CASE BRIEF: ANDHRA PRADESH STATE FINANCIAL v. KALPTARU STEEL ROLLING MILLS LTD 

 

NAME OF THE CASE	Andhra Pradesh State Financial vs. Kalptaru Steel Rolling Mills Ltd
CITATION	Company Appeal (AT) (Insolvency) No. 584 of 2020
DATE OF JUDGEMENT	December 13, 2022
APPELLANT	Andhra Pradesh State Financial
RESPONDENT	Steel Rolling Mills Ltd
BENCH /JUDGE	Justice Ashok Bhushan
STATUTES INVOLVED	The Insolvency and Bankruptcy Code, 2016 The State Financial Corporation Act, 1951 The Limitation Act, 1963
IMPORTANT SECTIONS/ARTICLE	Section 7 of The Insolvency and Bankruptcy Code, 2016. Section 30 of The Insolvency and Bankruptcy Code, 2016. Section 29 of the State Financial Corporation Act, 1951

Overview of the case

Andhra Pradesh State Financial Corporation vs. Kalptaru Steel Rolling Mills Ltd. is a landmark judgment pronounced by the National Company Law Appellate Tribunal, Principal Bench, New Delhi, on the application of the Insolvency and Bankruptcy Code, 2016. This case is about the appeal filed by Andhra Pradesh State Financial Corporation, an objecting secured creditor, against the resolution plan that was approved for Kalptaru Steel Rolling Mills Ltd., a corporate debtor in insolvency proceedings. The APSFC contended that the resolution plan did not comply with procedural and substantive requirements of the IBC, particularly with regard to the limitation period for initiating insolvency proceedings, the treatment of secured creditors, and the resolution of the debtor as a going concern. The resolution plan, proposed by M/s Shiva Ferric Pvt. Ltd., was sanctioned by the Committee of Creditors (CoC) and was upheld by the Adjudicating Authority in spite of the objections by APSFC. The case underlines the balancing required between adherence to statutory provisions and achievement of the overriding goals of insolvency resolution.

Facts of the Case

APSFC had given Kalptaru Steel Rolling Mills Ltd. a term loan sanctioned in 2008, and another loan was sanctioned in 2009. The loans were secured by the hypothecation of the corporate debtor's assets, which included its land, plant, and machinery. Kalptaru Steel Rolling Mills Ltd. failed to pay back the loan amount, and thus, in the year 2013, APSFC took possession of the secured assets under Section 29 of the State Financial Corporation Act, 1951. Subsequently, Andhra Bank, another financial creditor, filed insolvency proceedings against the corporate debtor under Section 7 of the IBC. This application was admitted by the Adjudicating Authority in 2018, and consequently, the Corporate Insolvency Resolution Process (CIRP) commenced. During the CIRP, the CoC invited resolution plans, and M/s Shiva Ferric Pvt. Ltd. filed the plan, which received the requisite majority approval in the CoC, though Andhra Bank held a majority voting share. APSFC holding a relatively smaller share of voting opposed the resolution plan on various grounds, mainly its alleged liquidation value of the secured assets, and failure of procedure for the grant of approval. Despite objections from APSFC, the Adjudicating Authority approved the resolution plan on the grounds that it met the requirements of the IBC and the commercial wisdom of the CoC. Aggrieved by the order, APSFC appealed before the NCLAT against the approval of the resolution plan and the directions to release the secured assets.

Issues Involved

The primary issues in this case were:

1. Whether the Section 7 application filed by Andhra Bank was barred by limitation under the Limitation Act.
2. Whether the resolution plan treated APSFC, a dissenting secured creditor, equitably in terms of the distribution of funds.
3. Whether the resolution plan’s approval as a going concern was valid, considering the debtor’s financial condition.
4. Whether the procedural and substantive requirements of the IBC were followed during the CIRP.

Concepts and Provisions Involved

• Section 7 of the IBC: Section 7 enables financial creditors to initiate insolvency proceedings against the corporate debtor if it has defaulted. It is a key provision under the IBC, enabling timely intervention in cases of corporate insolvency.

