FINANCIAL CREDITORS VS. OPERATIONAL CREDITORS: SUPREMACY DECIDED BY THE SUPREME COURT IN ESSAR JUDGMENT

With the much awaited-judgment in the Insolvency and Bankruptcy regime; the Supreme Court of India (hereinafter “SC” or “apex court”) cleared off the long-standing confusions encompassing the Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code” or “IBC”) with its landmark in Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta & Ors[i] on November 15, 2019.

 The judgment came at a point when the debacle and dilemma of rights between Financial Creditors (hereinafter “FC”) and Operational Creditors (hereinafter “OC”) stood at a stake. The SC, with its landmark judgment paved a way for upholding the rights of FCs over OCs, and many other uncertainties in the present-day Code.

 In light of this, the article will present a word picture of the landmark judgment of Essar steel vis-à-vis Insolvency and Bankruptcy jurisprudence in India and the way forward.

 BACKGROUND AND FACTS OF THE CASE

 The case between CoC of Essar Steel v. Satish Kumar Gupta, in a series of petitions filed in the apex court finally paved way for its final verdict on November 15, 2019. The judgment was passed by a Bench of Justices Rohinton Nariman, Surya Kant and V Ramasubramanian. The case started almost 2 years back in a bid to resolve the dispute between the debt-laden Essar Steel and its Committee of Creditors[ii] (hereinafter “CoC”) has taken many twists and turns.

THE NCLT’s DECISION (2017)

• The case took its first spark in August 2nd, 2017, when the assets of Essar Steel led company was declared insolvent owing ?54,547 crores to its creditors (both financial and operational). The company was identified as one of the biggest corporate defaulters by Reserve Bank of India (RBI). The creditors of the company led by a consortium of Standard Chattered and State Bank of India (including Numetal, Vedanta, JSW Steel and others) filed an insolvency application under Section 7 for the Corporate Insolvency Resolution Process (hereinafter “CIRP”) at the Ahmedabad Bench of National Company Law Tribunal (hereinafter “NCLT”), and the same was admitted.
•  The winning bid by ArcelorMittal, (led by Lakshmi Mittal in partnership with Nippon Steel and Sumitomo Corporation) set off the final race to take over the assets of the debt-laden Essar steel by paying of ?50,000 Crores in toto (including equity infusion of ?8,000 crores).
•  The resolution plan was approved by the NCLT (Ahmedabad Bench) in March 2019, but was challenged by the OCs (Dakshin Gujarat, Gujarat Energy, Bharat Petroleum, Indian Oil, GAIL, ONGC, and the NTPC), that they were being paid only 8% from the RP whereas FCs recovering 92.5% from the recovered amount.
•  The bid was also challenged by Standard Chartered Bank as well as by the directors of Essar Steel, as being violative. 

 THE NCLAT’s RULING (2019): CHALLENGE OF THE NCLT ORDER

•  The judgment of the NCLT was challenged and subsequently taken up by National Company Appellate Tribunal (hereinafter “NCLAT”) in series of petitions. The appellate tribunal in its judgment dated July 4, 2019, cleared the CoC’s plan but ordered that the FCs and OCs are equal in terms of receiving more than 60.7% of their total dues (making it over 1 crores).
•  Further, the NCLAT also held that the OCs below 1 crores claim are entitled to recover 100% of their dues, making the total debts of the company stood at ?69,192.34 crores from 54,547.
•  The NCLAT also confirmed that the FCs and OCs cannot be treated in a discriminatory manner by the CoC. Under the RP submitted to the Resolution Professional, OCs were to receive ?1, 200 crores as against their claim of ?4,976 crores while the Standard Charted have been approved of receiving ?60.71 crores out of their ?3,500 crores of investment. The same was challenged in the NCLAT. But, the NCLAT held that both, the FCs and OCs should be treated at par.

 THE APEX COURT’s VERDICT

 In light of the judgment passed by NCLAT, the consortium of banks led by SBI knocked the door of the apex court. The order of NCLAT was challenged by the CoC stating that the FCs have primacy, and the right to recover more than OCs. The SC reiterated with the view of COC and reversed the order of NCLAT to finally resolve the long-standing dispute going on for the last 830 days.

