NCLAT’s Essar Steel Judgment And The Spirit Of The Law 
A security guard pulls a gate across the logo of Essar Ltd. at the company’s corporate office in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)

NCLAT’s Essar Steel Judgment And The Spirit Of The Law 


It is no secret that the cases currently being resolved under the Insolvency and Bankruptcy framework have been marred by litigation, uncertainties, and varying judgments. The recent order by the National Company Law Appellate Tribunal in the case of the corporate insolvency resolution process of Essar Steel Ltd. has only added to the legal woes of the stakeholders involved in the IBC process.

Before we dissect the order, it will be worthwhile doing a quick recap of the Essar Steel case. The resolution plan submitted by ArcelorMittal India was approved by the committee of creditors and the National Company Law Tribunal. Subsequent to the NCLT order, Standard Chartered Bank, a financial creditor, and certain operational creditors challenged the NCLT’s order in NCLAT, on grounds that included discrimination amongst and within classes of creditors. They also challenged whether the Committee of Creditors has the power to decide the distribution of the money offered by ArcelorMittal.

The Bone Of Contention

As per the distribution ratio approved by the creditors and the NCLT, of the Rs 42,202 crore proposed to be paid by Arcelor, Rs 196 crore was proposed to be paid to operational creditors against their total claim of Rs 5,073 crore. This meant a recovery of about 4 percent. As against this, the majority of the secured financial creditors were getting a recovery rate of 91.99 percent.

This disparity between recovery rates seems to be the bone of contention for some of the operational and financial creditors, who had appealed against the NCLT order and were vying for equitable treatment.

The NCLAT, in its order, has noted that a reading of Section 5(7) and 5(8) of the IBC does not distinguish between one or the other financial creditor and therefore held that recoveries amongst financial creditors cannot be discriminated on the basis of financial creditors being secured or unsecured.

NCLAT’s ‘Balancing Act’

In the case of operational creditors, the NCLAT has relied upon its judgment in the Binani Industries vs Bank of Baroda case wherein it held that if operational creditors are ignored, no creditor will supply goods on credit to the corporate debtor and this will be against the basic principle of the IBC, which will also have a cascading impact on the Indian economy. The bench, therefore, held that it is necessary to balance the interest of all stakeholders.

Referring to the waterfall of payments under Section 53 (i.e. ranking of creditors in case of liquidation), the NCLAT has held that the same will only apply in case of a liquidation of the company and not in a scenario of resolution. The NCLAT has also ruled that the distribution amongst creditors has to be decided by the resolution applicant by incorporating the same in the resolution plan.

Finally, the NCLAT has broadly proposed an equal recovery of 60.7 percent for secured financial creditors, unsecured financial creditors, and operational creditors of Essar Steel after increasing the operational creditors’ claims by about Rs 14,000 crore. This was done on the basis that the resolution professional does not have any adjudication rights on claim admission. Historically, courts have not interfered in the allocations proposed in the resolution plan and approved by the committee of creditors.

Also read: Essar Steel Insolvency: NCLAT Strips Creditors’ Committee Of Key Power

Legally Speaking...

While the legal arguments all seem within the ambit of sound legal interpretation, the judgment is a body blow to the IBC as a remedy for speedy and fair debt resolutions. Legally too, it may violate Article 14 of the Constitution of India as it destroys all levels of security that either the IBC or other commercial laws provide creditors.

Equality should be among equals says the Supreme Court, which seems to be violated in this judgment.

Further, the court has, in many instances, exceeded its adjudication role and made commercial judgments.

Also read: Essar Steel Insolvency: NCLAT On Sharing Profit, Discrimination And Ruia’s Contention

Commercially Speaking ….

Commercially, the consequences of this order are not restricted to only the Essar case stakeholders, as there seems to be a crisis of confidence in the principles determining creditor heirarchy. Capital structures are now flat for all categories of creditors which, obviously, is bizarre. Also, investors, who believed in the seamless implementation of the law will certainly be thinking twice on their next investment.

Surely, no deal may happen with external investors unless the Essar case is appropriately addressed by the Supreme Court.

Finally, the courts need to be as much a part of a timely resolution as is the intent of the IBC which, quite frankly seems lacking, Courts are exempt most deadlines and the CIRP period stands extended for any sub-judice matter. Further, the inconsistencies of judgments do not do much to cement a newly introduced law. All of these impact recoveries for creditors and deters investors from taking aggressive positions.

Abizer Diwanji is Financial Services and Restructuring Leader at EY India.

The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.

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