Case Analysis of Essar Steel

In the Supreme Court of India

Name of the Case –Committee of Creditors of Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta.
Citation –CIVIL APPEAL NO. 8766-67 OF 2019
Name of the Parties-Committee of Creditors of Essar Steel India Limited through Authorised Signatory, Satish Kumar Gupta.
Bench- Rohinton Fali Nariman, S. Ravindra Bhat.

Case Analysis of Essar Steel Case

Introduction

The ultimate aim of Insolvency and Bankruptcy Code is the speedy resolution of strained assets of the insolvent debtor in a time bound manner. IBC emerges as a comprehensive fast track mechanism in the process of insolvency proceedings and aims at maximising the value of the assets of the corporate debtor. The Supreme Court judgement on Essar Steel is a landmark judgement that upholds the core principles of the IBC. After around two year intensive long-drawn battle that lasted for many days, the Essar Steel case has finally reached its certainty on its second half of 2019, with the Supreme Court overruling the National Company Law Appellate Tribunal’s (NCLAT) judgement & upholding the Committee of Creditors’ (CoC) mandate on how the funds from the ₹42,000-crore offer by ArcelorMittal would be dispersed among the creditors.

Background of the Case

The landmark Judgement has cleared the way for ArcelorMittal and Nippon Steel to take over debt driven Essar Steel. In March of 2019, National Company Law Tribunal sanctioned global steel-giant ArcelorMittal’s bid for Essar Steel. The Committee of Creditors (CoC) agreed to the resolution plan offered by the ArcelorMittal. Under the resolution plan, ArcelorMittal extended an advance cash payment of ₹42,000 crore to the financial creditors and capital of ₹8,000 crore in the next upcoming years.

However, the offer didn’t have much to offer to operational creditors to Essar Steel. The National Company Law Appellate Tribunal (NCLAT) approved the CoC’s plan but altered the financial distribution plan by adjuring an equal recovery plan for all creditors, including operational & financial creditors. To adumbrate, the Apex Court upheld the supremacy of the Committee of Creditors constituting the financial creditors of the bankrupt firms over the disbursement of claims.

The Apex Court quashed the earlier NCLAT judgement which brought parity between operational and financial creditors of Essar Steel in matters of disbursements of proceeds. The financial creditors had approached the Supreme Court stating that the National Company Law Appellant Tribunal order exceeds the scope of the IBC. They further argued that secured creditors have the prior right over funds, an argument that was also used to refuse Standard Chartered the same treatment as other financial creditors. With the Supreme Court finally upholding the Committee of Creditors primacy over distribution of funds, a major area of concern over grey area of law has been addressed to eradicate all form of ambiguity.

Facts of the Case

In this particular case, the resolution professional (for Essar Steel, after analyzing the resolution submitted by Numetal Limited and Arcelor Mittal India Private Limited,  disqualified both by declaring them to be ineligible in view of Section 29A of the Code. ArcelorMittal approached the SC against the order of the NCLAT. The Supreme Court, held that both the Resolution Applicants were disqualified from submitting resolution plans as they were in contravention of Section 29A of the Code. However, the SC exercised its extraordinary power under Article 142[1] of the Constitution of India to give the Resolution Applicants last opportunity. They were adjured to clear any outstanding dues regarding their NPA accounts within 2 weeks of the SC verdict. The Supreme Court invoked the principle of ‘lifting the corporate veil‘ to determine the ineligibility of the applicant submitting a resolution plan. After analyzing the SC laid down that:

where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the law, the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole.”[2]

In conclusion, the Supreme Court granted AMIPL and Numetal a period of 2 weeks to clear all their liabilities regarding Non Performing Assets accounts to become eligible resolution applicants.

Issues Involved in the Case

The prime issue involved in the case was whether both the Resolution Applicants were disqualified from submitting resolution plans as they were in contravention of Section 29A of the Code.

