The Supreme Court (SC) has restored the primacy of the secured creditors over unsecured creditors by staying the National Company Law Appellate Tribunal (NCLAT) order in the Essar Steel insolvency case, where the appellate tribunal had said that operational creditors should be treated on par with the financial creditors.
The apex court reversed the order of NCLAT and reiterated that the secured financial creditors have primacy over operational creditors. The SC also upheld the commercial wisdom of the committee of creditors in the matter of resolution and distribution of the proceeds of the resolution plan.
It is a significant judgment for many reasons. First, it gives a final go-ahead to the resolution of Essar Steel case, one of the largest under the Insolvency and Bankruptcy Code (IBC). While the resolution plan of ArcelorMittal was approved in March this year by the National Company Law Tribunal (NCLT), the operational creditors in this case had appealed against the resolution in the NCLAT, which had put a stay on the resolution process.
Second, the verdict paves the way for the amendment made by the government in the insolvency law. A petition has been filed in the court against the amendments proposed by the court.
The amendments proposed by the government earlier this year, among other things, have reinstated the Committee of Creditors as the main decision maker and driver of the resolution process. The amendments had proposed that 'commercial consideration in the manner of distribution proposed in the resolution plan' will remain within the powers of the Committee of Creditors (CoC). The SC judgment on Essar Steel case makes the same observation.
Third, the judgment makes an important change in the amendment proposed by the government in the insolvency law. While the amendment says that it is mandatory for a resolution process to be completed within 330 days (against 270 days earlier), which also includes time taken in litigations, the SC has said that the word mandatory should be removed from the amendment. However, it says that only in very exceptional cases, the time limit of 330 days should be allowed to be breached.
Sapan Gupta, Partner and National Head of Banking and Finance, Shardul Amarchand Mangaldas, says that the judgment gets the IBC back on track. "The apex court has correctly recognised the difference between secured and unsecured creditors which is essential for the banking industry where majority lending is done on the basis of collateral. The apex court has also given due recognition to the commercial wisdom of the lenders and has made CoC the primary decision maker," he says.
On the issue of time limit, Gupta says that even though the apex court has removed the word mandatory from the amendment, it has reiterated that only in exceptional cases the time limit should be breached, thus putting responsibility on all stakeholders to complete the process within the time limit of 330 days.