The Supreme Court on Friday upheld the supremacy of secured financial creditors, setting aside a ruling by the NCLAT which, in the Essar Steel case, had put operational creditors at par with financial creditors. A three-member bench, comprising Justices RF Nariman, Surya Kant and V Ramasubramanian noted there was no principal of equality between secured and unsecured creditors.
The court said the committee of creditors (CoC) would have the last word in deciding on how the bid amount was to be distributed between various classes of lenders, noting that bankruptcy courts had no say.
The judgment paves the way for ArcelorMittal, the world’s largest steelmaker, to take over the sick steel maker with the court allowing it to pay Essar Steel’s creditors, more than 800 days after the company was admitted to the NCLT (National Company Law Tribunal). Bankers stand to get around Rs 40,000 crore of the Rs 42,000 crore that Lakshmi Mittal-promoted Arcelor Mittal will pay as per the resolution plan, the resolution professional SK Gupta said.
Legal experts opined that the NCLT and NCLAT would need to accept the decision of the CoC. “There is no room for the tribunals to substitute the wisdom of the CoC with their own,” Shardul Shroff of Shardul Amarchand Mangaldas observed.
The apex court said in its order: “There is no doubt, whatsoever, that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the CoC…” It added that while the adjudicating authority cannot interfere in the merits of the commercial decision taken by the CoC, a “limited judicial review” was possible to see that the CoC had taken into account, inter alia,the fact that the interests of all stakeholders, including operational creditors had been taken care of.
“The reasons given by the CoC while approving a resolution plan may thus be looked at by the adjudicating authority only from this point of view, and once it is satisfied that the CoC has paid attention to these key features, it must then pass the resolution plan, other things being equal,” the SC observed. The judges, however, did away with the mandatory 330 day deadline for the corporate insolvency resolution process allowing the tribunals to extend the timeline if needed in exceptional cases.
On July 4, 2019, the NCLAT ruled that operational creditors should be given a bigger share of the proceeds than the amount provided in the resolution plan. It said secured lenders and operational creditors would receive 60.7% of their outstanding claims. On Friday, the SC restored the primacy of secured financial lenders setting a precedent for other bankruptcies awaiting resolution over the distribution of funds between different class of creditors.
The original promoters of Essar Steel made a couple of attempts to regain control of the company. On October 25, 2018, a day after ArcelorMittal’s bid was approved by over 90% of the lenders, they had offered to pay Rs 54,000 crore to their clear dues to both the financial and operational creditors. However, on January 29, the Ahmedabad bench of the NCLT, rejected the maintainability of their last-minute offer under Section 12 (A) of the Insolvency and Bankruptcy Code (IBC).
Earlier, in October 2018, the Supreme Court had asked both ArcelorMittal and Numetal — a company which one of the Ruia family members was a director — to clear their “taint of disqualification” by paying off debts of the companies they were associated. While NuMetal did not pay, ArcelorMittal cleared its liabilities of Rs 7,000 crore towards Uttam Galva and KSS Petron to get its taints cleared.
ArcelorMittal, which will invest Rs 8,000 crore in Essar Steel in addition to the payments of Rs 42,000 crore to lenders, becomes the country’s fourth-largest steel producer at a time when the industry is seeing a downturn. The company said in a statement it was pleased with the judgement and that its resolution plan has been approved. “We look forward to the closing of the acquisition soon,” the steelmaker said.The erstwhile promoters of Essar Steel, the Ruias, wished ArcelorMittal and its partner for the acquisition Nippon Steel the “very best” on their entry into the Indian market. Rajnish Kumar, chairman, State Bank of India, said this should significantly reduce the scope for long-drawn litigations under IBC and would eventually lead to faster resolutions of stressed assets.