 KEY HIGHLIGHTS AND WAY FORWARD

The apex court clarified major contentions that required much-needed thought on the present insolvency process. Some of highlights from the apex court’s judgment are:

• Wisdom of CoC: The apex court held that the wisdom of CoC in matters of final decisiveness of the proceeds received from the recovery amount. The court stated that the CoC will have supremacy for the disbursement of fund under the Code. This will allow the Resolution Professional to act within the framework of the Code and create a balance of interest for all stakeholders (including the operation creditors) associated with the funds of the company. The CoC’s decision will prevail over the distribution of funds to creditors, modification to the RP; thus having the “feasibility and viability” of the CIRP.
•  Restriction by the Adjudicating Authority: The apex court also held that the adjudicating authority i.e. NCLT under Section 30 (2) and the appellate authority i.e. NCLAT under Section 32 read with Section 61 (3), cannot interfere with the decision and the framework decided by the CoC. The authorities, however, have the right to make their recommendations for proper enforcement of the plan.
•  Relaxation on Resolution Deadline: The bench also reiterated that the deadline for completion of the CIRP within 330 days does not work rigidly as this would violate litigant’s fundamental right under Article 14 and 19(1) (g). The provision is subject to flexibility in exceptional cases. Therefore, the mandatory provision for completion of CIRP process underlined under Section 12(3) has also been relaxed by removing the word “mandatory” from the provision.
•  FCs right of claim over OCs: The court also cleared that the rights of FCs will prevail over the OCs in the distribution of the funds received from the insolvency proceeds. The court held that the FCs are the primary investors and capita-providers for the company whereas, OCs are secondary beneficiaries from the amount lent by the FCs. 
•  Equality and Equitable Treatment of Creditors: The court also set to clear out the loopholes and the gaps in light of the unsecured lending. Analyzing the debt proportionality ratio of the creditors, the priority of operational creditors over financial creditors does not mean the same percentage of debt recovery. The point of law is questioned on equitable treatment and not on equal treatment. 
•  Role of Resolution Professional: The role of Resolution Professional in the CIRP process is not adjudicatory, but a mere administrative function. The decision of the COC will prevail in all circumstances. However, the RC acts as an advisor and ensures those resolution plans submitted are in all forms complete and in accordance with the Code.

 CONCLUSION

The decision gives a go-ahead to the long pending 2 years dispute in clarifying the aforementioned contentions concerning the Code. The SC’s judgment paved way as the final decision encompassing the dilemma regarding the rights of FCs and gave a green signal to ArcelorMittal to take over the assets of Essar Steel. The takeover is amongst the biggest insolvency resolution after the enactment of the Code. The judgment clearing off several dusts in the Indian insolvency regime covered significant aspects from recovery of Non Performing Assets to debt laden companies, from speedy disposals to pending litigations. The judgment emerged as a white knight as a panacea of lakhs and crores of pending amount in the hands of chronic defaulters. The decisive say of CoC on the resolution process over the NCLT and NCLAT is yet another major clarification made by the SC. The judgment is a new ray of hope in the Insolvency and Bankruptcy to hold the spirit of the Code and the purpose of resolving disputes in a time-bound manner.

[i] In the Supreme Court of India, Civil Appeal No. 8766-67 OF 2019

[ii] In Insolvency and Bankruptcy Laws, Committee of Creditors are group of lenders who have interest in debt recovery from the insolvent company filing an application for resolution process. Section 21 of the Insolvency and Bankruptcy Code, 2016 underlines Committee of Creditors.  

By

Vijay Pal Dalmia, Advocate

Supreme Court of India & Delhi High Court

Email Id: [email protected] 

Mobile No.: +91 9810081079

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And

Pranay Bhattacharya

Maharashtra National Law University, Aurangabad (MNLUA)

Email Id: [email protected] and [email protected]

LinkedIn: https://www.dhirubhai.net/in/pranaybhattacharya/