The Supreme Court’s judgment on Friday in the matter of Essar Steel’s bankruptcy is a landmark in the short history of insolvency and bankruptcy resolution in India. Apart from clearing the way for eventual sale of Essar Steel to ArcelorMittal, the verdict has clarified on important aspects of insolvency resolution that had been interpreted variously by the National Company Law Tribunal and the National Company Law Appellate Tribunal (NCLAT). First off, the apex court has upheld the primacy of financial creditors over operational creditors in the repayments waterfall, and rightly so too. It is the financial creditors who provide capital to an enterprise and their interests are secured in the form of collaterals on the firm’s assets. Operational creditors, who are largely suppliers of goods and services, are unsecured creditors and they cannot claim equality or precedence over financial creditors. Second, the Supreme Court has shown the NCLAT, which was attempting to appropriate the role of the Committee of Creditors (CoC) in an insolvency resolution, its place. The ruling is clear that the CoC is supreme when it comes to deciding on commercial issues, including the repayment waterfall, in an insolvency resolution. These two clarifications should alone help in quickening a number of other cases, big and small, that are stuck in the insolvency courts across the country.
The apex court has also held that the 330-day limit for resolution is not sacrosanct. This will ensure that creditors are not pressured to accept a below-par deal due to paucity of time. With critical aspects of the law clarified, there may also not be reason to fear that entrenched promoter-defaulters can misuse the unlimited time now available to them. With the go-ahead given to the sale of Essar Steel, it is expected that banks will recover over 90% of the over ₹40,000 crore that the company owes them. Operational creditors are set to receive close to ₹1,200 crore. This should clearly help improve the financial position of weak public sector banks and bolster profitability as the Essar dues were fully written off by them. Shares of banks such as State Bank of India, and Punjab National Bank rallied following the verdict. More importantly, the decision, it is believed, will serve as a useful precedent when it comes to deciding on future bankruptcy cases. The insolvency and bankruptcy process is still young in India. There is a long way to go yet, especially in the matter of recovery percentages. The Essar Steel resolution has raised the bar but the overall recovery in all cases that have been adjudicated is less than 50%. This has to improve, along with the time taken for resolution, because significant capital is locked up in bankrupt companies.
Published - November 19, 2019 12:05 am IST
