The Aftermath Of Essar Steel Judgment
Legal Era|August 2019

A look at the purport of the judgment passed by the NCLAT…

The recent Essar Steel Judgment has created quite a stir with questions like – “Has the NCLAT gone wrong in the Judgment, in order to bring the Insolvency Code to work better or in an attempt to be fair? Has the NCLAT over-interpreted the provisions of the IBC?” - doing the rounds.

Hopefully, the Supreme Court will soon set all these inhibitions to rest. In the meanwhile, this is an attempt to take a close look and dissect the purport of the Judgment passed by the NCLAT.

The core findings of the Judgment are:

Firstly, that the

(i) financial creditors are a single class, and

(ii) financial creditors and operational creditors must be treated at par and cannot be discriminated.

While analyzing the first ratio, the judgment should have dwelled upon the reason as to why a financial creditor agrees to grant financial assistance with or without security. The reasons are simple – firstly, an unsecured creditor charges a much higher interest than a secured creditor (gets benefited more while the company is hale and hearty as compared to secured creditors). Considering this, the question arises as to why secured creditors, shouldn’t be given a better share of the revival plan?

In so far as the Second ratio is concerned, it is submitted that there is an inherent distinction between financial and operational creditors; and unsecured and secured financial creditors. Being distinct and unequal, they cannot be treated equally in the light of Article 14 of the Constitution of India. The obvious result of the findings of the judgment would therefore mean, that the financial creditors may not approve any revival plan of the company and could simply allow the company to be liquidated, and then stand outside the process of liquidation under IBC and liquidate the mortgaged assets (in cases where the secured financial creditors are beyond 34% of the CoC). Thus, this would result in complete failure of the intent and purpose of IBC.

Secondly, the CoC (Committee of Creditors) does not have the power to seek redistribution of the amounts mentioned in the resolution plan and pay itself a higher amount than other creditors who are not a part of the CoC. Section 30(2) read with Section 30(4) clearly enunciates that after considering the feasibility and viability of the plan, the CoC may approve the resolution plan, which is then presented to the Adjudicating Authority through the Resolution Professional (“RP”).

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