Facts
Essar Steel India Limited, a carbon steel manufacturing company, produced steel products from iron ore. However, after 2010, the company began incurring losses, forcing it to take substantial loans from both public and private banks. Once a key player in India’s steel industry, it faced financial troubles and was classified as a Non-Performing Asset (NPA) by its creditors. By 2015, Essar Steel was burdened with a debt of ₹54,000 crores owed to both financial and operational creditors, rendering it unable to repay. Consequently, the lenders initiated insolvency proceedings under the Insolvency and Bankruptcy Code in 2017. The National Company Law Tribunal (NCLT) in Ahmedabad took up the case and appointed Satish Kumar Gupta as the Interim Resolution Professional (IRP).
The Reserve Bank of India identified Essar Steel as one of 12 companies whose NPAs severely impacted the Indian banking system. Both the State Bank of India and Standard Chartered Bank, which suffered major losses, petitioned the National Company Law Appellate Tribunal (NCLAT), Ahmedabad Bench, against Essar Steel. After the company was declared insolvent, NCLAT proposed selling it. Several entities, including ArcelorMittal and Numetal, entered the bidding process. Following multiple rounds, ArcelorMittal won the bid at ₹48,000 crores. The Committee of Creditors (CoC) approved ArcelorMittal’s resolution plan, which allocated ₹42,000 crores to financial creditors and a significantly smaller amount to operational creditors. Although the plan was sanctioned by NCLT with some amendments, the differential treatment between financial and operational creditors led to a challenge in the NCLAT.
Issues
- Whether the Committee of Creditors’ (CoC) decisions on the resolution plan could be interfered with by the judiciary?
- Whether the resolution plan could legally treat financial creditors and operational creditors differently?
- Whether operational creditors were unfairly discriminated against by receiving a lower payout compared to financial creditors?
- Whether certain bidders were eligible under Section 29A of the IBC, which bars certain defaulters from bidding?
- Whether the strict timelines prescribed under the Insolvency and Bankruptcy Code (IBC) for completing the insolvency process should be strictly enforced?
Contentions
Petitioner
- The petitioners argued that the Insolvency and Bankruptcy Code (IBC) broadly classifies creditors into financial and operational categories based on the nature of their transactions with the corporate debtor. They further contended that the Code does not require equal treatment among different groups of creditors, whether between secured and unsecured financial creditors or between financial and operational creditors.
- They also argued that differential treatment of creditors is allowed under the IBC, provided it is fair, equitable, and justified. According to them, financial creditors hold a higher status than operational creditors and should be given priority in the distribution of resolution proceeds, particularly due to their larger stake and greater financial exposure.
- The petitioners emphasized that the Committee of Creditors (CoC) is the key decision-making body during insolvency proceedings, responsible for making commercial decisions. They argued that the CoC’s commercial wisdom should be respected and not subject to judicial intervention, as it possesses the necessary expertise, especially in prioritizing financial creditors given their crucial role in the insolvency process.
- Additionally, the petitioners, including ArcelorMittal, asserted their eligibility under Section 29-A of the IBC, as they had settled all previous dues related to their prior defaults.
- They further highlighted the need to adhere to the strict timelines outlined in the IBC for completing the insolvency process.
Respondent
- The petitioner elaborated on the interpretation of the term “modifications” in Regulation 39(3) of the 2016 Regulations, arguing that this power does not extend to discriminating between creditors who are in the same position. He also contended that the Committee of Creditors (CoC) cannot rank financial creditors or create sub-classes within the same class. He emphasized that Standard Chartered Bank’s status as a secured financial creditor has not been contested by any CoC member.
- It was further submitted that the NCLAT had correctly instructed that his client’s claim be considered, supporting the NCLAT’s decision to amend the resolution plan to ensure equal treatment for all creditors. The petitioner argued that the judiciary is entitled to intervene when a resolution plan breaches principles of fairness and equity.
- The respondent raised concerns about the eligibility of certain bidders under Section 29-A, arguing that previous defaulters should not be permitted to regain control of companies undergoing insolvency. They also questioned whether ArcelorMittal had fully resolved its past defaults.
- Additionally, they emphasized the importance of adhering to strict timelines, as well as upholding justice, equity, and fairness in the insolvency process.
Rationale
In its judgment dated November 15, 2019, the Supreme Court of India provided a detailed and multifaceted reasoning to resolve the issues at hand. The Court emphasized that the Committee of Creditors (CoC) plays a central role in the insolvency resolution process under the Insolvency and Bankruptcy Code (IBC) 2016. The Court observed that the CoC’s commercial judgment, particularly when a majority approves a resolution plan, should guide decisions, including the distribution of proceeds. It further noted that the CoC must assess all aspects of the resolution plan, such as how funds are distributed among various creditor classes.
The Court highlighted the distinction between financial creditors (FC) and operational creditors (OC). Financial creditors lend money to capital providers, allowing companies to acquire assets and maintain working capital to continue operations. In contrast, operational creditors benefit from these loans, as the funds are used to pay for goods and services they provide to corporate debtors (CD). Therefore, applying an equal treatment approach to all creditor classes would undermine the objectives of the IBC.
The Supreme Court also limited the role of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), stating that their function is to ensure that the resolution plan complies with the IBC. It clarified that neither tribunal has the authority to act as a court of equity or exercise overarching powers. The Court stressed that the CoC has full discretion in deciding how much to pay and to whom, and that the NCLT and NCLAT cannot interfere with the CoC’s commercial decisions on their merits.
Furthermore, the Court ruled that the 330-day timeline for the resolution process would not be rigidly enforced, ensuring creditors are not pressured into accepting reduced amounts. The Supreme Court also ruled in favor of the banks, allowing them to recover about 90% of the debt, thereby improving their financial position.
Defects of the Law
There were several legal gaps within the Insolvency and Bankruptcy Code (IBC) 2016, particularly regarding the scope of powers held by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). Prior to this case, there was significant confusion about the tribunals’ authority to modify decisions made by the Committee of Creditors (CoC), with both tribunals often seen as overstepping their powers. The Supreme Court’s clarification helped resolve some of this ambiguity but also highlighted the need for more precise guidelines within the IBC on the scope of judicial review.
The IBC does not clearly define how proceeds should be distributed among different creditor classes (financial and operational) during the insolvency resolution process. The Court ruled that while differential treatment is allowed, it must be based on sound commercial reasoning and remain fair and equitable.
Although the IBC sets strict timelines for completing the insolvency resolution process, adhering to these deadlines has been challenging in practice, particularly in complex cases involving large corporations like Essar Steel. The Court emphasized the importance of following these timelines but also supported some degree of flexibility when necessary.
Inference
The Supreme Court’s judgment clearly establishes the primacy of the Committee of Creditors (CoC) in decision-making during the insolvency resolution process. It reinforces the idea that those with the most at stake are best suited to make key decisions. The case also clarifies that the judiciary’s role is to ensure compliance with the legal framework established by the IBC, and courts should not intervene in the CoC’s commercial decisions unless there is a legal violation. The Court highlighted the importance of treating all creditors fairly, which does not necessarily imply treating them equally. The decision also reflects the flexibility in adhering to the resolution process timelines. This case exemplifies the principle of equity prevailing over equality, illustrating the need for fair treatment among creditors based on their unique circumstances.
Archit Singh
Teerthanker Mahaveer University