Essar Steel Insolvency: Supreme Court Upholds Resolution Plan and Creditor Rights

The landmark case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory vs. Satish Kumar Gupta & Ors. dealt with crucial aspects of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly concerning the rights of creditors, the role of the Committee of Creditors (CoC), and the validity of the resolution process.

The Supreme Court had to examine whether the resolution plan approved for Essar Steel was legally sound and whether the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) had overstepped their jurisdiction. The judgment clarified the powers of creditors, the treatment of secured and unsecured creditors, and the binding nature of approved resolution plans.

Background of the Case

Essar Steel, one of India’s largest steel manufacturers, had been admitted to insolvency proceedings under the IBC following default on loans exceeding INR 49,000 crores. Standard Chartered Bank and State Bank of India, among other financial institutions, were the major creditors.

During the corporate insolvency resolution process (CIRP), ArcelorMittal India Private Limited submitted a resolution plan offering an upfront payment of INR 35,000 crores, with an additional INR 8,000 crores infused as working capital. However, operational creditors challenged the plan, arguing that they were not given fair treatment compared to financial creditors.

Petitioner’s Arguments (Committee of Creditors of Essar Steel)

The CoC contended that:

• The resolution plan was approved following due process under the IBC.
• The NCLAT exceeded its jurisdiction by modifying the plan to distribute payments equally among financial and operational creditors.
• The CoC had the commercial wisdom to approve or reject resolution plans, and courts should not interfere with its business decisions.
• The treatment of secured and unsecured creditors must be different to maintain the sanctity of financial lending.

Respondent’s Arguments (Satish Kumar Gupta & Other Operational Creditors)

The respondents challenged the CoC’s decision on the following grounds:

• Operational creditors were unfairly treated as they were paid significantly less than financial creditors.
• The NCLAT correctly modified the plan to ensure fair treatment to all creditors.
• Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, which altered the treatment of operational creditors, were unconstitutional.

Supreme Court’s Judgment

The Supreme Court upheld the resolution plan approved by the CoC and set aside the NCLAT’s modifications. The key findings of the Court were:

• The CoC has the final authority in approving resolution plans, and its commercial wisdom cannot be questioned unless the plan violates the IBC.
• The principle of equitable treatment applies only to similarly situated creditors; secured creditors cannot be equated with unsecured or operational creditors.
• Personal guarantees given by promoters remain enforceable even after the approval of a resolution plan.
• Once a resolution plan is approved, undecided claims cannot be raised later.
• The amendments to the IBC were valid, and the legislature had the right to clarify the distribution of funds under a resolution plan.

The Court concluded:

“The decision of the NCLAT is set aside. The resolution plan as approved by the Committee of Creditors is held valid and binding on all creditors and stakeholders.”

Key Takeaways

• The commercial wisdom of the CoC is paramount in the resolution process.
• Financial creditors, especially secured creditors, will have priority in repayment over operational creditors.
• Personal guarantees of promoters remain enforceable post-resolution.
• Undecided claims cannot be introduced after the resolution plan is approved.
• Courts and tribunals must not interfere with the CoC’s business decisions unless they violate the law.

This judgment strengthens the IBC framework and provides clarity on creditor rights and resolution procedures, ensuring timely and effective insolvency resolutions.

Petitioner Name: Committee of Creditors of Essar Steel India Limited.
Respondent Name: Satish Kumar Gupta & Ors..
Judgment By: Justice R.F. Nariman.
Place Of Incident: Ahmedabad, Gujarat.
Judgment Date: 15-11-2019.

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