The Supreme Court accepted Arcelor Mittal’s offer to pay an aggregate Rs. 42,000 crores as an upfront amount to the secured financial creditors of bankrupt Essar Steel. This paves the way for Arcelor to take over Essar.

Details of Supreme Court Judgement

The court set aside a judgment of the National Company Law Appellate Tribunal (NCLAT), which held that the amount ought to be shared equally between financial creditors and operational creditors. Financial creditors are those creditors who have given loan for the purchase of assets of the company and Operational creditors are those creditors who have given loan to carry out the operations of the company.

The SC said that the equality principle cannot be stretched to treating unequals equally. That will destroy the very objective of the Insolvency and Bankruptcy Code (IBC) — to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.

Explaining why financial creditors are favoured over operational creditors of a bankrupt company in a corporate resolution process, Justice Nariman said financial creditors were capital-providers for companies, who in turn were able to purchase assets.  Operational creditors, on the other hand, enable such companies to run their business operations.

Priority to Committee of Creditors (CoC)

The court clarified that Corporate resolution is ultimately in the hands of the majority vote of the CoC. So long as the provisions of the Indian Bankruptcy Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the CoC which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors… All decisions by the CoC can be taken by a 51% majority vote.

Tribunals have no “residual equity jurisdiction” to interfere in the merits of a business decision taken by the requisite majority of the CoC in conformity with the law, the court held.

In short, tribunals cannot “trespass” into the turf of the CoC. The scope of judicial review over a CoC decision is certainly limited.

Source: The Hindu

Relevant for GS Prelims & Mains Paper III; Economics