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ESSAR STEEL CASE LAW

INTRODUCTION

The Essar Steel Case is a landmark judgment in the arena of Insolvency & Bankruptcy Law, which
decided the supremacy of the financial creditors in the Committee of Creditors in cases of
distribution of claims. It is one of the oldest cases going under the IBC process which lasted for
approximately 900 days. The Supreme Court set aside the NCLAT ruling and uphold the decision
of the Committee of Creditors on how the funds from the ₹42,000-crore offer by ArcelorMittal
would be distributed among the creditors. The law related to Insolvency and Bankruptcy is largely
settled in this major case.

BACKGROUND

Public-sector lenders are Essar Steel's primary financial creditors. Vendors and suppliers are the
operational creditors, the most prominent ones being Dakshin Gujarat, Gujarat Energy, Bharat
Petroleum, Indian Oil, GAIL, ONGC, and the NTPC.

A consortium of banks led by the SBI had moved the Supreme Court against a National Company
Law Appellate Tribunal (NCLAT) order in the case. The NCLAT had held that Essar Steel's
operational creditors be treated on par with financial creditors when settling the claims.

Essar Steel's Committee of Creditors (CoC) had sought the quashing of NCLAT's July 4 order that
approved the Rs 42,000-crore bid for the debt-laden firm by ArcelorMittal. This was to be divided
between the financial creditors who are owed Rs 30,030 crore and the operational creditors who
are owed Rs 11,969 crore.

 Factual

ArcelorMittal India Private Limited and Numetal Limited applied as resolution applicants in the
Corporate Insolvency Resolution Process of Essar Steel. The Resolution Professional for Essar
Steel, after duly analyzing the resolution plans of both the applicants, disqualified them and
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declared them ineligible for the same in accordance with the Section 29 A of the Insolvency and
Bankruptcy Code, 2016.

 Procedural

Both the companies approached the NCLT, Ahmedabad Bench in 2018, and it concurred with the
decision of the RP to disqualify the Resolution Applicants.

This was because in the case of Numetal, one of the shareholders was Rewant Ruia and whose
father i.e. Ravi Ruia was a promoter of the Essar Steel. It has also issued a guarantee in favour of
the creditors of Essar Steel. Therefore, Numetal was held ineligible in view of Section 29A (c) and
Section 29A (h) of the Indian Bankruptcy Code.

In the case of Arcelor Mittal, Netherlands was found to have been the promoter or exercised control
over two companies namely, Uttam Galva Steels Limited and KSS Petron Limited becoming
ineligible under Section 29A (c) of the Indian Bankruptcy Code.

When the case was taken to the appellate authority i.e. NCLAT, it held that the AMIPL shall stay
disqualified but gave a different judgment for Numetal, contrary to what NCLT held. The reason
being that Rewant Ruia had divested his interest in Numetal in favour of a third party. The NCLAT
order brought parity between financial and operational creditors of Essar Steel in matters of
distribution of proceeds.

Thereafter, AMIPL approached the SC against the decision of the NCLAT.

LAW APPLIED

Section 29A of the Insolvency and Bankruptcy Code, 2016.Arguments

CRITICAL ANALYSIS

The Supreme Court has put its trust in the Committee of Creditors and its commercial intelligence
with respect to the feasibility and viability of a resolution plan and the manner in which distribution
is to be made under it. This principle was also held and affirmed in a previous judgment by SC in
the K. Sashidhar Case. The SC affirmed that the distinction between different classes of Creditors
such as Operational and Financial creditors is mentioned in the provisions of the IBC as well as
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the general law governing classes of creditors. The SC has tried to make sure that equal treatment
between creditors falling in the same category is necessary, even if the IBC lays down different
classes of Creditors to be treated differently. SC has continually preserved the view that claims of
financial creditors are of primary importance, this judgment assumes great significance as it aims
to strengthen the state of the claims of operational creditors in comparison to the claims of financial
creditors. The judgment calls for payment of dues of operational creditors to ensure that a corporate
debtor can continue to carry on its business as a going concern. It was also of utmost importance
that a balance must be struck between adhering to the timelines provided under the IBC and the
possibility of an insolvent company’s liquidation if the process is carried out in haste.

As we further analyze the rationale behind the judgment delivered, it ensures the escalation of the
value of assets of corporate debtors and the balance the interests of all stakeholders, which are the
primary and the most important objectives of the IBC. These factors should be taken in account
by the Committee of Creditors while it takes any decision to revive the Corporate Debtor and to
pay off the dues of Financial and Operational Creditors and the decision of the COC shall reflect
the consideration of all of the above-mentioned factors. This judgment sets the law for resolution
processes that will follow in the times ahead. However, several challenges still remain.

