NCLAT Decision in Essar Steel Insolvency Proceedings: A Radical Stance?

[Ashwin Mathew is with Mansukhlal Hiralal & Co, Mumbai]

The National Company Law Appellate Tribunal (NCLAT) on 4 July 2019 laid down important principles on the corporate insolvency resolution process in Standard Chartered Bank v. Satish Kumar Gupta which related to the insolvency proceedings of Essar Steel India Limited, the corporate debtor, under the Insolvency and Bankruptcy Code, 2016 (IBC).

The committee of creditors of the corporate debtor approved the resolution plan that was submitted by Arcelor Mittal India Private Limited and this resolution plan was also approved by the National Company Law Tribunal, Ahmedabad with certain modifications. This was challenged by some operational creditors, employees and the Government.

In its decision, the NCLAT laid down the several principles. First, it stated that once the debt secured by a guarantee is paid pursuant to payments to the lenders under a resolution plan, the guarantee ceases to have effect. Second, in this case, the successful resolution applicant had left it to the committee of creditors to decide the distribution of payments pursuant to the resolution plan to the various creditors. The NCLAT held that this was not in consonance with section 30 of the IBC read with regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The committee of creditors cannot decide the distribution of payments to the various creditors pursuant to a resolution plan and such distribution must be decided by the resolution applicant alone. The only role of the committee of creditors is to decide on the viability and feasibility of the resolution plan and whether the resolution applicant is ineligible under section 29A of the IBC. Further, the committee of creditors cannot delegate these powers to a sub-committee as was done in this case.

Third, there was a huge disparity in the distribution of amounts under the resolution plan to the various stakeholders. The financial creditors had been given up to approximately 91% of the amounts outstanding from the corporate debtor and the operational creditors had in most cases not been allotted any amount. This was contrary to the IBC and the principles laid down by the Supreme Court. All stakeholders under the IBC including the financial creditors and the operational creditors must be treated equitably in the distribution of amounts pursuant to a resolution plan. The manner of distribution of amounts to the financial creditors and operational creditors must be done based on the following formula:

Amount offered in the resolution plan           x          100 = % due to each creditor*

Total amount due to creditors*

*includes both financial creditors and operational creditors

Based on this formula it was held that the financial creditors and operational creditors were each entitled to 60.7% of the outstanding dues.

The decision of the NCLAT is interesting and seems to be in line with the IBC. The committee of creditors for the corporate debtor had clearly determined the distribution of amounts under the resolution plan in an arbitrary and self-serving manner. The NCLAT was right to step in and hold that all stakeholders must be treated equitably. The NCLAT went further to determine the distribution of amounts under the resolution plan of the corporate debtor, which is certainly an activist approach. The decision of the NCLAT has already been challenged before the Supreme Court by the financial creditors of the corporate debtor who, pursuant to the NCLAT decision, would be forced to take a much bigger haircut on the amounts due to them than what had originally been laid down by the committee of creditors. The main argument of the financial creditors is that section 30 of the IBC does not preclude the committee of creditors from determining the distribution of amounts under a resolution plan. This argument does not seem to hold much water since section 30 clearly provides that the resolution plan must provide for payments to the operational creditors which should not be less than the liquidation value. If the Supreme Court upholds the NCLAT’s decision, there would be a significant impact on the manner in which resolution plans are prepared by resolution applicants and evaluated by the committee of creditors. Resolution applicants would need to ensure that the interests of operational creditors are also adequately protected in the resolution plan.

Ashwin Mathew 

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