The Supreme Court on Wednesday gave a week’s time to the operational creditors of bankrupt Essar Steel to challenge the new amendments to the Insolvency and Bankruptcy Code, which granted more powers to the lenders. A bench led by justice RF Nariman deferred the hearing on a batch of appeals till August 19 so as to decide the issue in light of fresh challenges following recent amendments.
“You can challenge a legislation as soon as it is passed,” the apex court bench said, while requesting attorney general KK Venugopal to be present in the court to assist it on the next date of hearing. It also allowed former promoters of Essar Steel (the Ruia family) to challenge the recent amendments in the insolvency code after they informed the court on Wednesday of their intention to do the same.
The apex court had on July 22 put on hold ArcelorMittal’s takeover of Essar Steel, after the lenders had sought a stay on the National Company Law Appellate Tribunal’s (NCLAT) ruling that reduced their share of sale proceeds from 90% to 60% and also put the financial creditors and operational creditors at par in settlement of claims.
Justice Nariman had also asked the parties to maintain status quo with regard to the acquisition of Essar Steel. Stating that the new amendments will deny us due share, operational creditors on Wednesday argued that they would file petitions within a week challenging the validity of the amendments to the IBC. The amendments among many modifications give lenders power over the distribution of proceeds in the resolution process and also authority to decide which resolution plan will be approved.
The Bill also fixes a firm timeline of 330 days for resolving insolvency cases. When senior lawyer Gopal Subramanian said the issue is a “little more nuanced” than that, justice Nariman said that there have been cases where operational creditors have actually gotten nothing in the resolution plan approved by lenders.
Justice Nariman also observed that as the lenders in the committee of creditors have been given power over distribution of bid amount, the operational creditors may be left with “zero”. “When CoC only has financial creditors, they can give nothing to operational creditors… In a winding-up proceeding, can an operational creditor be asked to get nothing?,” the judges questioned. Senior counsel P Chidambaram, appearing for one of the banks, submitted that no prudent businessman, who wants to acquire a going concern and run it in future, would present a resolution plan that offers nothing to the operational creditors.
Justice Nariman said the new management can opt to not continue with old operational creditors which will leave old set of operational creditors with nothing. ArcelorMittal also told the SC that 710 days have already passed and the resolution is getting delayed.
Challenging the awarding of higher payout to Essar Steel’s operational creditors and treating them on par with secured lenders as directed by the NCLAT, the CoC in its appeal said that the decision would effectively leave it “bereft of any role and authority, among others, in respect to approval of a resolution plan”. While approving ArcelorMittal’s `42,000-crore offer for Essar Steel, the NCLAT on July 4 had held that the creditors can only look at the viability of a resolution plan and have no role in deciding the distribution of funds. Besides, it also held that the operational creditors cannot be treated differentially.