Case Note: Standard Chartered Bank Vs S K Gupta, NCLAT


Dhiraj Yadav, 4th Year Law Student, Dr. Ram Manohar Lohiya National Law University, Lucknow; and
Urvashi Gattani, 3rd year Law Student, ILS, Pune

Insolvency and Bankruptcy Code, 2016 has been severely tested since its enactment. However, constructive interpretation by the judiciary coupled with effective amendments to the Code has flooded the gates with teething issues.

In the instant case, Corporate Insolvency Resolution Process was initiated against ‘Essar Steel India Limited (“Corporate Debtor”), and pursuant to which the Committee of Creditors (“CoC”) approved the Resolution Plan submitted by ArcelorMittal India Pvt. Ltd.(‘Successful Resolution Applicant’) which was adjudged by NCLT, Ahmedabad Bench with certain modifications by the impugned order dated 8th March 2019. The successful resolution applicant in its resolution plan made the following categorisation:

Financial Creditors

(i) Secured Financial Creditors (having a charge on project assets of the ‘Corporate Debtor’);

(ii) Secured Financial Creditors (having no charge on project assets of the ‘Corporate Debtor’);

(iii) Unsecured Financial Creditors (with admitted claims less than Rs.10, 00,000);

(iv) Unsecured Financial Creditors (with admitted claims equal to or above Rs. 10, 00,000).

Operational Creditors

(i) Operational Creditors (workmen and employees);

(ii)The Operational Creditors (other than workmen and employees), but admitted claim amount is less than Rs. 1 Crore and

(iii) The Operational Creditors (whose admitted claim is equal to or more than Rs. 1 Crore).

According to the resolution plan, the first two categories of the operational creditors were proposed to be paid 100% of their dues, but the rest of the Operational Creditors whose claim admitted is Rs. 1 Crore or more, have been proposed with NIL amount i.e. 0% (zero per cent).

However, pursuant to this bifurcation numbers of appeals were preferred by the Operational Creditors and the Financial Creditors, on similar ground. These appeals were clubbed together to answer the question of law involved. The grievances of the Operational Creditors have been that in the resolution plan 0% of their debt has been proposed to be paid and claims of some of the Operational Creditors have been notionally assessed at Re. 1/- (average) by the ‘Resolution Professional’ without any basis.

Standard Chartered Bank (SCB) being one of the Financial Creditors, alleged that they were not equated with other Financial Creditors. All the Financial Creditors have been allowed 91.99% of their claim amount, whereas the claim of SCB has been categorised as-

  • ‘Secured Financial Creditors’ (having a charge on project assets of the Corporate Debtor) ─ in respect of claim amount of Rs. 3,487.10 Crores and SCB has been shown as Secured Financial Creditors but it has not been allowed 91.99% of the claim amount as allowed in favour of other Financial Creditors. SCB has been provided with 1.74% of the claim amount on the ground that it has no charge on project assets of the Corporate Debtor.
  • Unsecured Financial Creditors in respect of claim amount of Rs. 70.34 Crore has been allowed 4.08% of the claim amount.

The following Questions of Law  arising from this appeal and the earlier preferred appeals have been answered by the Hon’ble NCLAT in this pertinent case:

  1. Whether the distribution as shown in the ‘Resolution Plan is discriminatory and can the Financial Creditors be classified on the ground of a Secured Financial Creditor having charge on project assets of the Corporate Debtor and Secured Financial Creditor having no charge on the project asset of the Corporate Debtor or on the ground that the Financial Creditor is an Unsecured Financial Creditor?

Financial Creditors being Claimants at par with other Claimants like other Financial Creditors and the Operational Creditors having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other Financial Creditors and minimum or ‘NIL’ amount in favour of some other Financial Creditors or the Operational Creditors. This violates Section 30 (2) and Regulation 38 (1A).

There is also discrimination made by CoC in the distribution of the proposed amount to Operational Creditors qua the Financial Creditors. The distribution is discriminatory and arbitrary. Classification of Financial Creditors is also discriminatory.

