This amendment in effect overrules the National Company Law Appellate Tribunal's judgement in the Essar Steel case, which struck parity between banks and operational creditors.
The Supreme Court on Tuesday sought response from the Centre on a batch of petitions challenging the new amendments to the Insolvency and Bankruptcy Code, which granted more powers to the lenders. A Bench, led by Justice RF Nariman, issued notices to the Centre and others after the operational creditors of debt-laden Essar Steel challenged the new amendments to the IBC. It had earlier also allowed former promoters (Ruia family) of Essar Steel to challenge the recent amendment in insolvency code after they sought to challenge to the Insolvency and Bankruptcy Code (Amendment) Act, 2019, which was notified last week.
The judges said that all the appeals will be heard after three weeks and once the hearing starts, no more adjournments will be granted.
Under the 2019 Act, a deadline of 330 days has been set for completion of corporate insolvency resolution process (CIRP), including litigation and other judicial processes. Besides, it gives banks power to decide how the bid amount in a resolution plan will be distributed as well as power to decide which resolution plan will be approved.
This amendment in effect overrules the National Company Law Appellate Tribunal’s judgement in the Essar Steel case, which struck parity between banks and operational creditors.
Operational creditors of Essar Steel in its appeal stated that ‘by no stretch of imagination can a situation be regarded as fair and equitable if the operational creditors are not supposed to get anything at the cost of the financial creditors who are getting almost the whole pie, in the circumstances when a company constitutes to run and do business. It is not as unfortunate a situation where a company is shutting and the proceeds are being distributed in liquidation and therefore the principles of liquidation shall not apply to the process of resolution’.
The apex court, had on July 22, put on hold ArcelorMittal’s takeover of debt-laden Essar Steel, after the lenders had sought a stay on the NCLAT’s ruling that reduced their share of sale proceeds from 90% to 60% and also put the financial creditors and operational creditors at par in settlement of claims. Justice Nariman had also asked the parties to maintain status quo with regard to the acquisition of Essar Steel.
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 in its appeal said that the decision would effectively leave it ‘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.
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.