Essar Steel - Arcelor Mittal wins the deal Finally

Bankruptcy Law in India finally settled its first major case “Essar Steel- Arcelor Mittal” where banks will recover almost 92% of the total Rs.42000 crore owed to them, while operational creditors will receive Rs.1196 crore.

Essar steel was one of the 12 cases selected by RBI to be resolved under IBC code. The Essar steel’s IBC case was formally sent to the tribunal on June 27,2017.

NCLT order

NCLT approved the Rs.42,000 cr. bid of Arcelor Mittal for takeover of Essar Steel. In addition, NCLT suggested 85:15 distribution between financial and operational creditors on pro rata basis against 90:10 as proposed in the resolution plan approved.

After the order was passed, operational lenders challenged the NCLT (National company Law Tribunal) order and filed an appeal before NCLAT (National company Law Appellate Tribunal. NCLAT had ordered that secured and unsecured creditors would get 60.7 percent of their dues from ArcelorMittal, which was again challenged by banks in the Apex Court.

In Supreme Court, three-judge bench lead by R.F. Nariman said the two set of creditors would be treated differently in any insolvency proceeding. There is no principal of equality between secured and unsecured creditors under IBC code. The resolution plan was under dispute for almost 2 years and crossed the time limit of 270 days under IBC code.

Who were part of Committee of Creditors (CoC)

The CoC was composed of four lenders with largest exposure, namely, Edelweiss ARC, SBI, IDBI and ICICI bank. Standard Chartered bank, the third largest secured financial creditor of Essar steel, opposed the resolution plan.

SC ruling

The Supreme Court ruling in the Essar Steel case not only brings huge relief to banks, but also lays to rest several issues that have been delaying the IBC resolution process, since long time.

The ruling in the case of Essar Steel IBC case is an exceptional judgement and the key takeaways from this landmark Supreme Court judgment are –

1) Supreme Court addressed the main issue that whether financial and operational creditors both have equal rights to take decision regarding distribution of proceeds or not. SC upholds that CoC will have a final say on apportionment of proceeds but they have to take care of the interest of operational creditors as well.

2) Only CoC can decide the distribution of liquidation proceeds and not even NCLAT can make changes in the resolution plan.

3) To speed up the pending litigation's, government introduced 330-day timeline this year. However, SC has given powers to Adjudicating Authority to take more time if it is required in any specific case.

4) IBC code follows waterfall mechanism for distribution of liquidation proceeds. According to this mechanism, in case of distribution of proceeds, secured financial creditors hold the first right followed by unsecured financial creditors and operational creditors.

The decision clears all hurdles to the takeover of Essar Steel by Arcelor Mittal for Rs.42000 Cr.

The Road Forward

There is a requirement of time bound disposal of cases under IBC, which would not only support the development of “credit markets”, but would also improve ease of doing business in India.

The IBC's biggest USP was its time-bound resolution of bankrupt firms and allowing bankrupt companies to continue as going concerns. This is important for improving India's business climate and ease of setting up new businesses.

Operational creditors will have to find ways and means to secure their payments against supplies made to companies, as following this judgement they will not be considered at par with financial creditors like banks. This landmark judgement will bring a paradigm shift in the way operational creditors now deal with companies for their supplies in the eventuality of default to secure their interest. Thank You

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