News Analysis

Analysis: Why the Supreme Court ruling in the Essar Steel case is important

Radhika Merwin BL Research Bureau | Updated on November 16, 2019 Published on November 15, 2019

In the Essar Steel case, the Supreme Court set aside the NCLAT's ruling ( File photo)

After a long-drawn battle that  lasted for nearly 900 days, the Essar Steel case has reached finality, with the Supreme Court setting aside the National Company Law Appellate Tribunal’s (NCLAT) ruling and upholding the Committee of Creditors’ (CoC) decision on how the funds from the ₹42,000-crore offer by ArcelorMittal would be distributed among the creditors.

The ruling has essentially upheld the rights of secured creditors, which is a huge relief, and sets a critical precedence for future cases. The CoC had decided on a resolution plan that gave secured creditors 92 per cent of their claims. The NCLAT had worked out a plan that gave secured creditors only 60 per cent of their claims.

Also read: Essar Steel case: Supreme Court strikes down NCLAT order

Sequence of events

 

Essar Steel was among the first 12 big defaulters that banks sought to resolve under the RBI’s directive in 2017. Since then, the case has seen some high-stake legal wrangling and has tested various points of law in the code.

Section 29A was inserted in the code in 2017 to keep out errant and wilful defaulters from buying back assets. The Essar Steel case has been a classic  one in which the  litigation settling the matter over eligibility of bidders has dragged the insolvency process.

The case was originally admitted by the NCLT on August 2, 2017. Both ArcelorMittal and Numetal had submitted  resolution plans on February 12, 2018, a little over six months after the NCLT admitted the case. However, on March 23, 2018, the resolution professional found both ArcelorMittal and Numetal to be ineligible under Section 29A.

It was only on October 4, 2018 – over a year after the case was first admitted – that the Supreme Court cleared the air and gave one more opportunity to both resolution applicants to pay off the NPAs of their related corporate debtors and resubmit their resolution plans.

But the high drama did not end there. In January this year, the promoters of Essar Steel had challenged the insolvency proceedings under Section 12 A of the code by offering to pay a full debt settlement of ₹54,389 crore, far higher than ArcelorMittal’s bid of ₹42,000 crore.

The case made an important headway when the NCLT rejected the promoter’s proposal, stating that under Section 12 A withdrawal from IBC could be sought only by the applicants – financial/operational creditors. Hence, in March, the NCLT had upheld ArcelorMittal’s ₹42,000-crore offer to lenders. But the case  did not end there. The issue of distribution of the proceeds among financial and operational creditors dragged the case for another eight months.

NCLAT order

In July, the NCLAT order, which put secured creditors on a par with operational creditors, had rattled lenders.

The original plan, as approved by the CoC, had admitted financial creditors’ claims of  ₹49,473 crore (against the submitted ₹55,440 crore) and operational creditors’ ₹5,074 crore (against the submitted ₹27,101 crore).

The NCLAT, however, in a bid to safeguard operational creditors’ interests, bumped up the claims to be admitted for operational creditors and then assigned the proceeds to both operational and financial creditors in the same 60.7 per cent proportion.

This meant a huge mark-down in the distribution of proceeds to secured financial creditors from what was envisioned in the CoC-approved plan.

The NCLAT order raised two key points, which were later sought to be addressed by the amendments to the code in August this year. The SC judgment has further removed the ambiguity on these aspects and set a clear ground for future cases

The first key point is the manner of distribution of proceeds. The NCLAT order had prescribed a sharing arrangement that treated identically all classes of creditors – secured, unsecured financial creditors and operational creditors.

The NCLAT had held Section 53 of the code (which lays down the hierarchy of payment in liquidation, where unsecured and operational creditors come after secured creditors) irrelevant under the insolvency process.

But the amendment to the code in August – under Section 30  sub-section 2 (b) – had clarified the rights of dissenting financial creditors and operational creditors, ensuring a minimum amount both under resolution or liquidation in accordance with Section 53, in turn upholding the principle of repayment hierarchy that gives priority to secured creditors.

The Supreme Court judgment has offered more clarity on this aspect. “The equality principle cannot be stretched to treating unequals equally as that will destroy the very objective of the code – to resolve stressed assets.

“Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs to: secured or unsecured, financial or operational.”

Stressing the point further, the SC has stated that if an “equality for all” approach is to be adopted, secured financial creditors may be incentivised to opt for liquidation rather than resolution.

One of the key issues raised by the NCLAT was whether the CoC (comprising  financial creditors) is empowered to distribute proceeds among various creditors.

The SC judgment has removed any ambiguity on this aspect by placing the manner of distribution of proceeds within the ambit of the commercial decisions of the CoC.

The apex court, in its 164-page order, stated that “full freedom and discretion has been given to the Committee of Creditors to classify creditors and to pay secured creditors amounts that can be based upon the value of their security”.

The other key point of contention in several cases has been the grounds on which the commercial wisdom of the CoC can be questioned by the adjudicating authority. Under Section 31 of the code, the adjudicating authority has, in various cases, reviewed the resolution plan to see if it does or does not conform to the requirements of the code.

The SC clarified that there is limited judicial review available within the code. The adjudicating authorities can see whether the approved resolution plan meets the requirement laid down under the code. It cannot otherwise reverse the commercial decision of the CoC.

While the SC ruling has lent relief to secured creditors, the position of operational creditors is still unclear. While the SC has stressed that the CoC must consider the interests of  all parties while deciding the resolution plan, it has also stated that CoC does not act in any fiduciary capacity to any group of creditors.

Not mandatory

One of the key amendments to the code in August sought to tighten the deadlines for resolution under the IBC. A mandatory timeline of 330 days was set, including any interim litigation period.

The SC has struck down the word ‘mandatory’  and allowed  the process to extend beyond the deadline in certain cases where the delay has been due to the tardy process of the adjudicating authority or the appellate tribunal.

Published on November 15, 2019
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