InvestorQ : What is the Supreme Court order on the Essar Steel front and why is it important for banks?
Neelam Naik made post

What is the Supreme Court order on the Essar Steel front and why is it important for banks?

NISHA Nayak answered.
2 years ago

In the judgement pronounced by the Honourable Supreme Court on 15 November, the Supreme Court upheld the supremacy and the pre-eminence of the Committee of Creditors (COC) comprising financial creditors of the bankrupt company in terms of distribution of proceeds of the bankruptcy. Here are the highlights of the order.

a) The order will pave the way for resolution of Essar Steel, which has been stuck in the NCLAT for a very long time. Essar Steel had massive loans and even had a confirmed buyer in the form of Arcelor Mittal but could not proceed due to legal hassles.

b) Earlier the NCLT Appellate Tribunal (NCLAT) had issued an order which brought parity between financial and operational creditors of Essar Steel in matters of distribution of proceeds. This had led to unnecessary delay in the settlement of the Essar Steel bankruptcy.

c) Most bankers and financial institutions in the Committee of Creditors (COC) had gone to the Supreme Court against this order by NCLAT and had argued that the NCLAT order exceeded their jurisdiction under the IBC.

d) Quite often it has been seen that IBC process gets delayed because operational creditors have expressed their unhappiness over the distribution of funds. Operational creditors have often complained that the IBC is loaded in favour of the financial creditors and against the operational creditors.

e) While the Supreme Court order clearly establishes the supremacy of the financial creditors as having the final say, it also puts the onus of ensuring fair treatment of operational creditors on the COC.

f) The waterfall formula is also clearly laid out in case of liquidation. As per the formula, secured financial creditors hold the first right over the distribution of funds followed by unsecured financial creditors and operational creditors, in that order.

g) The Supreme Court has also scrapped the 330 day limit.

In short, this is going to be a game changer for banks looking to free up their funds.