State Bank of India has done well to approach the Supreme Court to challenge the National Company Law Appellate Tribunal (NCLAT) asking the Committee of Creditors (CoC) to reconsider its decision in the Essar Steel matter so as to ensure that operational creditors—like Standard Chartered—get a higher amount than what the CoC has agreed to.
The NCLAT, in turn, is asking the CoC to go by the order of the Ahmedabad bench of the National Company Law Tribunal (NCLT) which advised that 85% of the `42,000 crore bid by Arcelor Mittal for Essar Steel be kept for the financial creditors and 15% be kept for the operational creditors as well as other stakeholders.
The NCLT, or the NCLAT, can’t be faulted for wanting the operational creditors to get more than what they are getting now, in the same way they may want the financial creditors to get more; but these wishes have to be in keeping with the Insolvency and Bankruptcy Code (IBC) law. And the law is very clear in that the CoC takes the final call on the matter and that, after the costs of the bankruptcy process and the workers’ dues for the last two years are met, it is the financial creditors that get the first priority. The courts should admit a challenge to the CoC’s decision only if mala fide is alleged and looks, prima facie, a possibility. The courts should not be petitioned to get a better deal for one group or the other; but that is precisely what is happening right now.
Indeed, by giving directions to the CoC, the NCLT/NCLAT are, in a sense, playing into the hands of Essar Steel’s promoters, the Ruias, who tried to upset the resolution process by coming in with an offer of `54,389 crore after the CoC had approved the Arcelor Mittal proposal for Essar Steel. The Ruia challenge, it is true, was set aside by the NCLT when it approved Arcelor’s bid, but if the CoC’s decision is to be questioned, the entire IBC law—and its functioning and the hierarchy of repayments—is under threat. While the IBC lays down a 180-day timeline for resolution, the average time taken so far is around 313 days, and, in the case of Essar Steel, this is over 550 days already. The fact that such challenges to the IBC are taking place at a time when a new government is being elected only adds to the uncertainty over the fate of the law.
Sadly, this is not the first time the NCLAT is overstepping. In the case of IL&FS, when the central bank wanted banks to declare their loans to the group as NPAs and to start making provisions for it, the NCLAT said that RBI couldn’t ask banks to declare IL&FS loans as NPAs until this was cleared by it. As this newspaper has pointed out before, RBI is the regulator for the banking sector, and if it is to keep the sector solvent, it has to ensure that banks are honest about declaring NPAs and then provisioning for them out of profits. If it so happens that the NPA turns viable later, the banks can write back the provisioning into their books and declare a higher profit; if the NPA doesn’t get ok, the banking system will not suffer a sudden shock since the banks would already have provided for it. In this case, it is not just the NCLAT—it said RBI was making classification of IL&FS loans as NPAs a ‘prestige issue’—but even the Supreme Court is examining the validity of the RBI’s February 12 circular; the judgment is expected later today. If the SC decides to set aside the circular, or parts of it, it will set the NPA-resolution process back in a big way; it doesn’t help that the IBC process is also fighting its own challenge.