Friday’s landmark Supreme Court judgment in the Essar Steel case establishes the primacy of secured financial lenders as the final arbiters of how sale proceeds from a stressed asset under Insolvency and Bankruptcy Code(IBC) are to be distributed. It is a huge win for lenders, who, despite their number one ranking, were fighting other stakeholders for their fair share. NCLAT—the appellate tribunal—had dealt banks a big blow in July 2019, when it ruled that they must give operational creditors a bigger share of the spoils. It said secured lenders, and operational creditors would receive 60.7% of their outstanding claims, and proportionately share the money that the bidder—Arcelor Mittal—had offered to pay to buy the bankrupt steelmaker.
On Friday, the SC set aside the NCLAT order, and rightly so, given the appellate tribunal had disrespected the IBC’s waterfall mechanism by putting operational creditors at par with secured lenders. It was important that the sanctity of the waterfall mechanism be restored; nowhere in the world do secured financial lenders and operational creditors enjoy the same status since they are dissimilar lenders.
Indeed, the apex court has made it abundantly clear the NCLT cannot interfere in the decisions of the Committee of Creditors (CoC), or substitute the CoC’s wisdom with its own. Only if there is any breach of the law, or some kind of miscalculation by the CoC, can the NCLT or NCLAT take action. But, it cannot reopen the issue of fair treatment between operational and financial creditors, and that is important if the corporate insolvency process is to succeed. All NCLTs across the country, and the NCLAT must uphold the SC’s verdict in letter and in spirit while deciding cases; unfortunately, there have been too many differing interpretations over the past two years. But, what is heartening is that the law has prevailed in the spirit it was meant to.
Much of the credit for this goes to the government for having initiated frequent amendments as and when required. There were times when it appeared that promoters, who were willful defaulters, would be allowed to bid for their company, and stood a chance of regaining it, but Section 29A was brought in to ensure such efforts would be stymied. In November 2017, when the code was less than a year old, it was strengthened to say that a person whose account had been classified as a non-performing asset for more than a year and who had failed to make payments of overdue amounts with interest, would not be eligible to submit a resolution plan. Again, the definition of related party was tightened by including all close relatives. Also, the government recognised the role that pure financial entities could play in reviving sick companies, and allowed them to participate in the bidding process. Promoters of smaller companies were permitted to bid for their businesses because otherwise, many of these small companies would not have attracted buyers.
To be sure, the Rs 42,000 crore which Arcelor Mittal is paying for Essar Steel is smaller than the Rs 54,550 crore which the erstwhile promoters—Ruias—owed the banks, who have also lost out because of the delays. Other resolutions, unfortunately, have resulted in even bigger haircuts for lenders—in some instances, as high as 80%. But, with the SC’s approval, cases should be decided faster, allowing capital to be saved, and freed up faster.
Source: Financial Express, November 18, 2019