Supreme Court Reserves Judgment In Essar Steel Insolvency Case

The Supreme Court of India on Thursday reserved judgment on petitions challenging the National Company Law Appellate Tribunal ruling in the Essar Steel insolvency case in which the appellate tribunal had equated operational and financial creditors for distribution of claims from the winning bid in the insolvency resolution process.

During the course of the hearing, the Committee of Creditors of Essar Steel argued against the NCLAT judgment while one of the financial creditors, Standard Chartered, argued against the CoC’s decision to create a distinction within financial creditors themselves.

The operational creditors which had received equitable treatment with financial creditors defended the NCLAT judgment and also sought to challenge the amendments introduced by the central government in August 2019.

Here are the main arguments put forward by the parties involved in the case:

Financial Creditors: IBC Code Does Not Grant Equality To All Creditors

The financial creditors argued against granting parity to all creditors, saying it is not something that was envisaged in the Insolvency and Bankruptcy Code.

The creditors’ committee argued that financial creditors are different from operational creditors as they are the one’s responsible for creation of assets and value which benefits all including operational creditors.

It further said that even within financial creditors, the value of their security interest will determine the priority they are accorded in distribution of claims. This, according to the committee, was used to give differential treatment to Standard Chartered Bank, which received a lesser claim amount than other creditors despite being a financial creditor.

The committee also argued that the NCLAT cannot go into deciding the distribution claims from the winning bid as that will amount to ruling on the commercial wisdom of the CoC and the insolvency code doesn’t grant the tribunal such a jurisdiction.

Standard Chartered: No Sub-Classification Of Financial Creditors Is Allowed Under IBC Code

Standard Chartered Bank, one of the dissenting members of the Committee of Creditors, called the treatment meted out to it by the CoC as “illegal” and “arbitrary” inasmuch as the distribution approved by the CoC was meant to benefit only select financial creditors. The committee treated us worse than even the operational creditors, argued Senior Advocate Kapil Sibal for Standard Chartered Bank.

The distinction of claim distribution being subject to the value of security interest held by the financial creditors is not recognised by the Insolvency and Bankruptcy Code, the bank argued, adding that the insolvency code makes distinction of only financial and operational creditors and nowhere does it make a further distinction between financial creditors during the resolution process.

It is the bank’s case that if the liquidation value of the security held by a creditor is the basis of distribution of claims, then such a criteria should be made applicable on all financial creditors and they should not be singled out on this ground.

Operational Creditors: Distinction Between Creditors Is Applicable Only During Liquidation

The operational creditors based their arguments on two main grounds: Supporting the similar treatment of all creditors and the challenge against the 2019 amendments to the IBC code.

The operational creditors had argued that the new limit imposed in the amendments to decide on insolvency cases goes against the spirit of separation of powers as it puts a timeline on the judiciary to decide cases.

Such an amendment will also burden the tribunals hearing these cases, resulting in genuine disputes not getting addressed and denying a genuine affected person right to judicial redressal, Senior Advocate Ranjit Kumar had argued during the course of the hearing.

The operational creditors also argued that the distribution mechanism in Section 53 mandates that operational creditors be given a minimum of fair liquidation value during disbursal of claims applies only when the company is undergoing liquidation proceedings. When an insolvency resolution process is in process and the company is functioning as a going concern, all creditors are to be treated equally, they argued.

“The IBC Code intends to grant parity to operational creditors at the resolution stage because of the role operational creditors play by ensuring the company continues to function as a going concern even when insolvency proceedings are ongoing,” Ideal Movers Pvt. Ltd., an operational creditor, said. The code, it said, emphasises on revival of the company as a going concern, priorities which apply at the stage of liquidation will have no relevance.

Central Government Defends IBC 2019 Amendments

The central government in this case was represented by Additional Solicitor General Madhvi Divan who argued that apart from the 330-day time limit imposed for resolution process, the amendments also provide for another 90-day period for liquidation proceedings. This, she said, needs to be looked in the larger context of what the code aims to achieve.

Time is of the essence in realising the aim of the IBC code which is to maximise the assets of a corporate debtor and passage of time is inversely proportional to maximising the value of assets of the corporate debtor, explained Divan while defending the 330-day time limit introduced by the amendments in August 2019.

The bench, however, questioned Divan on whether making this time limit can be struck down on grounds of it being arbitrary. Justice Rohinton Nariman observed that the government can also look at better management of tribunals which hear these cases so that they can complete the proceedings on time.

Divan pointed out instances where parties file legal challenges in a bid to delay the insolvency proceedings. “Players who know how to play the system will file all sorts of applications to delay the proceedings. In the Jaypee homebuyers case, applications are still being filed to oppose the proposals put forward by NBCC,’’ Divan said.

In its July 2019 judgment, the NCLAT had upheld the winning bid of ArcelorMittal for Essar Steel and 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.

The Supreme Court bench which has reserved the judgement today includes Justice Rohinton Nariman, Justice Surya Kant and Justice V Ramasubramanian. The top court has granted one week time to all the parties to submit any written submissions they would like to bring to the attention of the court.

Follow our daily coverage of Essar Steel hearings in the Supreme Court

Essar Steel’s Insolvency: Final Lap?

Day 1: Fair, Equitable Treatment Does Not Mean All Creditors Are Equal, Argues Creditors’ Committee

Day 2: Creditors’ Committee Says Insolvency Code Mandates Primacy Of Financial Creditors

Day 3: Standard Chartered Got An ‘Extravagant Bonanza’, Argues SBI

Day 4: Creditors’ Committee Treated Us Worse Than Operational Creditors, Says Standard Chartered

Day 5: Essar Hearing Day 5: Operational Creditors Make Their Case As Hearing Nears Conclusion