Essar Insolvency : SC Orders Status Quo On NCLAT Verdict

The Supreme Court on Monday ordered status quo as of today with respect to the order of National Company Law Appellate Tribunal in the Essar insolvency case.

The bench of Justices R F Nariman and Surya Kant was hearing a bunch of appeals filed by the Committee of Creditors and several banks challenging the July 4 order of the NCLAT which had approved ArcelorMittal's Rs 42,000 crore bid for the acquisition of Essar Steel.

 The bench headed by Justice R F Nariman said the monitoring committee will continue its work till the case is heard on August 7.

The appellants are aggrieved with the NCLAT granting operational creditors equal status as lenders in the distribution of the ArcelorMittal's bid amount among the creditors of Essar Steel.

Secured creditors such as banks argue that their claims should be given priority over unsecured creditors and operational creditors.

The NCLAT bench headed by Justice S J Mukhopadhyaya held that 'waterfall mechanism' under Section 53 of IBC is only applicable to distribution of proceeds from liquidation and not to resolution bids. According to the NCLAT, the Committee of Creditors acted in a discriminatory fashion by allowing only less than one percentage of claims of operational creditors although 99.19% claims of financial creditors were allowed.

"The 'Financial Creditors' being Claimants at par with other Claimants like other 'Financial Creditors' and the 'Operational Creditors' having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other 'Financial Creditors' and minimum or 'NIL' amount in favour of some other 'Financial Creditors' or the 'Operational Creditors'. The members of the 'Committee of Creditors' being interested party are also not supposed to decide the manner in which the distribution is to take place", the NCLAT observed.

The SC bench orally asked if the NCLAT could doubt the financial wisdom of the CoC.

Essar Steel was auctioned to recover Rs 54,547 crore of unpaid dues of financial lenders and operational creditors.

In January, the NCLT Ahmedabad bench had approved the resolution plan, by rejecting the last minute offer of settlement made by Ruias, the promoters of Essar.