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

Has the NCLAT set a dangerous precedent?

Photographer: David Paul Morris/Bloomberg
Photographer: David Paul Morris/Bloomberg

The National Company Law Appellate Tribunal has introduced a twist in the insolvency process by taking away the power of committee of creditors to decide on distribution of proceeds from a resolution plan.

In deciding on a bunch of appeals in the Essar Steel Ltd. insolvency case, the NCLAT today approved ArcelorMittal’s Rs 42,000 crore resolution plan. Given the insolvency resolution process has now been on for over 700 days, this comes as good news for the bankrupt company’s creditors. What doesn’t is that the NCLAT has held that the committee of creditors has no role to play in the distribution of funds to lenders.

In this judgment, we have laid down what are the things committee of creditors can decide and what it can’t, NCLAT said while reading out its order. The distribution of claims will be done by the resolution professional, the committee of creditors will not have any role, the appellate tribunal said in court.

This is the first time the appellate tribunal or any tribunal has sought to overrule the committee of creditors in distribution of funds. The Insolvency and Bankruptcy Act, 2016, doesn’t explicitly mention who decides the issue of distribution and in listing the duties of the resolution professional, it makes no mention of this. All it says is the resolution plan should be scrutinised by the resolution professional to ensure it conforms with the law. A plan is considered approved if over 75 percent of the creditors on the committee vote in favour of it. After which the resolution professional shall submit the resolution plan to the tribunal for final approval.

Abiding by this, in all IBC cases so far the creditors’ committees have decided on which plan to pick and the distribution of the repayment. Even the Supreme Court has been in agreement with that process. In the case of K Sashidhar, the apex court had stated that the commercial wisdom of the committee of creditors has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by IBC.

The legislature, consciously, has not provided any ground to challenge the ‘commercial wisdom’ of the individual financial creditors or their collective decision before the adjudicating authority. That is made non-justiciable.
Supreme Court

Hence, this NCLAT order seeks to set a new precedent.

The NCLAT has basically substituted their judgment as if this was the judgment of the committee of creditors and that is completely wrong, Shardul Shroff, managing partner at Shardul Amarchand Mangaldas, told BloombergQuint. Shroff has been advising Essar Steel’s creditors’ committee.

If this principle has been articulated by the judges, it’s contrary to the global principles and it will mess up the whole application of the law. In my view, they have gone beyond the ambit of the law and have replaced the scheme as if they have the power and authority to amend or modify a resolution plan; this is not permissible.
Shardul Shroff, Managing Partner, Shardul Amarchand Mangaldas

The jurisdiction of the NCLT is only based on consent and if the consent has been granted in a particular way, the court or the appellate tribunal does not have power to amend the consent because that does not have either the sanction of the resolution applicant or the sanction of the committee of creditors, Shroff added.

Right after the NCLAT announced the operative parts of its order, the Essar Steel committee of creditors sought a stay on it but the tribunal denied. There’s already a pending case in the Supreme Court, filed by the lenders earlier when both the NCLT and NCLAT made suggestions to the committee to consider a different distribution ratio. The committee of creditors will revisit the apex court now against this NCLAT decision.

“You have not really taken a vote nor a decision or judgment based on whether this acceptable to the set of creditors who are entitled to vote i.e. the committee of creditors. So this is bound to go in appeal,” Shroff said.

The approach of the NCLAT is curious because the determination of allocation is a combination of the discussion between the resolution applicant and the CoC, subject to reasonable requirements and equity, Nilang Desai, partner at AZB said.

If the CoC (committee of creditors) doesn’t, then it seems, the responsibility must fall somewhere and that must be on the resolution applicant which puts him in the same tricky situation as the CoC found itself in earlier.
Nilang Desai, Partner, AZB

The NCLAT also set out a new repayment ratio in the Essar Steel case. It said employees, operational creditors and financial creditors whose claim is less than Rs 1 crore will be repaid in full and those with claims of over Rs 1 crore will get 60 percent, the appellate tribunal has held.

As per the approved plan, financial creditors were to get Rs 42,000 crore against their claims of more than Rs 49,000 crore. That is a recovery rate of 92 percent. However, against its admitted claim of Rs 3,487 crore, the resolution plan allocated Rs 60 crore to Standard Chartered Bank Plc—working out to be a 1.7 percent recovery. The bank as well as operational creditors, who were miffed for similar reasons, had approached the NCLT and NCLAT seeking a higher share.

The National Company Law Tribunal had recommended the committee of creditors reconsider the allocation to financial creditor Standard Chartered Bank and 40 operational creditors of Essar Steel. The committee of creditors didn’t change its mind. The same issues arose when the matter reached the appellate tribunal and now will play out again in the Supreme Court.