SC ruling in Essar Steel case has restored order to the IBC process

By ruling in the Essar Steel case that the Committee of Creditors (CoC) has the discretion to decide on the distribution of proceeds, the Supreme Court has brought huge relief to banks. Importantly, the SC has set aside the NCLAT order in this case that had prescribed a sharing arrangement treating all classes of creditors — secured, unsecured financial creditors and operational creditors — identically. The NCLAT order had worked out a blanket 60 per cent share of claims for all creditors, threatening the basic tenets of commercial law that accords priority to secured creditors. The SC has instead ordered that Arcelor Mittal’s ₹42,000-crore offer be distributed according to the resolution plan approved by the CoC in October last year, implying 92 per cent of secured financial creditors’ claims being settled — a big win for lenders. The SC ruling has also importantly put to rest ambiguity over several aspects of the IBC, setting a key precedent for future cases.

The manner in which funds are distributed among creditors has been a bone of contention in many cases under the IBC. Striking down the simplistic approach of the NCLAT,the SC has helpfully clarified that “the equality principle cannot be stretched to treating unequals equally”. A similar observation was made by the SC in the landmark Swiss Ribbons case, where it noted a clear difference between financial and operational creditors. The other key issue raised in the case was whether the CoC is at all empowered to distribute proceeds amongst various creditors. The SC has put to rest this argument by ruling that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the CoC. The SC has also shed light on whether the adjudicating authority can question the resolution plan approved by the CoC. The SC in a nutshell has ruled that the adjudicating authority has to satisfy itself on whether the approved resolution plan meets the requirement laid down under the IBCand it cannot turn down the plan for any other reason. By upholding the collective decision of the CoC as paramount, the SC has to some extent addressed one of the key reasons for long-drawn litigations under the IBC.

That said, whether the interests of operational creditors will be safeguarded needs to be seen. While the SC re-iterated that the CoC must balance the interests of all stakeholders, including operational creditors, it also ruled that the CoC does not act in a fiduciary capacity to any group of creditors. This still leaves the position of operational creditors unclear. The fact that the case dragged on for over 800 days highlights excessive delays under the IBC. The SC move of striking down the word ‘mandatorily’ in the 330-day timeline laid down in the August amendment could hinder time-bound resolution.

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