The Supreme Court last week paved the way for Steel baron Lakshmi Niwas Mittal led ArcelorMittal to takeover of the bankrupt Essar Steel from the Ruias after a prolonged legal battle for over two years. Financial creditors of Essar Steel had moved the Supreme Court against the NCLAT decision to remove the nomenclature of financial and operational creditors and ordered distribution of £4.2 billion to be paid by ArcelorMittal equally.
The money paid by Mittal will go to banks whose loans the Ruias had defaulted on. Essar Steel was among the first batch of a dozen high-profile bad debt cases referred by the Reserve Bank of India for insolvency action in June 2017. The outcome, significant for banks and the government which are keen to recover NPAs, came after a tortuous journey which marked intense litigation, raising doubts whether insolvency law can successfully recover millions loaned to chronic defaulters. The SC order breathes fresh hope into the process by emphasising that the Committee of Creditors will have the decisive say in resolutions, with the role of National Company Law Tribunal and the National Company Law Appellate Tribunal (NCLAT) confined to reviewing whether process is in harmony with the Insolvency and Bankruptcy Code.
Although the law provides for resolution in a maximum 270 days, a series of cases in various forums resulted in the entire resolution process stretching to nearly 28 months. ArcelorMittal’s proposal to take over the Indian company had been approved by Committee of Creditors (CoC), led by banks, but fresh hurdle arose following a ruling by NCLAT, which held that a financial creditor such as banks and an operational creditor such as a vendor be treated equally while settling dues. Under IBC, it is the Committee of Creditors that is tasked with taking major decisions along with the resolution professional once proceedings have been initiated by National Company Law Tribunal.
The lenders moved the apex court and a bench of Justices Justice R F Nariman, Surya Kant and V Ramasubramanian set aside the NCLAT order. In a judgment, the bench demarcated the role of resolution applicants, resolution professionals, CoC and the adjudicating authorities in insolvency proceedings. There was setback for the government too as the court struck down the provision under IBC making it “mandatory” to complete the insolvency proceedings within 330 days. However, it seemed to be pleased with the fact that the Essar case had finally gone through. Finance minister Niramala Sitharaman said the verdict reinforced the credibility and substantive nature of IBC and would help improve the process of resolution.
Emphasising the primacy of the Committee of Creditors, the SC bench said the adjudicating authority cannot interfere with the commercial decision taken by the CoC and the limited judicial review available to it is to see whether the panel has taken into account the fact that the corporate debtor needs to keep going during the insolvency process, if it needs to maximise the value of its assets, and that the interests of all stakeholders, including operational creditors, have been taken care of. Further, the court said that tribunals should restrain from interfering in the commercial decision taken by CoC and they can at most ask the committee to re-examine the resolution plan. “It is clear that when CoC exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. 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 Committee,” it said.