Section: D
Category: Case Commentary
Paper Code: CC-RG-08
Page Number: 471 - 475
Date of Publication: February 10, 2021
Citation: Rajat Gupta & Vaishnavi Pandey, Committee of Creditors Essar Steel India Limited Through Authorized Signatory v. Satish Kumar Gupta and Ors., 1, AIJACLA, 471, 471-475, (2021), https://www.aequivic.in/post/aijacla-ccommittee-creditors-of-essar-steel-india-limited-through-authorized-signatory-satish-kumar.
Details Of Author(s):
Rajat Gupta, Student, National Law University and Judicial Academy Assam
&
Vaishnavi Pandey, Student, National Law University and Judicial Academy, Assam
INTRODUCTION The Insolvency and Bankruptcy law was introduced to consolidate and amend the laws that would give certainty of process, time, and outcome to creditors, borrowers, and other market participants. It has improved the jurisprudence of insolvency in the country. The case also demonstrates the parliamentary form of government as the Corporate Insolvency Resolution Process (CIRP) provisions were clarified even though, the decision of the National Company Law Appellate Tribunal(NCLAT) was pending before the Supreme Court. This case comment attempts to analyze the judgment of the Hon'ble Supreme Court of India (hereinafter referred to as Supreme Court) in the case of Committee of Creditors of Essar Steel India Limited through Authorized Signatory v. Satish Kumar Gupta and Ors, which dealt with a pertinent and extremely contentious issue of the Corporate Insolvency Resolution Process (CIRP) under Insolvency and Bankruptcy Code (IBC), 2016, and the scope of powers of the Committee of Creditors (CoC) of corporate debtors thereof.
BACKGROUND The facts of the present case involved a challenge to the decision of the National Company Law Appellate Tribunal (NCLAT) in the Supreme Court by the Committee of Creditors (CoC), to recover more than the operational creditor. The Ahmedabad bench of the National Company Law Tribunal (NCLT) approved ArcelorMittal's bid for Essar Steel and their resolution plan was approved by the Committee of Creditors CoC. This was opposed by the operational creditor because they were getting notional payment.[1] In July, the appellate tribunal had ordered for an equal distribution of funds to all creditors and that they should be treated equally. So, all the operational creditors as well as the employees of the company, who have claims below INR 1 crore, should be given all the dues. And, creditors who have claims of more than INR 1 crore, were to recover 60.7% of the dues. A petition was filed by the financial creditors against the National Company Law Appellate Tribunal (NCLAT's) ruling in the Supreme Court saying the secured creditors have the first rights over the funds and it was also argued that the ruling of the National Company Law Appellate Tribunal (NCLAT) has exceeded the scope of the Insolvency and Bankruptcy Code.
SUPREME COURT JUDGEMENT: AN ANALYSIS The Supreme Court of India on November 15, 2019, through a three-judge constitution bench, delivered a landmark judgment, concerning the supremacy of the creditors over each other. 1. Though under Section 30(2) of the Code the National Company Law Tribunal (NCLT) has powers to examine the decision of the Committee of Creditors (CoC), the Supreme Court held that the commercial decision of the Committee of Creditors (CoC) is paramount. The jurisdiction of the National Company Law Appellate Tribunal (NCLAT) is also expressly limited. Thus, it is clear that the limited power available, neither National Company Law Tribunal (NCLT) nor National Company Law Appellate Tribunal (NCLAT) can direct the admission of several claims. “The decision of what and how much to pay each class of creditors is retained with the Committee of Creditors (CoC) also, it should ensure the presence of the corporate debtor during the Corporate Insolvency Resolution Process (CIRP) process. There should be a balance of interests of all the stakeholders and the value of assets should be maximized.”[2] 2. Further, the Supreme Court clarified the amended Regulation 38 of the Corporate Insolvency Resolution Process (CIRP) Regulations, that fair and equitable treatment of operational creditors does not mean the debts are distributed pro-rata. Treating unequal equally would violate the purpose of the Insolvency and Bankruptcy Code (IBC). The Supreme Court also observed that the National Company Law Tribunal (NCLT) does not have any residual jurisdiction to reject a plan on the ground of inequality. 3. Under section 30(4), the Committee of Creditors (CoC) has the power to approve a resolution plan and the Sub-committees have only administrative work, but their activity needs to be ratified by the Committee of Creditors (CoC). The resolution plan once approved by the Committee of Creditors (CoC) is binding on all stakeholders. 4. Furthermore, the decision of the Appellate Authority was set aside and it was upheld that the distribution of profits made during the Corporate Insolvency Resolution Process (CIRP) will not go towards the payment of debts of any creditor.[3] 5. The Supreme Court made it clear that the 330-day limit is not sacrosanct as mark the violation of Article 14, 19 of the Constitution, which means that the creditors will not be pressurized to accept the below-par deal.
