Essar Steel Case: Creditors’ Committee Says Insolvency Code Mandates Primacy Of Financial Creditors
The Committee of Creditors of Essar Steel continued their arguments in favour of primacy of the financial creditors in distribution of claims on the second day of the hearing in the Supreme Court.
Senior Advocate Rakesh Dwivedi said the priority to financial creditors is an accepted proposition in the Insolvency and Bankruptcy Code as well as in international laws. The National Company Law Appellate Tribunal judgment equating financial and operational creditors will expose banks and financial institutions to grave financial distress, he said.
“The resolution applicant is expected to take into account differential bargains of creditors with the corporate debtor while proposing payment terms under a resolution plan,” Dwivedi said, adding the order of priority varies even within the same class of creditors.
The CoC said this differentiation in the case of financial creditors is done on the basis of availability and value of security interest while for the operational creditors it depends on whether they are employees, trade creditors or government dues. In some situations there can also be a separate class of operational creditors on the basis of availability of security, it said.
In its July 2019 judgment, the NCLAT had ordered an equal recovery of 60.7 percent for secured, unsecured and operational creditors of Essar Steel. The CoC, which has challenged this part of the order, said that the appellate tribunal’s judgment will have a disastrous impact on the banking industry which will result in a serious damage to the Indian economy.
If the security interests, during insolvency resolution are to be abrogated, the entire banking and lending landscape in India would undergo a change as the above abrogation would lead to increase in the risk of capital, lending at higher interest rates, nullifying of the basis and rationale of Reserve Bank of India’s provisioning norms.Committee of Creditors for Essar Steel
Rakesh Dwivedi also used the relation between financial and operational creditors to highlight the difference in priority given to the two classes. He argued that the credit extended by financial creditors enables a company to create assets, generate working capital and run its business operations and this trickle-down effect in the economic and operational cycle benefits all stakeholders including the operational creditors.
On the first day of the hearing, Senior Advocate Gopal Subramanium had told the court that over Rs 55,000 crore were paid to the operational creditors even while the insolvency process was ongoing while there was a moratorium on the claims of the secured creditors. Dwivedi today told the court that this fact should also be kept in mind to dispel the claims that operational creditors have not been paid sufficiently compared to financial creditors.
The CoC is also contending that the judgment passed by the NCLAT is beyond the powers given to it under the insolvency code. Building on the first day arguments of Gopal Subramanium, Dwivedi argued that the Supreme Court in its earlier judgment of K. Sashidhar Vs Union of India has held that the CoC is tasked with exercising its commercial wisdom which includes distribution of claims and the NCLAT cannot impose conditions on its own without the consent of the resolution applicant or the CoC.
The CoC will continue its arguments on Thursday.
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