NCLAT ruling in Essar Steel-ArcelorMittal set aside by Supreme Court

The Supreme Court has set aside the National Company Law Appellate Tribunal's (NCLAT) ruling in the Essar Steel-ArcelorMittal case that provided for equal distribution of proceeds between financial and operational creditors. The NCLAT had approved ArcelorMittal’s bid for Rs. 42,000 crore for acquiring the debt-laden Essar Steel.

The Supreme Court bench headed by Justice R F Nariman quashed the NCLAT order which had given financial creditors equal status with operational creditors in the distribution of ArcelorMittal's bid amount.

The top Court relaxed timeline of 330 days to find a resolution of the stressed asset as prescribed in Insolvency and Bankruptcy Code (IBC) and held that it is open for the NCLAT to extend the timeline if required.

The Court further held that the appeals of Committee of Creditors (CoC) will be allowed and the resolution plan of ArcelorMittal as amended by CoC must be accepted for Corporate Insolvency Resolution Process (CIRP). The Court has clarified that financial creditors should be accorded priority and the tribunal cannot interfere with the commercial decisions taken by the Committee of Creditors, potentially clearing the decks of its takeover by ArcelorMittal.

While pronouncing the order, Justice Nariman said that although the ultimate discretion on distribution is with the CoC, its decision should also balance the interests of all stakeholders.

According to Sapan Gupta, Partner and National Head of Banking and Finance, Shardul Amarchand Mangaldas & Co, "The judgment by the Hon'ble Supreme Court is very heartening for the growth of IBC in India. The apex court has correctly recognized the difference between secured and unsecured creditors which is essential for the banking industry where majority lending is done basis collateral. The apex court has also given due recognition to the commercial wisdom of the lenders and has made COC the king. While we await the written judgment, this is a huge win for the economy which will see an influx of Rs. 42000 crores to wipe out a chunk of NPA and for investor confidence in IBC."

Earlier this year, the Supreme Court had put on hold the sale of Essar Steel to ArcelorMittal as it agreed to hear the appeal filed by lenders against the NCLAT order.

On August 1, Parliament had approved changes in the IBC providing greater clarity over the distribution of proceeds of the auction of loan defaulting companies. The Insolvency and Bankruptcy Code (Amendment) Bill 2019 gives CoC of the loan defaulting company explicit authority over the distribution of proceeds in the resolution process and fixes a firm timeline of 330 days for resolving cases referred to the IBC.

Essar Steel was auctioned under the new IBC to recover Rs. 54,547 crore of unpaid dues of financial lenders and operational creditors. In July, the NCLAT had ordered that financial creditors will get 60.7 % of their admitted claims of Rs. 49,473 crore, which is roughly the same as operational creditors. The operational creditors with an admitted claim amount of less than Rs 1 crore would get 100 percent, while above Rs 1 crore would get 60.26 percent and workmen and employees would get 100 percent.

The tribunal had said that the CoC will have no role in the distribution of Rs 42,000 crore and allowed claims of the operational creditors such as Dakshin Gujarat, Gujarat Energy, Bharat Petroleum, Indian Oil, GAIL, ONGC, and the NTPC. In a bid to acquire Essar Steel under the insolvency process, ArcelorMittal was ready to pay Rs 42,000 crore, including a minimum guarantee of Rs 2,500 crore as working capital.

The tribunal said that since the Apex Court had settled the issue of eligibility of ArcelorMittal India, it could not be re-opened before the Appellate Authority at a stage where the ‘Resolution Plan’ approval was being considered.