ASSETS OF THE INDIAN BANKING SYSTEM ON THE ECONOMY The problem of Non-Performing Assets (NPA) in the Indian Banking System is one of the most formidable problems in the arena of the Indian Banking System that has a huge impact on the economy. Higher NPA's causes poor recycling of funds which in turn has a deleterious effect on the deployment of credit which further trembles the confidence of investors, depositors, and lenders. Further, puts pressure on the recycling of funds and reduces the ability of banks to lend more and thus results in lesser interest income. Due to High Non Performing Assets (NPA's) banks may tend to levy higher on advances to sustain Net Interest Margin on one hand and likely to lower the interests on deposits. Banks are required to maintain adequate capital on risk-weighted assets on an ongoing basis which shore up their capital base. Capital has a price tag ranging from 12% to 18% since it’s a scarce resource. The high Non Performing Assets (NPA) has a cascading effect on all important financial ratios of banks Net Interest Margin (NIM), return on assets, profitability, credit contraction which may likely erode the value of stakeholders like shareholders, depositors, lenders, borrowers, employees, and the public at large. With souring NPA's public confidence almost gets ruptured and starts losing confidence in the soundness of the Banking System. An increase in the rate of NPA not only affects banks by posing liquidity issues but also has a huge impact on the economy as a whole. The Supreme Court order and government move on financial service providers could prove as a huge relief to banks battling high NPA's. Banks are likely to recover almost 90% percent of their amount which are exposed to the Essar Steel account which is 30 % percent more than what they would have garnered out of the National Company Law Appellate Tribunal (NCLAT) decision, this will improve their profitability and have an articulated impact on the economy and because of capital infusion more money supply will take place in the economy.[4]
CONCLUSION AND SUGGESTIONS The Apex court’s decision not only enables the sale of Essar Steel but opens a way for the banks to recover the dues from the company that is estimated at around INR 40,000 crore which is more than 90% of their dues. It is estimated that the Operational creditors should receive near about INR 1,200 crore. This decision will them to help improve the financial position of weak public sector banks and increase profitability, as almost all the dues owed by Essar Steel were fully written off by the majority of lenders. The landmark judgment of the Apex Court put to rest on the key questions concerning the treatment of operational and financial creditors, the role of the Committee of Creditors (CoC), National Company Law Tribunal (NCLT), and National Company Law Appellate Tribunal (NCLAT) in the Corporate Insolvency Resolution Process (CIRP) of a corporate debtor under the Code. The Apex Court has flawlessly observed the difference between secured and unsecured creditors which is essential for the banking industry. Additionally, by reinstating the Committee of Creditors (CoC) to be the primary decision-maker, the Supreme Court gives commercial wisdom to the lenders. With this landmark judgment, a large number of pending appeals on similar questions of law before the National Company Law Appellate Tribunal (NCLAT) and National Company Law Tribunal (NCLT) were disposed of very soon. Recent news articles and reports have indicated the framework of distribution of proceeds to financial creditors and operational creditors under the Code on account of protracted litigation (in multiple cases) based on challenges from operational creditors will be revised by the government soon. Such litigation led to delays in the completion of the process and distribution of proceeds to creditors. However, the position of the government regarding this decision as to the settled law for this purpose will clear with time. The Apex court decision will help to improve the financial position of weak public sector banks. This Judgment should put to rest the question regarding the treatment of creditors and the role of the Committee of Creditors (CoC) in the Corporate Insolvency Resolution Process (CIRP) of a Corporate Debtor under the code. Further, it has articulated the difference between Secured and Unsecured Creditors. It remains interesting to see whether the government will treat this decision as finally settled as a lot of pending cases can dispose of which have a similar cause of concern in the matter.
[1] Prachi Bharadwaj, NCLATs order set aside in Essar Steel Insolvency Case; Key issues on Corporate Insolvency Resolution answered, SCC (Dec 20, 2020, 02:12 AM), NCLAT's order set aside in Essar Steel Insolvency case; Key issues on Corporate Insolvency Resolution Process answered | SCC Blog (scconline.com). [2] Ibid. [3] Pallavi Saluja, Essar Steel Judgement: Key Highlights, BAR & BENCH (Dec 13, 2020, 02:10 AM), Essar Steel Judgment: Key Highlights - Bar & Bench (barandbench.com). [4] Pro. D.S. Rathore, Dr. Sangeeta Malpani, et al., Non Performing Assets of Indian Banking System and its Impact on Economy, 7(6), IOSR-JEF, 21, 21-26, {2016).