Essar Steel insolvency: SC expresses reservation on redistribution of funds

The Supreme Court (SC) on Monday expressed reservation on the redistribution of funds in the Essar Steel insolvency case and observed that once the Committee of Creditors (CoC) had “in their commercial wisdom” decided on distribution of funds in a particular way, it should not have been disturbed.

“Once the CoC in their commercial wisdom had decided on division of assets, there should have been no re-distribution, like you are a Resolution Professional (RP). We would settle this issue once and for all," said a two-judge bench headed by Justice Rohinton Nariman. The top court said it would hear the matter starting August 7. In the interim, there would a status-quo on the sale of Essar Steel to ArcelorMittal, the top court said.

The top court’s orders came on a plea moved by the lenders plea against a National Company Law Appellate Tribunal’s (NCLAT) July 4 judgment which had said that both the financial and operational creditors would now get nearly 60.7 per cent of their admitted claims instead of the earlier arrangement wherein the secured financial lenders were getting nearly 90 per cent of their claims.

Aggrieved by the NCLAT’s decision, the banks and other lenders have approached the top court with a plea that the judgment would put the entire CIRP of Essar Steel “under jeopardy” and that it was “shocking, unsettling of otherwise settled principles of law recognising and protecting the rights of the secured creditors”.

The appellate authority’s decision to equate financial creditors with operational creditors and disregarding the security interests of the former would lead to “severe plunge in recovery rate of banks and financial institutions” during the CIRP, which could lead them to “grave financial distress,” the CoC ha said in its plea before the top court.

On July 4, the NCLAT approved the resolution plan submitted by Lakshmi Mittal-led ArcelorMittal for Essar Steel India, but with modifications. Of the Rs 42,000-crore plan submitted by ArcelorMittal, the financial creditors would now get about Rs 30,030 crore while the operational creditors would get Rs 12,000 crore, the NCLAT said, holding both the classes of creditors would get 60.7 per cent of their admitted claims.

A two-member Bench of the appellate tribunal headed by Chairperson Justice S J Mukhopadhaya had then also reprimanded the CoC for discriminating against the operational creditors and other financial creditors such as Standard Chartered Bank (StanChart). The CoC, the NCLAT said, had not been empowered to decide the manner in which the distribution was to be made between one and the other creditor.

Apart from the CoC, ArcelorMittal has approached the top court with a plea that the NCLAT’s decision to redistribute among all classes of creditors nearly Rs 3500 crore that Essar Steel had recorded as profit during the corporate insolvency resolution process. This fund, the NCLAT had then said, would be distributed among the creditors on a pro-rata basis.

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