8 July 2019: The latest ruling by the bankruptcy appellate tribunal in the Essar Steel resolution case may not mark the end of the long-drawn legal tussle. Bankers and the Ruias plan to appeal against the decision by the National Company Law Appellate Tribunal (NCLAT) in the Supreme Court, said the people aware of the matter.
The lenders are unhappy with the tribunal ruling that operational creditors should be treated at par with financial creditors at the time of settling claims. The Ruias, the original promoters of Essar Steel, have been trying to regain control of the asset, so appealing against the NCLAT decision that went in favour of ArcelorMittal’s bid is the next logical move.
Bankers told ET they had no option but to move the Supreme Court as the NCLAT order slashes their recoveries to Rs 30,000 crore or 60 per cent of the overall claims against 89 per cent earlier. More importantly, the order undermines the essence of the Insolvency and Bankruptcy Code (IBC), which gives financial creditors a superior claim in the recovery process, they said.
“We are filing an appeal next week because this order has ramifications beyond the Essar case,” said one of the bankers. “Financial creditors are treated as secured creditors according to the code but this order, by giving even operational creditors an equal share, has destroyed this distinction. If secured creditors are treated like operational creditors, then we might as well give loans at 16 per cent to 18 per cent per annum without any security.”
On July 4, the appellate tribunal held that the committee of creditors (CoC) had “no role to play in the matter of distribution of amount among the creditors, including the ‘financial creditors’ or the ‘operational creditors.” Essar Steel owes a total Rs 69,192 crore to financial and operational creditors. As per the NCLAT decision, financial creditors will get 60.7 per cent of their dues, while operational creditors with claims over Rs 1 crore will get 59.6 per cent. Creditors with claims of up to Rs 1crore will be paid in full.
“The NCLAT has relied on its recent decision in Binani Industries Ltd while passing the order. The judgement of Binani Industries was also appealed before the Supreme Court and it was upheld. What remains to be seen is whether the SC would take a different view given the unique facts of Essar Steel,” said Ashish K Singh, managing partner of law firm Capstone Legal. “Any detailed decision by the SC on this important matter would set the precedent for many pending cases. Moreover, it would help financial institutions manage their risk at the time of lending as well.”
As part of the resolution plan, ArcelorMittal will also infuse another Rs 8,000 crore of working capital in Essar Steel. The earlier plan approved by the committee of creditors (CoC) had provided for 89 per cent recovery for all financial creditors and around 20.5 per cent for operational creditors with dues of more than Rs 1 crore.
The NCLAT held that the CoC could only look at the viability of a resolution plan and not the distribution of the amount. It also said CoCs were not allowed to form subcommittees to negotiate with resolution applicants.