Judgment Summaries (Supreme Court) Essar Steel

  February 27, 2022

Case‌ ‌Summary:‌ ‌

Committee of Creditors of Essar Steel India Limited Through Authorised Signatory‌ ‌v.‌ ‌Union‌ ‌of‌ ‌India‌ ‌&‌ ‌Ors.‌‌ ‌‌

{Supreme‌ ‌Court‌ ‌of‌ ‌India;‌ ‌November ‌15,‌ ‌2019}‌

ABBREVIATIONS & ACRONYMS USED

Committee of Creditors CoC
Corporate Debtor CD
Corporate Insolvency Resolution Process CIRP
Financial Creditor FC
The Insolvency and Bankruptcy Board of India IBBI
Insolvency and Bankruptcy Code, 2016 the Code
National Company Law Appellate Tribunal NCLAT
National Company Law Tribunal NCLT
Operational Creditor OC

 

FACTS: NCLT admitted the insolvency application filed by State Bank of India and Standard Charted Bank against Essar Steels. ArcelorMittal India Private Limited (“ArcelorMittal”) initially submitted a resolution plan wherein OCs would forego claims of 1 crore rupees which NCLT partially approved. However, NCLT directed CoC to reconsider the distribution plan provided by ArcelorMittal. The claims of workmen and employees and other operational creditors having claims of less than a crore were to be paid in full and claims of all other operational creditors were paid only in a small percentage. The NCLT held that the dues of the operational creditors must be treated equitably to those of the financial creditors. Further, the operational creditors must be paid 15% of the amount offered by the resolution applicant which will enable the OCs to recover at least 50% of their claims.

The resolution plan was later challenged by several operational creditors, suspended board members, the Standard Charted bank and the promoters and an appeal was filed before the NCLAT. The CoC also appealed against the NCLT’s order.

NCLAT held that while paying dues in accordance with the resolution plan, there should be no differentiation in manner of payment between FCs and OCs. It approved the resolution plan of ArcelorMittal with this condition directing redistribution of proceeds amongst the creditors. Later, this decision of NCLAT was challenged in the Supreme Court by the FCs. The appellants argued that clear distinction has been drawn between the FCs and OCs in the Code and it does not “mandate identical treatment between differently situated” the OCs and FCs. Further, they argued that commercial wisdom of the CoC is non justiciable citing the judgements of K. Sashidhar v. Indian Overseas Bank & Swiss Ribbons v. Union of India and any modification by NCLAT is illegal.

SUPREME COURT HELD: The Supreme Court noted that the Indian Insolvency Process is a creditor driven process and relying upon the judgement cited by the appellants – K. Sashidhar v. Indian Overseas Bank that there is an underlying assumption that the FCs are best-suited and fully informed about the viability of the CD.

Equitable Distribution

The Supreme Court held that both financial and operation creditors cannot be treated equally for payment of dues under a resolution plan. The Supreme Court further clarified upon equitable and equal treatment and held that the relationship of both the creditors is different in context of security interest and such classification also lies under one category as well. Thus, they are bound to be treated equitably, however, if resolution is complying with the CIRP regulations and the Code then the majority decision of CoC cannot be rejected on the grounds of unfair classification among class of creditors. The Court also noted that disregard for security interest could lead creditors to vote for liquidation  instead of resolution.

Role of CoC and Sub-Committee

The Supreme Court held that CoC as a decision maker plays an important role for rehabilitation of corporate debtors. The Supreme court further held that a resolution plan can be approved by CoC by voting of 66% of voting share of financial creditors keeping in mind the all aspects of the plan. Further Supreme Court upheld the validity sub-committee as to perform administrative or any other ministerial activities. However, the Supreme Court put a limitation on the sub-committee that all the action taken must be in all sense be ratified by CoC. Additionally, decisions under Section 28 can not be delegated by CoC.

Judicial Review by NCLT

Supreme Court held that Section 30 (2) of the Code limits the power of judicial review by NLCT wherein a resolution professional is appointed to examine all aspects of resolution plan. Also, Section 32 read with Section 61(3) puts a limitation on NCLAT for judicial review, that appeal to NCLAT can only be entertained only when there is some material irregularity in the resolution plan. The Supreme Court with this reasoning established that commercial decisions of CoC cannot be trespassed by NCLT or NCLAT in any case.

 

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