The Supreme Court has recently made a pivotal judgement in the Essar Insolvency case. This judgement has initialized the takeover process of the debt-ridden Essar Steel by ArcelorMittal and Nippon Steel.
Background
In 2019, the National Company Law Tribunal (NCLT) approved the bid for Essar Steel by global steel giant ArcelorMittal, following the approval of the resolution plan offered by ArcelorMittal by the Committee of Creditors (CoC). As part of this resolution plan, ArcelorMittal promised an advance cash payment of ₹42,000 crore to financial creditors and capital infusion of ₹8,000 in the near future. However, the plan offered very little for the operational creditors to Essar Steel.
NCLAT’s Tweaking of the CoC Plan
The same year, the National Company Law Appellate Tribunal (NCLAT) confirmed the CoC’s plan but made slight modifications to the financial distribution plan. It ordered an equal recovery plan for all types of creditors, which encompass both financial and operational creditors.
Key Points of the Supreme Court Judgement
The judgement given by the Supreme Court revolved around the following key points:
– Wisdom of CoC: The requisite majority (66%) of the CoC is responsible for negotiating and accepting a resolution plan, considering differential payment to different classes of creditors.
– Principle of Equality: The principle of equality should not be misused for treating unequals as equals.
– Financial vs Operational Creditors: The precedence of financial creditors over operational creditors was upheld in terms of fund distribution.
– Relaxation of Resolution Deadline: The 330-day mandatory deadline for the resolution of insolvency and bankruptcy cases was removed.
Consequences of the Judgement
The judgement is expected to have a significant impact on banks, as they will be able to recover around 85% of admitted debts, compared to the average recovery of 53%. The verdict will also likely speed up the resolution process and attract foreign investors.
Table of Facts about the Judgement
| Fact | Description |
|---|---|
| Wisdom of CoC | The Commercial Wisdom of CoC (66%) is responsible for negotiation and acceptance of a resolution plan. |
| Principle of Equality | Equality principle can’t be stretched to treat unequals equally as it hampers the objective of the IBC to resolve stress assets. |
| Relaxation of Resolution Deadline | 330-day mandatory deadline was removed for resolution of insolvency and bankruptcy cases. |
| Bank’s Recovery | Banks will recover about 85% against admitted debts in contrast to the average recovery of 53%. |
Insolvency Resolution Process in India
In India, companies, public limited companies and Limited Liability Partnerships (LLP) are considered as defaulting corporate debtors under the Insolvency and Bankruptcy Code (IBC). The code can be triggered when there is a minimum default of Rs 1 lakh. This process can be initiated through an application before the National Company Law Tribunal (NCLT).
The subsequent steps include appointment of an Interim Resolution Professional (IRP) by the NCLT, formation of a Committee of Creditors (CoC) by the IRP and eventually, the Corporate Insolvency Resolution Process (CIRP) which involves revival strategies such as raising fresh funds for operation or finding a new buyer for the company.
If no resolution plan is approved by the CoC, the company will enter liquidation proceedings under the direction of the tribunal.
