Essar Steel: Supreme Court On When The 330-Day IBC Deadline Can Be Relaxed
The Supreme Court’s judgment in the Essar Steel Ltd.’s case comes with a good news for the central government as the top court cleared the amendments introduced in August 2019 to the Insolvency and Bankruptcy Code after removing the mandatory nature of the 330-day insolvency resolution deadline.
The challenge to the IBC amendments was mounted against two main changes brought to the code:
1.) Introduction of a 330-day mandatory period for insolvency resolution process from the date of admission of the insolvency application. The deadline also included the time taken in litigation by courts during the resolution process.
2.) Fixing a minimum amount to be paid by the Committee of Creditors to operational creditors and dissenting financial creditors. The amendment said operational creditors and dissenting financial creditors should not be paid less than the fair value they would have received on liquidation of the company.
The amendments were introduced shortly after the National Company Law Appellate Tribunal’s judgment of July 2019 in the Essar Steel case where the appellate tribunal had granted parity to both the financial and operational creditors by ordering around 60 percent distribution of claims of all creditors whose claim was above Rs 1 crore and were not employees of the company.
The amendments made Section 53, which lays down the hierarchy of payment to creditors during liquidation, applicable during the resolution process.
The operational creditors who had challenged the amendments had argued that the amendments were introduced with the specific aim to overturning the NCLAT judgment and the legislature acted beyond its mandate since the law bars it from interfering with any judgment.
The top court, however, has rejected the arguments and held that while the NCLAT judgment may have formed the basis for introduction of the amendments, it cannot be said that they were introduced to set aside the judgment as the appeal against the appellate tribunal’s judgement can be made to the Supreme Court.
330-Day Insolvency Resolution Period Cannot Be Made Mandatory
Through the 2019 amendments, the Parliament added an additional 60 days to the earlier deadline of 270 days to complete the insolvency resolution process. The additional time was to account for any litigation, which by several court decisions, had been excluded from the 270-day timeline. With litigation in several cases far exceeding the timelines under the IBC, the Essar Steel insolvency itself has been underway for two years, the amendment sought to put a time limit to litigation. It made it mandatory for the tribunals and courts to complete the legal proceedings within the same 330-day period. On the expiry of the 330-day period, the company heads for mandatory liquidation.
This was the focus of the challenge at the hearing as the operational creditors argued that putting a timeline for courts to decide cases is not permitted by law and would defeat the purpose of the code which is revival of the company and not its liquidation.
The court in its judgment noted that the introduction of the time limit comes in the light of experiences with previous laws such as the Sick Industrial Companies Act and the SARFAESI Act where cases dragged on for years and defeated the purpose of these laws which was resolution of stressed assets.
However, there may be situations when the insolvency resolution and the litigation arising out of it cannot be completed within 330-day period without any fault of the litigant, said the judgment while striking down the mandatory nature of the 330-day deadline.
The exceptions to this rule, according to the top court judgment will be granted on fulfilment of three conditions:
1.) It can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days.
2.) That it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation.
3.) The time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself.
SC Upholds Payment Of Minimum Value to Operational and Dissenting Financial Creditors
The 2019 amendments also introduced a minimum value which has to be paid to operational creditors and those financial creditors who do not vote in favour of the approved resolution plan.
This was done by amending Section 30(2) of the IBC Code where it now makes it mandatory to pay a minimum of fair liquidation value of the operational creditor’s claim. The same rule is made applicable on dissenting financial creditors as well. As far as the manner of distribution of claims is concerned, the amendments made Section 53(1) which until then laid down the manner of distribution of claims during liquidation, applicable to the resolution process.
The operational creditors had argued that the payment mechanism envisaged for liquidation of a company cannot be applied during the resolution process as the aim during resolution is to maximise the value of the company. The operational creditors play a vital role in keeping the company as a going concern during the resolution process and therefore the minimum threshold of their claims cannot be set at liquidation value, argued the operational creditors of Essar Steel.
The government’s argument that this amendment is a beneficial provision in favour of operational and dissenting financial creditors has found favour with the Supreme Court which has upheld the changes brought in the code.
As a matter of fact, pre-amendment, secured financial creditors may cramdown unsecured financial creditors who are dissentient, the majority vote of 66 percent voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors are now to be paid the minimum amount...Supreme Court judgment in the Essar Steel case
The court said that application of Section 53(1) during the insolvency process is only to serve as a reference to determine the minimum amount to be paid to the creditors and does not come in the way of the exercise of their commercial wisdom by the Committee of Creditors.
In its July 2019 judgment, the NCLAT had upheld the winning bid of ArcelorMittal for Essar Steel and but had altered the distribution of claims by ordering an equal recovery of 60.7 percent of claims for secured, unsecured and operational creditors of Essar Steel.
The Supreme Court bench which heard the case included Justice Rohinton Nariman, Justice Surya Kant and Justice V Ramasubramanian.
For more background information on the Essar Steel case and daily hearings at the Supreme Court read these stories.
Supreme Court Decides: Power Restored To CoC