23 July 2019: The Supreme Court on Monday put on hold the sale of Essar Steel India Ltd to ArcelorMittal after lenders to the bankrupt Indian steel maker challenged an appeals court ruling that said operational creditors have to be treated on a par with financial creditors.
The Supreme Court agreed to “expeditiously” hear the plea filed by banks against the National Company Law Appellate Tribunal (NCLAT) order of 4 July.
The bankruptcy appeals court order, approving ArcelorMittal’s ₹42,000 crore offer for Essar Steel, had upset secured financial creditors, as it diminished their priority rights to the proceeds generated from the sale or liquidation of a bankrupt entity.
A division bench of Justices Rohinton Fali Nariman and Surya Kant said the NCLAT order not be given effect to as of now. The bench added that the monitoring committee comprising the committee of creditors and the resolution professional shall continue its work till the next hearing on 7 August. A consortium of lenders, led by State Bank of India, challenged the NCLAT order on 16 July.
On the following day, the Union cabinet approved several changes to the bankruptcy law, including upholding secured creditors’ priority rights on the sale or liquidation proceeds of insolvent companies.
The proposed changes to the insolvency law are likely to help the secured creditors of Essar Steel. The modifications make the rights of financial and operational creditors explicit. The Insolvency and Bankruptcy Code (IBC) gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.
A status quo implies that “everything remains as it is, no party should do anything and the NCLAT judgement is stayed”, a senior lawyer said on condition of anonymity. “The Supreme Court will revisit the positions of all the parties on the next date. I believe it is in the banks’ interest to wait till the amendments to IBC are passed in Parliament; it will boost their case. So, they will have no intention to hurry this along.”
A member of the Essar Steel’s CoC said it is confident the apex court would reverse the NCLAT order to the original set forth in the resolution plan, which gives priority in payment to secured creditors. “With the cabinet approving the amendments to IBC, we feel the judges will have more clarity on how the payment should be done,” this person said, requesting anonymity.
In the Essar Steel case, the appellate tribunal had ruled that lenders and operational creditors will get 60.7% of their outstanding claims and proportionately share the money that ArcelorMittal has offered to pay for the Indian firm, which in rupee terms entails a payment of ₹30,030 crore to financial creditors and ₹11,969 crore to operational creditors.
Operational creditors with admitted claim amounts of less than ₹1 crore would get 100%, while for those with claims of more than ₹1 crore, the payment would be 60.26%, according to the NCLAT ruling.