The Supreme Court on Friday accepted ArcelorMittal’s offer to pay an aggregate ₹42,000 crore as an upfront amount to the secured financial creditors of bankrupt Essar Steel.
This paves the way for Arcelor to take over Essar and enter the world’s second-biggest steel market.
With this, a three-judge Bench led by Justice Rohinton F. Nariman upheld the “commercial wisdom” of the Committee of Creditors (CoC) to accept Arcelor’s offer and set the ball rolling for the takeover. The court set aside a judgment of the National Company Law Appellate Tribunal (NCLAT), which held that the amount ought to be shared equally between financial creditors and operational creditors.
“The equality principle cannot be stretched to treating unequals equally. That will destroy the very objective of the Insolvency and Bankruptcy Code (IBC) — to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational,” Justice Nariman wrote in his 164-page judgment.
Explaining why financial creditors are favoured over operational creditors of a bankrupt company in a corporate resolution process, Justice Nariman said financial creditors were capital-providers for companies, who in turn were able to purchase assets and provide a working capital to enable such companies to run their business operations. Operational creditors, on the other hand, were beneficiaries of amounts lent by financial creditors.
“If an ‘equality-for-all’ approach, recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution… This would defeat the entire objective of the IBC,” Justice Nariman observed.
The NCLAT tried to substitute its wisdom for the commercial wisdom of the CoC, he said.
“Corporate resolution is ultimately in the hands of the majority vote of the CoC,” the court clarified.
“So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the CoC which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors… All decisions by the CoC can be taken by a 51% majority vote,” Justice Nariman noted.
Tribunals have no “residual equity jurisdiction” to interfere in the merits of a business decision taken by the requisite majority of the CoC in conformity with the law, the court held.
In short, tribunals cannot “trespass” into the turf of the CoC. The scope of judicial review over a CoC decision is certainly limited.