Essar Steel Verdict: A Watershed Moment In India's Insolvency Regime

Author:Mr Sawant Singh, Neha Naik and Madhavi Doshi
Profession:Phoenix Legal
 
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Rahul Kanoujia - Intern co-authored this article.

After a battle that lasted approximately 900 days, the Supreme Court of India in the case of Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta, paved the way for ArcelorMittal to take over Essar Steel Ltd.('Essar') by upholding the primacy of the Committee of Creditors ('CoC') in distribution of funds of INR 42,000 crore received under the resolution plan submitted by ArcelorMittal.

FACTS:

In August 2017, a petition for initiating the insolvency resolution process against Essar was admitted by the National Company Law Tribunal, Ahmedabad bench ('NCLT') after the Reserve Bank of India identified 12 insolvent accounts responsible for 25% of non-performing assets on its balance sheet. It is notable that of these 12, 8 have currently been resolved.

In the corporate insolvency resolution process ('CIRP') of Essar, ArcelorMittal was the successful resolution applicant. The resolution plan submitted by ArcelorMittal provided that the operational creditors with an exposure of above INR 1 crore would not be entitled to any distributions. The NCLT approved ArcelorMittal's resolution plan and asked the CoC to distribute 85% of the amount under the resolution plan amongst financial creditors and the remaining 15% amongst the operational creditors. The decision of NCLT was subsequently challenged before the National Company Law Appellate Tribunal ('NCLAT').

By its judgment dated July 4, 2019, the NCLAT approved the resolution plan of ArcelorMittal but held that in a resolution plan there cannot be any difference between a financial creditor and an operational creditor with regard to payment of dues. The NCLAT further held that the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016 ('Code') cannot be applied in the event of a resolution plan, but will only apply at the stage of liquidation. The NCLAT ordered that each financial creditor (whether secured or unsecured) with a claim equivalent to or more than INR 10 lakh, be paid 60.7% of its admitted claim, irrespective of their security interest. The decision of the NCLAT assailed the supremacy of the CoC and their powers to approve a resolution plan, which is considered to be a cornerstone of the Code. Aggrieved by the decision of NCLAT, the CoC challenged the decision before the Supreme Court.

SUPREME COURT'S JUDGMENT:

ROLE OF THE RESOLUTION PROFESSIONAL: The role of the...

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