Asserting that there must be an absolute “judicial hands-off” in any interference with the commercial wisdom of the Committee of Creditors (CoC), the Supreme Court Friday gave the final nod to the Rs 42,000-crore resolution plan submitted by ArcelorMittal for Essar Steel.
The approval of ArcelorMittal’s plan takes the corporate insolvency resolution process into the final lap for one of the biggest cases from among the Reserve Bank of India (RBI)’s first list of big defaulters. Essar Steel, which has a total debt of nearly 54,000 crore, was among the biggest defaulters along with Amtek Auto, Bhushan Steel, as well as Bhushan Power and Steel.
The judgment by the apex court is significant in laying down clear guidelines for the treatment of secured, unsecured financial creditors, and operational creditors in the corporate insolvency resolution process. The judgment, State Bank of India chairman Rajnish Kumar said, will lead to faster resolution of stressed assets with the CoC getting the “ultimate discretion” on distribution of funds.
The National Company Law Appellate Tribunal (NCLAT) judgment on July 4 this year had advocated equal pay (at 60.7 per cent of their admitted claims) for all forms of creditors, whether secured or unsecured financial creditors or operational creditors.
Setting this aside, the SC said that jurisdiction of the National Company Law Tribunal and NCLAT was “circumscribed” by provisions of the Insolvency and Bankruptcy Code (IBC), which called upon the adjudicating authorities to only check if the resolution plan had been approved by the CoC. The apex court also said agreed with the bank’s submissions that the “equality for all” approach, as held by NCLAT would encourage banks to opt for liquidation of companies rather than their resolution under IBC.
As banks earn profit by earning interest on money lent with low margins, it would not be right to give them the same treatment as operational creditors, the apex court said.
“It also clarifies the long-held position of priority of financial creditors in distribution of sale proceeds in enforcement or liquidation. The effect of this finding will be that financial creditors will have priority over operational creditors,” said Kumar Saurabh Singh, Partner at Khaitan & Co.
The option of forming sub-committees which can negotiate with resolution applicants for better offers should also be respected, the apex court said.
The SC judgment, experts said, is an important course correction in the re-establishment of the narrow path that tribunals must tread.
“The noise-to-signal ratios after the last NCLAT order could have made the IBC incomprehensible to investors in the market,” said Sudipta Routh, partner at IndusLaw.
What is also confirmed by this judgment is that in matters of approval of a resolution plan or distribution of funds among creditors, the final decision will always lie with the CoC and adjudicating authorities like the NCLAT should not interfere, Singh said.
The dilution of the provision which mandates resolution within 330 days — or liquidation — also reasserts the purpose of the code, experts said. The government should now suitably amend the law so as to give more clarity on the duration of the resolution, they said.
Friday’s judgment, which sets the ball rolling for ArcelorMittal’s takeover of Essar Steel, comes after a long wait for Lakshmi Niwas Mittal. The 69-year-old steel baron of Indian origin, who left India in 1976 to expand his father’s steel business in Indonesia, has been wanting to set up a business in India since 2005.
With the judgment in, ArcelorMittal said it would look forward to closing the acquisition soon.