InvestorQ : What are the highlights of the recent Essar Steel Supreme Court judgement and how does it really help the banks and financial institutions?
shrinidhi Rajan made post

What are the highlights of the recent Essar Steel Supreme Court judgement and how does it really help the banks and financial institutions?

Answer
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Riya Dwivedi answered.
10 months ago


The Essar Steel order delivered by the Supreme Court was in response to a petition filed by the leading banks of India against an order by the NCLAT. In the case of Essar Steel insolvency resolution, NCLAT had passed an order that Standard Chartered Bank was entitled to a higher level of compensation. In that case, Stanchart was an unsecured financial creditor and ranked below secured financial creditors in the priority list. The SC has clearly pointed out that the NCLAT had no jurisdiction over such decisions of allocations and they should be left to the wisdom of the Committee of Creditors (COC).

Supreme Court order on Essar could have far reaching implications. Indian markets heaved a sigh of relief when the Supreme Court on Friday adjudicated in favour of the Committee of Creditors (COC). A quick background! In the Essar resolution case, Standard Chartered (an unsecured creditor) had approached the NCLAT (NCLT Appellate Tribunal) over the compensation given to it. NCLAT had ruled in favour of a higher compensation to Stanchart. This had resulted in the COC filing a review petition in the Supreme Court. The SC has now struck down the NCLAT order and restored full powers to the COC. This would have a much larger meaning for insolvency cases beyond the Essar case.

Essar case had been stuck in the IBC after the last NCLAT order had led to the COC approaching the SC. The order, effectively, restores the supremacy of the financial creditors represented by the COC in the insolvency settlement process. The order also lays down a clear waterfall regarding how the dues will be prioritized. It states that the financial secured creditors will have the first priority followed by the financial unsecured creditors and finally by the operational creditors. However, the SC order also places the onus on the COC to ensure that the operational creditors are adequately compensated and they are not short changed. This will ensure greater accountability in the process while avoiding frivolous legal cases. Above all, this will also expedite the entire IBC process by putting the financial lenders at the apex of the resolution. The SC judgment actually hits two birds with one stone. Firstly, it speeds up the resolution process by giving full powers to the COC. At the same time, it also puts on the COC the onus of ensuring that the unsecured and operational creditors are not subjected to a raw deal.