17 July 2019: The Ministry of Corporate Affairs (MCA) is likely to implead in the Supreme Court (SC) against the recent National Company Law Appellate Tribunal (NCLAT) judgment in the Essar Steel case treating secured lenders and operational creditors on a par, said a senior government official.
The order, the government said, is not in line with the Insolvency and Bankruptcy Code (IBC). “We will clarify the intent of the law in the apex court. The latest order is deviating from the Code,” said a senior official.
Lenders to Essar Steel have appealed against the NCLAT order in the SC, which will be heard next week.
The Cabinet on Wednesday approved amendments to the IBC to give preference to secured lenders over operational creditors effective retrospectively.
The MCA wants to make it ‘abundantly clear’ in the law, the limit to the protection available to unsecured and operational creditors, a senior government official said, adding, “All options are open in front of the government.”
Operational creditors — supplier of goods and services such as vendors — are kept at a different footing from secured lenders who bring in finances into the company and have greater risk exposure.
Experts feel that the proposed retrospective amendment will have far-reaching impact. “It will directly affect even such plans which have long ago attained judicial finality, on merely there being an appeal pending against such finality. This may result in opening the floodgates to fresh challenges and would be interesting to see how the courts react to the same,” said Diwakar Maheshwari, dispute resolution partner, Khaitan & Co.
According to people in the know, operational creditors in nearly 200 cases have approached the NCLAT to seek a stay on the resolution plan in the hope that they would get a better deal after the Essar Steel case.
In the case of Bhushan Power & Steel, some of the operational creditors, too, had moved against the resolution plan filed by JSW Steel in the National Company Law Tribunal in March this year. JSW had offered to pay operational creditors a sum of ~350 crore against their admitted claims of ~733 crore.
The latest proposed amendment, however, could put a lid on these cases. “The proposed clarification that how much dissenting financial creditors and operational creditors will get after comparing under the resolution plan and in liquidation will definitely reduce the litigation which were initiated because of issues in respect of distribution of value between the stakeholders,” said Ashish Pyasi, principal associate, Dhir & Dhir Associates.