Therefore, Appellate Tribunal observed that as per the definition of the creditor in the Code, it includes a ‘Financial Creditor’, an ‘Operational Creditor’, a ‘Secured Creditor’, an ‘Unsecured Creditor’ and a decree-holder. Also as per the definition of Financial Creditor and Financial Debt (Section 5 (7)& (8), there is no distinction made between one or other ‘Financial Creditor’. All of such person form one class i.e. ‘Financial Creditor’ they cannot be sub-classified as ‘Secured’ or ‘Unsecured Financial Creditor’ for the purpose of preparation of the ‘Resolution Plan’.

  1. Whether the Operational Creditors can be validly classified on the ground of:
  2. employees of the Corporate Debtor
  3. those who have ‘supplied goods’ and ‘rendered services’ to the ‘Corporate Debtor’ and
  4. the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the Local Authorities?

The Hon’ble  Appellate Tribunal held that the Operational Creditors can be classified for determining the manner in which the amount is to be distributed to them, they are to be given the same treatment if similarly situated.

Thus the classification of Operational Creditors in the Resolution Plan is upheld and not discriminatory as the Operational Creditors whose claim is more than Rs. 1 Crore or the ‘Central Government’ or the ‘State Government’ or the ‘Local Authority’, who raise their claim on the basis of the statutory dues, cannot ask for same treatment as allowed in favour of the Operational Creditors like employees or those who have ‘supplied goods’ and ‘rendered services’ having claim less than Rs.1 Crore, are provided with 100% dues of their claim amount.

  1. Whether the ‘Committee of Creditors’ can delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiation with the ‘Resolution Applicant’ for revision of plan and is it empowered to distribute the amount amongst the ‘Financial Creditors’ and the ‘Operational Creditors’ and other Creditors?

A ‘Sub-Committee or ‘Core Committee’ is unknown and against the provisions of the IBC. There is no provision under IBC which permits constitution of a ‘Core Committee’ or ‘Sub-Committee’ nor the IBC or Regulations empowers the ‘Committee of Creditors’ to delegate the duties of the ‘Committee of Creditors’ to such ‘Core Committee’/ ‘Sub-Committee’.

Therefore, the Committee of Creditors’ cannot delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiating with the ‘Resolution Applicant(s)’. The manner of distribution of amount among various stakeholders is the exclusive domain of the Resolution Applicant.

The said provision makes it clear that the ‘Resolution Applicant’ in its ‘Resolution Plan’ must provide the amount it proposes to pay one or other Creditors, including the ‘Operational Creditors’ and the ‘Financial Creditors’ that means if the ‘Resolution Plan’ does not show the distribution amongst the ‘Financial Creditors’ and the ‘Operational Creditors’, it cannot be placed before the ‘Committee of Creditors’.

Conclusion

The Insolvency and Bankruptcy Code,2016 is experiencing a seesaw of judgments where time and again rights of Financial and Operational Creditors rights have been determined. As per this judgment following the precedents set up in the case of Binani Judgments and in Swiss Ribbons Financial and Operational Creditors have been treated at par. Amount earned during the process by the company, where the Resolution Applicant is not paying full, the profits have been given to the creditors – financial and operational. It has also serious relevance where the resolution plan has been approved and accepted by the lender whether the said lender has any rights left against the principal borrower under the guarantee or otherwise This judgment will have a far-reaching impact in the future when the law of precedent will be referred to.

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REPORTING COMPANY AND REPORTED OWNERS


On public demand, I am summarizing provisions relating to reporting company and the reported significant beneficial owners.[1]

Reporting Company under Rule 2(f) of SBO Rules, 2018 may be any company as defined under Section 2(20). According to Section 90(4), every company under shall report and file the return. For the practical purpose the return to the Registrar in respect of declaration under section 90Form BEN – 2 does not allow to fill the form if the company has no Significant Beneficial Owner.

Take Away 1: No return if no SBO. Read further to identify SBO.

The reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent of its (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable in a financial year, give notice to such member, seeking information in accordance with subsection (5) of section 90, in Form BEN – 4. [Rule 2A]

Take Away 2: Identify Share not held by an individual (human) as a registered member or owner of beneficial interest. [Do not forget humans though, keep record]

Take Away 3: Send notice to every registered member or owner of beneficial Interest identified in Taka Away 2 having 10% of (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable.

Shares and share capital respectively includes Equity share with or without differential voting and/or other rights and Preference shares.

Voting right means the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Generally, Preference share carries voting power in certain resolutions but where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.

Right to receive dividend may be held by someone who is not a registered member.

Take Away 4: check your dividend distribution in the last two years to preference shareholders.

Take Away 5: calculated beneficial owners and the right to receive dividend or profit participation carefully.

Beneficial Interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i) exercise or cause to be exercised any or all of the rights attached to such share; or

(ii) receive or participate in any dividend or other distribution in respect of such share. [Section 89(10)]

Take Away 6: Beneficial Interest is a wider term than a day to day understanding.

Every individual, who acting alone or together, or through one or more persons or trust, holds beneficial interests of not less than percentage as prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars. [Section 90(1)]

Take Away 7: Stay focused on Section 90(1)

If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner. [Explanation I to Rule 2(h)]

An individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely:

(i) the shares in the reporting company representing such right or entitlement are held in the name of the individual;

(ii) the individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company.

Take Away 8: individual members and other Individuals with ANY indirect holding or interests need to be identified.

The reporting company may have partial relief form reporting in respect of certain shares held by –

  1. Investor Education and Protection Fund;
  2. A reporting holding company reporting its own SBOs in Form BEN – 2;
  3. Central, State and Local Government (NOTE: Under Indian Constitution of India);
  4. A government company, government body corporate or government entity controlled by Central, State or Local government;
  5. SEBI Registered investment vehicles like MFs, AIFs, REITs, InVITs, (See footnote)[2]; and
  6. RBI, IRDA, PFRDA Registered investment vehicles. [Rule 8]

Take Away 9: Ignore Shares mentioned in Rule 8. Please seek information or send a notice in case of doubt.

To identify an SBO behind a Body Corporate Member; whether company, other bodies corporate, whether Indian or foreign, the reporting company shall identify the individual who

 (a) holds the majority stake in that body corporate member; or

(b) holds the majority stake in the ultimate holding body corporate  (whether incorporated or registered in India or abroad) of that member.

Take Away 10A: Go up to the steps of holdings body corporate till you find individual members. However, just for the purpose of reporting, identify the holder of a majority stake.

To identify an SBO behind a Hindu Undivided Family (HUF) identify the karta. Sometime the registered member may have shares in his name but the Hindu Undivided Family (HUF) is actual beneficial owner (through karta). The Karta shall be SBO.

Take Away 10C: Identify Karta in HUF.

To identify an SBO behind partnership entity – Limited Liability Partnership or Partnership Firm whether registered or not, the member of the reporting company is a partnership entity (through itself or a partner), and the SBO individual,-

(a) is a partner; or

(b) holds the majority stake in the body corporate which is a partner of the partnership entity; or

(c) holds the majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.

Take Away 10C: In LLP and Partnership, identify the individual partners or SBO as per Take Away 10A where a partner is a body corporate.

To identify an SBO behind the trust, where the member of the reporting company is a trust (through the trustee), and the SBO individual –

(a) is a trustee in case of a discretionary trust or a charitable trust;

(b) is a beneficiary in case of a specific trust;

(c) is the author or settlor in case of a revocable trust.

Take Away 10D: In a trust, SBO individual may differ on a case to case basis.

To identify an SBO behind (a) Pooled Investment Vehicle; or (b) an entity controlled by the pooled investment vehicle, the SBO individual in relation to the pooled investment vehicle,-

(A) is a general partner; or

(B) is an investment manager; or

(C) is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

Take Away 10E: In pooled investment Vehicle, identify the decision-maker.

