Something for everyone in the Essar judgment

By Aniket Sawant and Arvind Nagaraj, SNG & Partners
20 December 2019

The long-awaited decision of the Supreme Court in Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta & Ors case comes as a relief for financial creditors, especially those holding security, as the decision of the National Company Law Appellate Tribunal (NCLAT) has been reversed. The NCLAT had decided that all creditors should be dealt with as equals whether they were financial creditors or operational creditors, secured or unsecured.

The Supreme Court stated that applying a principle of equality to all creditors may motivate the secured financial creditors to vote for liquidation rather than resolution, but held that equal treatment shall be given to creditors within the same category. In view of this and of the amended section 30(4) of the Insolvency and Bankruptcy Code, 2016 (code), a committee of creditors (CoC) can approve a resolution plan that may provide for differential treatment of the various classes of creditors and of sub-classes of secured financial creditors depending on the priority of security held by such creditors.

Aniket Sawant
SNG Partners

The Supreme Court considered the jurisdiction of the adjudicating authority and held that it does not have residual jurisdiction under the code to reject a resolution plan on the grounds that it is unfair or unjust to a class of creditors. The Supreme Court also held that the adjudicatory authority cannot interfere with the commercial wisdom of the CoC, and that its powers are limited to ensuring that the CoC has considered reviving the corporate debtor as a going concern, maximizing the value of its assets, and the interests of all stakeholders including operational creditors.

With regards to the rights of the guarantors of the corporate debtor, the NCLAT held that once the financial creditors have been paid under an approved resolution plan any guarantee is extinguished. The Supreme Court set this aside holding that it was contrary to section 31(1) of the code, which provides that an approved resolution plan is binding on all stakeholders, including guarantors of the corporate debtor. Therefore, financial creditors shall ensure that the proposed resolution plan includes a provision to the effect that the guarantors shall continue to be liable with respect to the personal guarantees. The NCLAT’s ruling was also held to be contrary to the Supreme Court judgment in State Bank of India v V Ramakrishnan. This will have far-reaching impact as promoters will now refrain from providing personal guarantees.

Arvind Nagaraj
SNG Partners

The Supreme Court also held that after the resolution plan has been accepted, the resolution applicant should not be faced with undecided claims and that all claims should be submitted to, and decided by the resolution professional (RP). Further, with regards to the admission of disputed claims, the court held that the RP may admit such claims at notional valuation because disputes may be pending.

The Supreme Court has left intact the provisions inserted by section 4 of the Insolvency and Bankruptcy Code Amendment Act of 2019 (amendment act), which stipulate that resolution processes shall be completed within 330 days. However, the Supreme Court has struck out the word mandatorily from those provisions as they have imposed arbitrary and unreasonable restrictions. The amendment provides that ordinarily the resolution process of the corporate debtor is to be completed within the period of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, in exceptional cases where delay in litigation is attributable to inefficiency of the adjudicatory authority and the NCLAT, the adjudicatory authority or the NCLAT may consider extending the 330-day limit.

Further, the Supreme Court has also upheld the constitutional validity of section 6 of the amendment act, which adds an explanation to section 30(2)(b) of the code. This provides that a certain minimum payment, being not less than the liquidation value, is to be made to operational creditors and dissenting financial creditors. Therefore, financial creditors cannot undermine operational creditors and dissenting financial creditors and must pay the latter that minimum amount, which shall be not less than the liquidation value.

The see-sawing of judgments, where time and again the rights of various classes of creditors have been the subject of dispute, has finally come to an end. The Supreme Court has delivered a multi-faceted judgment answering different and difficult questions of law. This makes the code more transparent. The court has tried to balance the intention of the code to eliminate delay and bring about speedy debt resolution, and the claims of various classes of creditors. Accordingly, this judgment sets an important precedent for future insolvency and bankruptcy cases.

Aniket Sawant and Arvind Nagaraj are associates at SNG Partners.