NCLAT order on Essar Steel has rewritten IBC rules: Lenders

The lenders of Essar Steel have told the Supreme Court that the National Company Law Appellate Tribunal (NCLAT) has misconstrued and misinterpreted the provisions of the Insolvency and Bankruptcy Code (IBC) to such an extent that the statute itself has been literally rewritten.

In an appeal filed against the NCLAT order, the Committee of Creditors (CoC) has said the judgment has put the entire insolvency of one of the largest non-performing assets of the country under jeopardy and unsettled the otherwise settled principles of law recognising and protecting the rights of the secured creditors.

The verdict, which suffers from jurisdictional and factual errors, has also endangered the economic interests of the country, it said.

On July 4, the NCLAT had approved the ₹42,000-crore bid placed by ArcelorMittal to take over Essar Steel, but placed the secured and operational creditors on the same pedestal for distribution of the recovered money. This has led to banks suffering a higher hair cut than envisaged before.

The NCLAT has entirely altered the payment terms of the approved resolution plan without the consent of the CoC or the resolution applicant ArcelorMittal, and has taken away the CoC’s authority to approve or reject a resolution plan, said the appeal, which has been read by BusinessLine.

The NCLAT has failed to appreciate that the IBC is based on equitable treatment of different classes of creditors, and not all creditors can be treated equally irrespective of their nature of claim, it said.

In distribution of profits generated by the corporate debtor during the insolvency process, the order has erroneously held that the operational creditors should receive equal treatment as the financial creditors.

The lenders have lost interest of over ₹12,000 crore during the insolvency process on account of a moratorium, which ensured continuity in business operations and timely payment to operational creditors, it said.

Impact on creditors

The interpretation adopted by the NCLAT judgment will have a disastrous impact on the banking industry and expose the banks and financial institutions to grave financial distress, it said.

If no preference is given to secured creditors, they will have to enforce their individual claims at the very first instance of default, rather than adopting an approach aimed at rehabilitating viable enterprises.

Implementation of the judgment would have serious repercussions for Indian jurisdiction in the international market and gravely discourage foreign investment in India, it said.

By admitting the disputed claims of ₹14,000 crore of operational creditors, the NCLAT order has improperly exercised its jurisdiction and admitted the claims without appreciation of proper evidence or underlying documents.

The NCLAT had said that the payments made under the resolution plan would absolve the corporate debtor.

However, if such payment is lesser than the total admitted debt, then it would by no stretch of imagination settle the entire debt and take away the right of the creditors to proceed against the guarantor for the balance debt under their respective contracts of guarantee, the lenders claimed.