NCLAT'S ORDER

The NCLAT, in its order, said financial creditors would get 60.7 per cent of their admitted claims
of Rs 49,473 crore, about the same as operational creditors. The operational creditors with admitted
claim amount of less than Rs 1 crore would get 100 per cent, while above Rs 1 crore would get
60.26 per cent and workmen and employees would get 100 per cent. The tribunal had said that the
CoC will have no role in the distribution of Rs 42,000 crore and allowed claims of the operational
creditors. ArcelorMittal had told the NCLAT that it would pay Rs 42,000 crore, including a
minimum guarantee of Rs 2,500 crore as working capital, for acquiring Essar Steel under the
insolvency process.

The financial creditors - in this case state-run banks comprise the committee of creditors. While
financial creditors are secured creditors, the operational ones are not. That's why financial creditors
are up in arms against the NCLAT's equal status order, which they say is a disincentive to lenders
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and investors. According to the lenders and the CoC, the IBC framework does not envisage such
a parity between the two categories operational creditors are expected to be paid only after all
secured creditors have been paid off.

JUDGMENT

The final judgment of the SC was that both the Resolution Applicants were disqualified from
submitting resolution plans as the plans submitted by them were in contravention of Section 29A
of the Code.

But, exercising its extraordinary power under Article 142 of the Constitution of India, SC gave the
Resolution Applicants one final opportunity which was to clear any outstanding dues regarding
their NPA accounts within 2 weeks of the SC verdict.

IMPLICATIONS OF THE ESSAR STEEL CASE JUDGEMENT-

The Supreme Court Judgement on Essar Steel landmark judgement and affirms basic principles of
Insolvency and Bankruptcy Code (IBC), 2016. A few of these are:

1. Commercial Decisions left to Commercial entities- Committee of Creditors- For

Commercial aspects of a resolution plan, its viability or otherwise, and, distribution of
proceeds amongst stakeholders, Committee of Creditors (CoC) is the competent authority.
The role of a resolution professional (RP) is only administrative and not adjudicatory. The
adjudicating authority cannot trespass upon a business decision taken by a majority of
CoC.

IMPACT Huge Positive for the financial sector, as the Supreme Court (SC) reinforces the
inalienable and unfettered right of financial creditors over the business/assets created out of bank
finance.

2. Inequality and differentiation amongst creditors based on security held-

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
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cases, be incentivised to vote for liquidation rather than resolution, as they would have
better rights in liquidation.

IMPACT - The judgement appreciates the complex charge and security interests in the Indian
financial landscape dominated by consortium lending and adopts a flexible approach rather than
one-size-fits-all.

3. Objective of IBC is resolution of distressed assets, only when if it is not possible,

liquidation follows-

IMPACT - In the backdrop of 4 in 5 IBC cases closed till Sept 19, going for liquidation, this
statement reiterates the importance of having a resolution plan in place. In the Indian context,
lending is dominated by Public Sector Banks and when a unit is liquidated, capacity created and
employment generated gets lost besides the value erosion.

4. No last minute shock from 'unknown' claims-

A successful resolution applicant cannot suddenly be faced with "undecided" claims after
the resolution plan submitted by him has been accepted as this would amount to a hydra
head popping up which would throw into uncertainty amounts payable by the successful
resolution applicant.

IMPACT - This is one of the most relevant observations. In many cases, claims crop up after the
resolution plan is finalised and even thereafter, and activism by various authorities completely
change the dynamics of a resolution plan and act as a dampener for any investor who can not price
such risk/uncertainty.

5. IBC Process can not 'mandatorily' end after completion of Timeframe-

"Mandatory" end of resolution process after 330 days of commencement of process struck
down as an excessive interference with a litigant's fundamental right to non- arbitrary
treatment under Article 14 and unreasonable restriction on a litigant's fundamental right to
carry on business under Article 19(1)(g) of the Constitution.
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CONCLUSION

The final outcome in the Essar Steel case will provide a significant boost to efforts to revive several
corporate entities which are in a distressed state. It also lays down an important responsibility for
NCLT and NCLAT to look at cases under the IBC beyond their legal issues and monetary claims.
The implicants and consequences on the creditors, stakeholders, promoters, along with everyone
whose interest depends on the revival of the company, should be kept in mind while exercising the
adjudicatory power by these authorities.

This judgment will set a precedent for other corporations which are going through an insolvency
process and are awaiting resolution over the distribution of funds between different classes of
creditors.
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BIBLIOGRAPHY
 https://www.drishtiias.com/daily-news-analysis/essar-insolvency-
case
 https://www.ijlmh.com/wp-content/uploads/2020/01/ESSAR-
STEEL-INSOLVENCY-CASE.
 https://indiankanoon.org/doc/7427609/