Background

The Hon’ble National Company Law Tribunal, Principal Bench (‘Adjudicating Authority’) has, by way of its judgment dated February 26, 2019, dismissed a petition filed by Vistrat Real Estates Private Limited (‘Vistrat’) against Bhushan Steel Limited (now known as Tata Steel BSL Limited) (‘BSL’) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The judgment also imposes a cost of ₹ 50,000 (approx. US$ 700) on Vistrat. Vistrat has been found to be a related party to the erstwhile promoters of BSL, including Mr. Neeraj Singal and Mr. Brijbhushan Singal (‘Singals’).

Earlier, in the largest resolution under the IBC, the Adjudicating Authority had, by way of its judgment dated May 15, 2018 (‘Approval Order’), approved the resolution plan (‘Plan’) submitted by Tata Steel Limited (‘TSL’) in the corporate insolvency resolution process (‘CIRP’) of BSL, which had been initiated on July 26, 2017. The order of the Adjudicating Authority was also subsequently confirmed by the Hon’ble National Company Law Appellate Tribunal. This had resulted in successful resolution of accumulated debt of BSL amounting to approximately ₹ 58,000 crores (approx. US$ 8 billion) and realization by banks of approximately ₹ 36,000 crores (approx. US$ 5 billion). This has also resulted in the revival of BSL in the control of TSL (through its subsidiary Bamnipal Steel Limited).

Brief Facts

Shortly after the Approval Order, Vistrat filed a petition under Section 9 of the IBC seeking initiation of CIRP against BSL. The following facts are noteworthy:

(a)    Vistrat is a private limited company registered in India. The erstwhile promoters of BSL, the Singals, were the signatories to the Memorandum of Association of Vistrat. There are various other connections between Vistrat and the erstwhile promoter group of BSL.

(b)      Vistrat owns premises in New Delhi, which was leased to BSL pursuant to a memorandum of lease (‘MoL’) dated May 1, 2015. The MoL acted as a lease discounting facility for a loan availed by Vistrat from IndusInd Bank (‘IndusInd’). The MoL provided Vistrat an option of termination with the prior approval of IndusInd. However, no express right of termination was provided to BSL.

(c)      During the CIRP of BSL, the Resolution Professional (‘RP’) had, pursuant to an independent valuer’s report, found the terms of the MoL to be onerous and leading to value leakage. Since the lease rental under the MoL was above the market rate, during the CIRP of BSL the RP had paid a reduced amount to Vistrat towards lease rental for the premises.

(d)      The Plan approved by the Adjudicating Authority recognized the MoL as a value leakage transaction and provided for its termination. The Plan also provided for no liabilities to related parties, associates and joint venture of the erstwhile promoters of BSL. Pursuant to the change in control of BSL upon the successful completion of the CIRP, TSL immediately terminated the MoL and handed over possession of the premises to Vistrat on September 10, 2018.

(e)       The petition claimed a default in payment of lease rental by the RP of BSL for the period during the CIRP, for which a reduced lease rental amount was paid to Vistrat.

Highlights of the Judgment

Some of the key highlights of the judgment are:

(a)      The Adjudicating Authority recognized the independent valuer’s report submitted by the RP and accepted the decision of the RP to pay a reduced lease rental during the CIRP period basis the same. The Adjudicating Authority also accepted that the MoL was described as a value leakage and an onerous transaction in the Plan, and the Plan provided for no liability to related parties, associates and joint ventures of BSL.

(b)      Based on facts before it, the NCLT accepted that Vistrat was a related party to BSL (prior to commencement of CIRP) and its erstwhile promoters and, thus, liabilities of BSL to Vistrat stood excluded in terms of the Plan.

(c)      The relationship between Vistrat and the erstwhile promoter group of BSL has been noted through: (i) the presence of Neeraj Singal and Brijbhushan Singal as the signatories to the Memorandum of Association of Vistrat and its initial shareholders; (ii) the authorisation in favour of the Singals to act on behalf of Vistrat, including in connection with the loan from IndusInd, and operate the loan facility, even though they were not directors of Vistrat at that time; and (iii) the transfer of shares of Vistrat to Ritu Singal (wife of Neeraj Singal) taking place less than two years prior to the commencement of CIRP of BSL. The Adjudicating Authority has held that given the fact that the Singals exercised control and were persons on whose advice / directions / instructions the directors of Vistrat were accustomed to act, coupled with Neeraj Singal’s wife being a director of Vistrat, BSL (prior to commencement of CIRP) had substantive control over Vistrat. Further, given the nature of the transaction and the timing of the transfer of shares of Vistrat being within the look-back period in respect of BSL’s CIRP, the transactions are capable of being examined during the CIRP and deemed to be preferential transactions.

(d)      Whilst there is no bar under Section 11 of the IBC from a fresh petition being filed post the Approval Order, the only course open to Vistrat was to file its claim before the RP during the CIRP. The remedy of filing of claim has been exhausted and has resulted in acceptance of Vistrat’s claim partially by the RP. The rejected claim cannot find basis for a new petition, more particularly, when (i) the Plan has even specifically excluded the claim of related parties, and (ii) BSL has terminated the MoL and handed over possession of the premises after the Approval Order.

In dismissing the petition, the judgment has taken note of various actions of the RP during the CIRP of BSL and accepted the same. Further, the Adjudicating Authority has also implemented terms of the Plan, including for termination of value leakage agreements and no liability for related party transactions, in order to hold that no amount was due to Vistrat. Finally, the Adjudicating Authority has also held that absence of a bar under Section 11 of the IBC from filing a fresh petition post the Approval Order does not permit a party to file fresh proceedings for initiating insolvency for claims which arose prior to the Approval Order. The Adjudicating Authority has recognized that in such cases, the remedy is filing of claim before the RP during the CIRP.

The judgment shows that the Adjudicating Authority is accepting the decision of the successful resolution applicant and the committee of creditors in identifying and terminating value leakage agreements. It also shows that the Adjudicating Authority is dismissing efforts from erstwhile promoters to, directly or indirectly, stall or disrupt the actions to effectively resolve a distressed company.