Related Provisions

In the case, Section 29A of the Insolvency and Bankruptcy Code, 2016 was interpreted by the court. Section 29A was introduced in the Insolvency Code to broadly prevent individuals whose misconduct can be contributed to the default of the corporate debtor or those who were otherwise undesirable, from gaining control of the corporate debtor[3]

Judgement in a Succinct

  1. The Supreme Court held that it is the commercial wisdom of the majority (66%) of the Committee of Creditors under the Insolvency and Bankruptcy Code (IBC) to negotiate and approve a resolution plan, which may involve discriminatory payment to different classes of creditors.
  2. The Supreme Court did away with the 330-day mandatory deadline for the resolution of insolvency and bankruptcy cases. The bench allowed flexibility by allowing exceptions where the resolution plan is about to get finalised. The Supreme Court has given the adjudicating authority the requisite powers to decide if it needs more time to decide on a specific resolution process.
  3. Tribunals have no “residual equity jurisdiction” whatsoever to intervene in the merits of a decision taken by the Committee of Creditors. This implies that the tribunals cannot intervene with the commercial decisions taken by the Committee of Creditors.
  4. The Apex Court held that the equality principle cannot be applied in context of treating unequals equally, it will have the very effect of defying the very objective of the IBC to resolve burdened assets. Equitable treatment can be granted to each creditor depending upon the class to which it belongs: financial or operational, secured or unsecured.
  5. The Court upheld the primacy of financial creditors over operational creditors in the disbursement of funds received under the insolvency scheme.

Impact of the Judgement

1. Banks will recover Rs. 42,000 about 85% compared to the average recovery of 53% in other resolution cases. This would help banks in elevating their capital adequacy.

2. The removal of the 330-day deadline will facilitate resolution, achieving the ultimate objective of the Insolvency & Bankruptcy Code.

3. The verdict is likely to abate legal disputes between operational creditors and the financial accelerated resolution process.

4. It will lure investors who were earlier worried of the nation’s bankruptcy process.

Concepts Highlighted

Essar steel being one of India’s most high-profile insolvency cases, any order on Essar Steel is likely to have ramifications for all the similar resolution schemes. The Apex Court’s verdict has put concerns to rest as it was said that even though the Committee of Creditors will have an ultimate say on apportioning the funds received, it has to take care of the interests of the operational creditors too.

This ruling is premised on the fact that no concern can function without due regard to operational creditors.

The Supreme Court in the process evolved a Waterfall Mechanism, which states secured financial creditors hold the first right over the distribution of funds followed by unsecured financial creditors and operational creditors.  Though there is a glaring concern regarding functioning of tribunals. Out of 898 companies undergoing resolution, 275 companies have exceeded the 270 days mandatory limit set for resolution under the code. The data related to the pile-up of cases in the various branches of the cases doesn’t paint a very good picture of the situation. There is a dire need for more branches of the NCLT to clear the pile-up. It’s high time that the government pays heed to the over-burned tribunals, otherwise the fate of the tribunals would end similar to our courts and the whole idea of creating a tribunal would be retrograded.

The culmination of the Essar steel, which definitely speaks volume about the effectiveness of the legislature which is less than four years old. A faster Insolvency Bankruptcy resolution is in the interest of all stakeholders & it inspires confidence among all the stakeholders. It will relieve the banking sector of the stress, which it is currently facing in terms of Non Performing Assets. This is pivotal for ameliorating India’s business environment and ease of setting & running of new businesses.

Questions covered by the Article:

1. What is the background of the Essar Steel Case?

2. What was the law laid down in the Essar Steel Case?

3. What is the aim of Section 29A of the Insolvency & Bankruptcy Code?

4. What are the highlights of the Essar Steel Case?

5. What will the Impact of the Judgement?

6. What are the glaring concerns regarding the functioning of the tribunals?


[1] Article 142 of Indian Constitution.

[2] 34 of the judgement at p. 61.

[3] Section 29A of the Insolvency & Bankruptcy Code, 2016.

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