Essar Insolvency: SC Starts Hearing Appeal Against NCLAT's Decision To Treat All Creditors Equally [Read Written Submissions]

The Supreme Court bench comprising of Justices R F Nariman, Surya Kant and Ramasubramanian started hearing on Wednesday the batch of appeals challenging the NCLAT's decision in Essar Steel insolvency resolution, one of the most crucial insolvency matters of the country. While approving ArcelorMittal's Rs 42,000 crore bid for the acquisition of Essar Steel, the NCLAT had held that financial and operational creditors must be treated at par under a resolution plan. It had ruled that the 'waterfall mechanism' under Section 53 of IBC is only applicable to distribution of proceeds from liquidation and not to resolution bids. The Appellate Tribunal re-distributed the proceeds payable under the Resolution Plan of Arcelor Mittal India Ltd. (AMIL) for Essar Steel, so that all financial creditors (FC) (whether secured or unsecured) were paid 60.7% of their admitted claims and operational creditors (OCs), with claim amounts equal to or above Rs. 1 crore, were paid 60.26% of their admitted claims. OCs with admitted claim amounts under Rs. 1 crore were paid in full. The NCLAT had further held that the financial creditors could not be classified on the basis of their security interest for the purpose of distribution of resolution proceeds. Apart from the treatment of the claim of the OCs, the lenders of Essar viz. SBI, IDBI and ICICI were aggrieved that Standard Chartered Bank (SCB), with a much lower security interest value, was treated at par with the other lenders. Although Standard Chartered bank was a secured creditor, there was no security on the loan given out SCB. Senior Advocates Gopal Subramanium and Rakesh Dwivedi appeared on behalf of the Committee of Creditors (COC) of Essar Steel. Gopal Subramanium argued that the NCLAT had acted beyond its jurisdiction prescribed under Section 61 of the Insolvency and Bankruptcy Code, 2016 ('Code') as the Code does not confer any jurisdiction on the NCLAT and NCLT to examine the commercial and technical decisions of the CoC, such as the viability and feasibility of a resolution plan.Subramanium also argued that the distribution of proceeds under a resolution plan, subject to compliance with the requirements under Section 30(2)(b) of the Code, was within the negotiated domain of the CoC and could not be subjected to judicial review. He referred to the clarificatory amendment to Section 30(4) of the Code ("Amendment Act"), which came into effect from 16.08.2019. The amendment unequivocally clarified that the CoC is authorized to take a decision with respect to distribution of proceeds under a resolution plan. Furthermore, Subramanium also emphasized that the Code was based on equitable treatment of different classes of creditors, and recognized that different class of creditors deserve different treatment, and not all creditors can be treated equally. "Differential treatment to different stakeholders is key to any just and fair bankruptcy regime", said Subramanium. He contended that the view taken by the NCLAT in proposing "equal treatment" of secured and unsecured creditors, was "grossly myopic" and without appreciating that economically the two types of creditors have inherently different risk profile and business model.Essar Insolvency : SC Orders Status Quo On NCLAT VerdictSenior Advocate Rakesh Dwivedi, relying on the Supreme Court's decision in Swiss Ribbons Private Limited vs. Union of India, asserted that financial creditors as a class have been given superior status and rights as against the operational creditors. It was his submission that Section 3(30) and 3(31) of the Code define the terms "secured creditor" and "secured debt", and the definition of secured creditors was not limited to only financial creditors. The very availability of security interest in favour of a creditor distinguishes it from other creditors, irrespective of nature of underlying transaction, whether financial lending or operational. Dwivedi also submitted that the Constitution envisages classification under Article 14, as long as the same is made on sound rationale, based on an intelligible differentia and is carried out to obtain the object of the Code. Classification of creditors on the basis of their debt and existence of security interest is a sine qua non for any insolvency law. He said that while on one hand, creation of security interests helps mitigate risks of the creditors by increasing the likelihood of repayment (especially in events of default), it also allows better availability of credit by increasing the appetite of financial institutions to give credit in recognition of the predictability of repayment. This in turn results in better availability of capital in the economy to fuel economic growth. Dwivedi argued that the CoC not only ensured compliance of the statutory safeguards provided under Section 30 (2) of the Code (including the better safeguard introduced by ...

Essar Insolvency: SC Starts Hearing Appeal Against NCLAT's Decision To Treat All Creditors Equally [Read Written Submissions]

Arunima Bhattacharjee

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