Distribution of proceeds: CoC’s can’t be reversed, says SC

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Published: July 23, 2019 3:55:47 AM

The appellate tribunal had held that the profits should be distributed amongst all the financial and operational creditors on a pro-rata basis of their claims.

A Bench led by Justice RF Nariman, while agreeing to hear all the four appeals, filed by SBI-led CoC, ICICI Bank, SBI and ArcelorMittal, on August 7, also asked the parties to maintain status quo with regard to the acquisition of Essar Steel till then.

Banks will likely reign supreme when it comes to commercial decisions concerning firms under the insolvency process: while last week the Cabinet approved amendments to the relevant code to buttress the powers of the committee of creditors (CoC), the Supreme Court on Monday seemed throwing its weight behind the move.

The apex court has put on hold ArcelorMittal’s takeover of debt-laden Essar Steel, after the lenders sought a stay on the National Company Law Appellate Tribunal’s (NCLAT) ruling that reduced their share of sale proceeds from 90% to 60% and also put the financial creditors and operational creditors on a par in settlement of claims.

A Bench led by Justice RF Nariman, while agreeing to hear all the four appeals, filed by SBI-led CoC, ICICI Bank, SBI and ArcelorMittal, on August 7, also asked the parties to maintain status quo with regard to the acquisition of Essar Steel till then.

Also, Justice Nariman cited a February 2019 judgment by the Justice AM Khanwilkar’s Bench in the case, K Sashidhar vs Indian Overseas Bank, where it was held that there is no provision in the Insolvency and Bankruptcy Code that empowers the resolution professional, the adjudicating authorities (NCLT & NCLAT), to reverse the “commercial decision” of the CoC.

The court said it would resolve all the issues arising from the Essar Steel verdict expeditiously and observed that NCLAT could not have acted as the resolution professional. However, it allowed the monitoring committee to continue work till then.

Considering a batch of appeal, Justice Khanwilkar in February had held that NCLT has no authority to evaluate the commercial decision of the CoC to approve or reject a proposed resolution plan as there is complete autonomy regarding the commercial decision or wisdom of the financial creditors.

Challenging the awarding of higher payout to Essar Steel’s operational creditors and treating them on par with secured lenders as directed by the NCLAT, CoC said that the decision to modify the distribution of proceeds would lead to higher lending rates and increased risk of capital. The lenders stated that if they did not have the power to decide on the plans submitted by the bidders, it would effectively leave them “bereft of any role and authority inter alia in respect to approval of a resolution plan”.

While approving ArcelorMittal’s Rs 42,000-crore offer for Essar Steel, the NCLAT on July 4 had held that the creditors can only look at the viability of a resolution plan and have no role in deciding the distribution of funds. Besides, it also held that the operational creditors cannot be treated differentially.

“By virtue of the impugned judgement, the entire Corporate Insolvency Resolution process with respect to the corporate debtor being one of the largest non-performing assets of the country has been put under jeopardy and the shocking unsettling of otherwise settled principles of law recognising and protecting the rights of the secured creditors on account of complete misreading of the Code has endangered the national economic interest of the country overall,” the lenders stated in their appeal.

ArcelorMittal has also challenged a part of the NCLAT order that ruled that the profit of Rs 3,495 crore generated during the corporate insolvency resolution process cannot be given to it. The appellate tribunal had held that the profits should be distributed amongst all the financial and operational creditors on a pro-rata basis of their claims.

According to the steel giant, the modified order has made it liable to pay an amount in excess of Rs 42,000 crore provided for in its resolution plan. “If the order is read as compelling the appellant (ArcelorMittal) to pay Rs 42,000 crore plus the difference between the value of the actual increased working capital and the assumed figure of Rs 2,500 crore, then it would amount to a modification of its bid, which is not agreeable and thus would be illegal,” the petition stated.

The NCLAT had said if ArcelorMittal does not pay the total dues to the creditors — financial creditors or the operational creditors — “but pays lesser amount than the claim, then in such case, the profit should be distributed amongst all the creditors.”

The NCLAT had on July 4 modified a resolution plan cleared by the CoC, holding that the secured creditors including SBI, IDBI Bank, Canara Bank will get Rs 30,030 crore or 60.7% of their Rs 45,559-crore claims and the rest will go to operational creditors, treating them on a par with the financial creditors. Operational creditors had made total claims of Rs 19,719 crore and could get Rs 11,969 crore or 59.6%, as per the NCLAT order.

The earlier plan approved by the lenders had provided for 90% recovery for all financial creditors and around 20.5% for operational creditors with dues of more than Rs 1 crore.

The appellate tribunal had also rejected its former promoters’ claim that the Luxembourg-based steel giant was ineligible to acquire the steel firm.

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