1. 1. Section 30 of the IBC: Section 30 provides conditions for a resolution plan including that it must provide reasonable treatment to creditors, as well as compliance with other provisions of the IBC and meeting the thresholds fixed by the CoC.

• Limitation Act, 1963: The applicability of the Limitation Act to insolvency cases was the key issue of debate. The limitation for filing an insolvency application was fixed at three years, commencing from the date of default, with a 2018 amendment. The precedents of the Supreme Court clarified that this limitation is strictly applicable in the context of insolvency.

• Section 29 of the State Financial Corporation Act, 1951: This section enables financial institutions like APSFC to collect the due amount by taking the mortgaged properties in its control. APSFC relied upon this provision in 2013 before the CIRP started in order to protect their rights.

Arguments of the Appellant 

APSFC, being the applicant, primarily argued that Andhra Bank's application for initiating CIRP is covered by limitation under Section 7. It contended that the debt was defaulted way before the commencement of the CIRP and that the application was barred by the three-year limitation period as envisaged under the Limitation Act. The APSFC further averred that since it is a secured creditor, it was entitled to the liquidation value of its secured assets and the resolution plan did not have sufficient fund provisions for it. Further, APSFC challenged the order of approval of the resolution plan on the grounds that the corporate debtor was no longer operational and, hence, not suitable for resolution as a going concern. The appellant also submitted that the Adjudicating Authority did not properly address its objections during the CIRP and thus violated procedural fairness.

Arguments by the Respondents

The respondents, which include the resolution professional and Andhra Bank, denied these claims. They contended that the Section 7 application was filed within the permissible timeframe. They argued that the issue of limitation had already been resolved by the Supreme Court, which dismissed related objections raised by APSFC in previous proceedings. The respondents further argued that the resolution plan was in accordance with Section 30 of the IBC and was, as such, approved by the CoC, which was commercially prudent. They argued that it was in accordance with the IBC framework for fund distribution and that the objectives of value maximization and creditor satisfaction were better placed than liquidation.

Judgements Cited 

Following were the cases cited by the Hon’ble Court in deciding the present case: 

• B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates: This Supreme Court judgment clarified that the limitation period for filing insolvency applications under the IBC is three years from the date of default, as per the Limitation Act.

• India Resurgence ARC Pvt. Ltd. v. Amit Metaliks Ltd.: The Supreme Court, in this case, upheld the sanctity of the CoC’s commercial wisdom, emphasizing that the allocation of funds to creditors is non-justiciable unless procedural violations are evident.

• Ram Chandra Singh vs. Savitri Devi: This judgment highlighted that orders issued without jurisdiction are nullities. However, the tribunal found this precedent inapplicable, as the CIRP initiation and resolution plan approval were within the jurisdiction of the Adjudicating Authority.

Judgment

The NCLAT dismissed the appeals filed by APSFC and upheld the validity of the resolution plan while turning down the argument that the Section 7 application was time-barred. It held that the Supreme Court had finally settled the limitation and could not be considered justiciable in this appeal. It confirmed the resolution plan as in compliance with Section 30 of the IBC and aligned with the commercial wisdom of the CoC. The tribunal also held that the liquidation value of the secured assets of APSFC was subject to the larger purposes of the resolution process. It held that the approval of the resolution plan, which aimed to preserve the corporate debtor as a going concern, would serve the objective of maximizing stakeholder value under the IBC.

Conclusion

The case brings out the strong commitment of the judiciary in upholding the principles of the IBC, in particular the resolution over liquidation and the sanctity of the CoC's commercial wisdom. It also brings out how procedural compliance is important to insolvency proceedings and to what extent judicial interference with CoC decisions is actually limited. For dissenting creditors like APSFC, such a judgment reminds them of the fact that the process of resolution under the IBC is directed toward benefitting collective stakeholders rather than satisfying individual creditor claims. Ultimately, the verdict reiterates the objectives behind the IBC to provide efficient and equitable resolution of insolvency of corporate persons coupled withthe  revival of the economy.