plan, the creditors were to infuse more capital into the entity and the debt would be repaid by a 2 year payment plan. Subsequently, an application was filed under Section 7 of IBC by ICICI Bank due to default on part of the Appellant in meeting with the requirements of the payment plan. 

On the first instance, the Appellant was of the contention that under Maharashtra Relief Undertakings (Special Provisions) Act, all the liabilities and remedies for enforcement were suspended for a period of one year by the way of notification issued on 22^nd July 2015 and for another one year as notified on 18^th July 2016. In the second hearing, the appellant contended that the default has occurred to due to non release of funds under the Master Restructuring agreement by the creditors. It was stated that the credit given by five of its lenders were repaid in accordance to the agreement as they have complied with its terms in full. 

NCLT held that IBC would prevail over the Maharashtra Act in view of the non-obstinate clause given under Section 238 of the Code. It was held that the Parliamentary statute would prevail over that of a State and the evidence placed before it was sufficient to ascertain the existence of a default. Hence the application was admitted and moratorium was imposed. 

An appeal was filed before NCLAT. NCLAT was of the view that both of these legislations operate in different fields and are not repugnant to each other. It further held that the Appellant cannot derive any advantages from the state act as it was done only in order to stave of the proceedings under Section 7. 

It was contended by the appellant before the Supreme Court that both the acts are repugnant to each other and they cannot function together. The Maharashtra Act imposes a limited moratorium and the directors are still in control of the management of the corporate debtors after which the State government may take control over the company. While on the other hand the Code places a complete moratorium and adopts a creditor in control model. It was contented by the Respondents that the erstwhile directors are no longer in control over the corporate debtor and hence are not in position to initiate any proceedings on behalf of the corporate debtors. 

Issues 

1. Whether the present appeal by the erstwhile directors on behalf of the corporate debtor maintainable ?
2. Whether the Maharashtra Act and IBC are repugnant to each other?

Ratio 

It was held by the Apex Court that, the management of the company was handed over to the interim resolution professional and the directors are no longer in a position to represent the debtor. Hence it was held that the appeal is not maintainable by the Directors.

The SC held that the NLCT and NCLAT were correct in holding that the Maharashtra Act does not place a bar on proceedings under Section 7 of the code owing to the non obstinate clause under Section 238 of the Code. The Court referred to Article 254 of the Constitution which states that in case of any inconsistency between laws made by the Parliament and laws made by the Legislature of the State, the laws made by the Parliament would prevail irrespective of whether they have been made prior or later than the state legislation. It was held that the admission of under Section 7 was right and the appellant is unconditionally obligated to follow the provisions of the code. 

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