IBC---UNFAIR TREATMENT OF SHAREHOLDERS

EDITED VERSION OF MY PETITION TO NCLT

MY CA NO. 308 OF 2018 WAS SUMMARILY DISMISSED ON 17 APRIL 2018.

Brief Introduction: Electrosteel Steels Limited (ESL) was  incurring losses due to delay in implementation of the project, Chinese Visa Issue, Local Issue, Delay in Disbursement of Loans, led to delay in implementation of project. Additional loan for completion of project etc., debt restructuring under CDR mechanism was carried out with some reliefs & concessions. The restructuring package was approved and implemented in December 2013.

Ultimately State Bank of India filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 in the NCLT, Kolkata on 27th June, 2017. The said application was disposed off by approving the resolution plan as submitted by VEDANTA  on 17^th April 2018. Shareholders capital, especially the Minority shareholders’ was almost completely wiped out.  I had filed a petition in the NCLT, putting forward the case of Shareholders, especially the Minority shareholders.

THE ‘ATMA’  OF MY ARGUMENT WAS:

A.    The earliest Economists had recognized three basic  resources or factors of production - Land, Labour and Capital. The entrepreneur first introduces capital and the capital mobilizes all the other resources for production.  Without capital no industrial development can take place.  Wiping out the share capital will have a long term negative impact on entrepreneurship and the Economic development of the country will be adversely effected in the long run.

B.    Preamble of IBC is  promoting entrepreneurship , maximization of value of assets , and balancing interest of all stakeholders.

C.    About 83,000 small shareholders lost their wealth unjustifiably. Trading in these shares were done  with the permission of CoC, wrongfully tempting the investors to buy the shares without being aware that they will lose their investment almost completely.

D.   Any value above LIQUIDATION value is because it is a going concern, an enterprise. As the shareholders are the earliest contributors to enterprise, they deserve to be fairly treated.

  

1.    The Preamble of the Code is quoted herein below:

“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

2.    The preamble of the Code specifically  provided that the purpose of enactment of the instant Code include promoting entrepreneurship , maximization the value of assets , and balancing interest of all stakeholders.

The Code casts an express obligation on the resolution professional with regard to the stakeholders having interest in the corporate debtors as its shareholders. The text of Section 28 (1) (i) of the Insolvency and Bankruptcy Code, 2016 is reproduced below:

28. (1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely:—

(i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties

The shares of the corporate Debtor- Electrosteel Steels Limited(ESL) are listed on the National Stock Exchange(NSE) and Bombay Stock Exchange (BSE) are being traded very heavily on daily basis

Impliedly, this trading is allowed with “the prior approval of the committee of creditors”.  This gives a clear signal to the investors at large that the CoC is aware and shall take care of their interest in investment made in the shares of corporate debtors. With such powers being vested with the CoC, a fiduciary relationship is being established and the CoC is obliged to take care of the interest of the investors, especially the 83,000/- odd small investors of the Corporate Debtor. The CoC cannot be allowed to act in its own selfish interest to the detriment of the shareholders. The CoC cannot be allowed to destroy shareholders’ value. It is humbly submitted that the RP and CoC are solely responsible for any loss to the shareholders after 21.7.2017.

3.    One of the avowed objectives of the IBC is “to promote entrepreneurship”  The earliest Economists had recognized three basic  resources or factors of production - Land, Labour and Capital. The entrepreneur first introduces capital and the capital mobilizes all the other resources for production.  Without capital no industrial development can take place.  Wiping out the share capital will have a long term negative impact on entrepreneurship and the Economic development of the country will be adversely effected in the long run.  It is humbly submitted that the Resolution Professional should not be permitted to perform any act which would erode the share capital of the Corporate Debtor and prejudicially affect the interests of the majority as well as minority shareholders of the Corporate Debtor.

4.    The liquidation Value of the Corporate Debtor is Rs.2,900/- Crores. Therefore, if the assets are sold not as a going concern they will be able to realize only Rs.2,900/- Crores, but if the bidders/resolution applicants give more than that or almost double than the liquidation value, it is because the corporate debtors is a going concern, an enterprise. As the shareholders are the earliest contributors to enterprise, they deserve to be fairly treated and have a right to be informed about the resolution process. 

5.  The applicants further states that by 2^nd amendment in the Insolvency Resolution Process for Corporate Person Regulation 2017 the Regulations 38 has been amended which is quoted as follows :-

         Mandatory contents of the resolution plan

[‘(1A) A resolution plan shall include a statement as to how it has dealt with the interest of all stakeholders, including financial creditors and operational creditors, of the corporate debtor”].

6. The applicants state that the applicants are not given any access to the meetings of the committee of the creditors. The minutes of the committee of creditors and the records of the corporate insolvency resolution process is not being given to the shareholders of the corporate debtor. The applicant being a shareholder of the corporate debtor, is entitled to know whether the resolution plan has been prepared upon due compliance of Section 38 (1A) of the Insolvency and Resolution Process of Corporate Person Regulation,  2017.

7. The applicants state that equal and equitable treatment should be provided to the shareholders along with the Financial Creditors by the Resolution Professional. It is humbly submitted that the fact that the shareholders will not be entitled to any dividends and will also lose substantial part of their capital, whereas the Financial Creditors will be entitled to receive either in full or partial satisfaction the amount of money provided to the Corporate Debtor as finances is contrary to the objectives of the Code.