Essar Steel India defaulted on repayment obligations to its creditors and in 2017 Standard Chartered Bank (SCB) and State Bank of India filed petitions for financial debt under the Insolvency and Bankruptcy Code, 2016. The petitions were admitted and a resolution professional was appointed by the National Company Law Tribunal (NCLT). Resolution plans were submitted by ArcelorMittal, Nu Metal and Vedanta. After many tribunal hearings and a Supreme Court case, the committee of creditors (CoC) approved the resolution plan of ArcelorMittal.
The NCLT, in turn, approved the resolution plan of ArcelorMittal with a modification to allot 15% of the resolution amount to the operational creditors with the remaining to be distributed among the financial creditors. On appeal, the National Company Law Appellate Tribunal (NCLAT) ruled that there cannot be differential treatment between financial and operational creditors and each class deserves equal treatment. Due to the conflict of interest, the CoC was not empowered to decide the distribution between classes of creditors. The NCLAT redistributed the resolution proceeds to ensure that financial and operational creditors were paid 60.7% of their admitted claims.
On appeal, the Supreme Court, in Committee of Creditors of Essar Steel Limited v Satish Kumar Gupta & Ors, disagreed and ruled on the jurisdiction of the NCLT and NCLAT to decide resolution plans approved by the CoC. Relying on section 30(4) of the code and regulation 39(3) of the Insolvency Resolution Process Regulations, 2016, the court held that the code accorded supremacy to the CoC’s commercial wisdom.
In the K Shashidhar case, the Supreme Court upheld the supremacy of the commercial wisdom of CoC, free from judicial intervention. The decision of the CoC would be based on the “feasibility and viability” of a resolution plan, which would take into account all aspects including the manner of the distribution of funds to various classes of creditors. It was assumed that financial creditors as members of the CoC were fully informed about the viability of the corporate debtor and the feasibility of the proposed resolution plan. The CoC would show its commercial wisdom through its majority vote to approve or reject the plan.
The court held that the NCLT does not have the authority to analyse or evaluate the commercial decisions of the CoC and cannot enquire into the fairness of the decision. The enquiry by the NCLT is primarily limited by section 30(2) of the code to ensure priority in payment of the insolvency resolution process costs, payment to operational creditors as prescribed and implementation and supervision of the resolution plan. Regulating the exercise of commercial wisdom during the voting on the resolution plan is not within the power of the NCLT. Further, the NCLT cannot decide whether the CoC was correct to reject a resolution plan. Similarly, the NCLAT cannot trespass on a business decision of the majority of the CoC.
The court rejected the premise that secured and unsecured creditors should be treated equally under a resolution plan to ensure equity and fair play. The equity principle cannot stretch to treating unequals equally, as that would destroy the very objective of the code, which is to resolve stressed assets. In the Swiss Ribbons case, the Supreme Court relied on the UNCITRAL Legislative Guide and recognized that not all creditors need to be treated identically, but in a manner that reflected the different bargains they had struck with the debtor. Equitable treatment would be accorded to each creditor within the same class, secured or unsecured, financial or operational.
The CoC had however voted to allot 0.14% of the resolution proceeds set aside for secured creditors to SCB, which held a charge over the shares of the corporate debtor. The balance of 99.86% was to be distributed between other secured financial creditors who had a charge on the project assets. SCB challenged the sharing ratio and sought pro rata distribution. SCB did not succeed. The court ruled that a pro rata distribution was not the only method of distributing assets. A straitjacket formula would not be appropriate for all cases and would fail to incentivise secured creditors to resolve their debts and revive a corporate debtor. Even in deciding on the distribution ratio, the CoC’s commercial wisdom would be supreme, especially in the absence of an express prohibition in the code.
However, the court did not fault a subcommittee of the CoC for negotiating resolution plans with resolution applicants or performing ministerial and administrative tasks on behalf of the CoC, provided that those actions were approved and ratified by the CoC itself.
Karthik Somasundram is a partner and Shreya Gupta is a managing associate at Bharucha & Partners.
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