If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be ‘acting together’

Take Away 11: Identity individuals acting together.

Significant Influence means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies.

Take Away 12: Significant Influence may be taken care of.

“significant beneficial owner” in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:-

(i) holds indirectly, or together with any direct holdings, not less than ten per cent. of the shares;

(ii) holds indirectly, or together with any direct holdings, not less than ten per cent. of the voting rights in the shares;

(iii) has right to receive or participate in not less than ten per cent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

(iv) has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone:

Take Away 13: After identifying all individual beneficial owners on all routes, you may find one individual in more than one place or a few individuals acting together.

If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner.

Take Away 14: ignore all individuals holding rights or entitlements in the reporting company directly.  

Take Away 15: List out individuals with indirect holdings or individuals having both direct and indirect holdings.

Now, compile the data in the required format. While compiling data, we may face many practical realities.

Special Take Away 1: One individual may have less beneficial ownership from in a single non-individual member but the combined effect of his all beneficial ownership may make him a significant owner.

Special Take Away 2: It is a reporting company which is in a better position to identify SBO then SBO himself, particularly where SBO using multiple member entities in the reporting companies.

Special Learning Point: Beneficial Interests and Beneficial ownership are two different ownership or interest aspect. Do not mingle them.

CS Aishwarya Mohan Gahrana

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[1] Please refer all of these posts for details:

[2] Mutual Funds (MFs), Alternative Investment Funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) and such other SEBI registered investment vehicles

THE FORM BEN – 2


Form BEN – 2 seems to be a comic strip name for kids but for Indian companies and company secretaries, it seems to be a just another nightmare of corporate governance. On 1st July 2019 BEN – 2 finally arrived. This BEN – 2 is an updated version introduced by the Companies (Significant Beneficial Owners) Second Amendment Rules 2019 with effect from the date of publication of the notification in the Official Gazette. In this post we discuss the Form BEN – 2 briefly. Continue reading

ISSUE OF SECURITIES IN DEMATERIALISED FORM BY UNLISTED PUBLIC COMPANIES


Ministry of Corporate Affairs earlier brought into existence a new rule with effect from 10th September 2019 which mandates the issue of new securities by unlisted public companies in dematerialised form. These rules also placed restrictions on the transfer of existing securities in dematerialised form only. Judicially it is a welcome to step to reduce the burden of courts and partially it is an additional cost. The rule was amended twice since its inception. Let us discuss.

The government inserted a new Rule 9A to the Companies (Prospectus and Allotment of Securities) Rules, 2014 vides notification G.S.R. 853(E) dated 10th September 2019. The Rule came into effect with effect from 2nd October 2018. With recent amendment vide Notification G.S.R. 376(E) dated 22nd May 2019 introduced a half yearly return called Reconciliation of Share Capital Audit Report (Half-yearly).

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LICENSE FOR PROPOSED COMPANIES WITH CHARITABLE OBJECT


With notification of the Companies (Incorporation) 6th Amendment Rules, 2019 on 7th June 2019 to come into force with effect from 15th August 2019, the Government of India further centralized incorporation and registration of new companies to Central Registration Centre, Manesar in Haryana. Let us discuss the law.

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Propaganda against Compliance Tools


Politics is claimed to be a dirty game of propaganda in India and the public already accepted it as a reality of life. Unfortunately, Indian professionals start using similar tools against compliance regime and compliance professionals. Role of the media is also come to under strong protest recently. This is evident that Indian media do no research and do not cross verify the facts. Recently published propaganda titled “FM Nirmala Sitharaman urged to waive e-form 22A for firms” published by Deccan Chronicle on 12th June 2019 and copied by few others seems to be published without cross-checking on law and facts.

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PERIOD FOR REGISTRATION OF CHARGES


The Registration of Charges is always one of the most used but controversial and practically ignored chapters of the Indian company law. I personally never understood the utility of such registration except for a limited public notice in an era of Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Recent amendment in the law governing the registration of charge makes it more complicated and less user-friendly. Let us try to understand the amended law.

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