Strengthening of committee of creditors comes with riders

ESSAR STEEL VERDICT

The Arcelormittal saga finally achieved quietus on November 15, 2019. Its resolution plan for rehabilitating Essar Steel was blessed by the apex court. While the judgment traverses a range of issues, the core question which it deals with is the extent to which the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) can interfere with a resolution plan, once it is approved by the committee of creditors (COC).

In an earlier column, we had outlined how the amendments (Section 30 of the IBC) were a reaction to the NCLAT’S decision on July 4, 2019, in Standard Chartered Bank vs IRP of Essar Steel and Ors. It may be recalled that the NCLT, in the teeth of the statute (as it existed before the amendment), essentially held that the COC has no role in the distribution of the upfront payment by the resolution applicant, as part of the resolution plan. It also held that the “waterfall mechanism” (Section 53) under the code could not be applied in distributing the upfront payment of the resolution applicant among the creditors, as it is relevant only for liquidation. At its core, these errors flowed from constant efforts of operational creditors to seek higher returns by prompting interference through the NCLT/NCLAT, thereby frustrating and delaying the resolution process.

The amendment (to Section 30) made it clear that operational creditors would, at a minimum, receive liquidation value or the value they would have received, whichever is higher, if the upfront payment under the resolution plan had been distributed, clarifying that this would be “fair and equitable”. The amended Section 30(4) clarifies that the COC may approve the resolution plan after considering "the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in Section 53 (1), including the priority and value of the security interest of a secured creditor". We pointed out that this not only validates the applicability of Section 53 at the stage of resolution (and not only liquidation) but also clarifies the central role of the COC in approving the resolution plan and in making an upfront distribution.

This very same NCLAT judgment of July 4, 2019, was carried to the Supreme Court and is now ultimately reversed. The Supreme Court has laid out principles clearly.

It has stated that “it is the commercial wisdom of this majority of creditors which is to determine, through negotiation with the prospective resolution applicant, as to how and in what manner the corporate resolution process is to take place”. The role of the NCLT while approving the resolution plan, according to the Supreme Court, “is circumscribed in the (Insolvency and Bankruptcy) Code”. In other words, the NCLT is merely supposed to go through the laundry list of requirements under the Code and ensure that the minimum conditions set out therein have been satisfied. Similarly, the court emphasised the limited jurisdiction of the NCLAT, under the Code (Section 61(3)).

The message of the court is loud and clear: There must be minimal interference with a resolution plan (once it is approved by the COC) by the NCLT/NCLAT. Unfortunately, however, this message is diluted midway with the below observations:

“There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the committee of creditors, but the decision of such committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders, including operational creditors. This being the case, judicial review of the adjudicating authority that the resolution plan as approved by the committee of creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force.”

Section 30(2)(e) read with Section 31 of the Code merely prompts the NCLT, while approving the resolution plan, to ensure that there is no contravention of “law for the time being in force”. Unfortunately, the Supreme Court has read into this as a limited power of judicial review, by which a resolution plan could be sent back by the NCLT, if it is of the opinion that the COC has not “adequately balanced the interests of all stakeholders, including operational creditors”. Arguably, while taking two steps forward in cementing the autonomy of the COC, the court may have taken one step back by allowing the NCLT to exercise such vague and undefined power, which is highly subjective.

From the financial creditor’s perspective, the only way to lend meaning to this is to conjointly read this judgment with an earlier Supreme Court judgment in the Swiss Ribbons case, which delineates differences between financial creditors and operational creditors. The argument for financial creditors would be that, in adequately balancing the interests of all stakeholders, the court is merely referring to equitable treatment, within the same class of creditors, given the discussion in the judgment concerning the equitable treatment “only of similarly situated creditors”. The court states: “Equitable treatment is to be accorded to each creditor depending on the class to which it belongs: Secured or unsecured, financial or operational.”

In short, if there is equitable treatment within a class, the NCLT cannot interfere even under this discretionary left by the recent judgment since such a resolution plan would “adequately balance” stakeholders’ interests. Any alternative reading would, once again, arm the tribunal with wide powers to interfere in the insolvency resolution process and may cause delays. It would be wise for makers to intervene and clarify this part of the SC judgment with a suitable amendment to the code.

Arguably, while taking two steps forward in cementing the autonomy of the COC, the SC may have taken one step back by allowing the NCLT to exercise vague and undefined power, which is highly subjective