Essar Steel lenders led by the State Bank of India (SBI) are likely to appeal the National Company Law Appellate Tribunal (NCLAT) order in the Supreme Court following its judgement earlier this month where it approved a Rs 42,000 crore bid placed by ArcelorMittal to take over the stressed steel maker.

The most important part of the NCLAT judgement was its verdict that ArcelorMittal is an accepted buyer. But the devil was in the fineprint, which said that the committee of creditors (CoC) and the way they distributed the money is not acceptable.

It said that the committee of creditors had given 90 percent to the financial creditors and 10 percent to the operational creditors. The NCLAT, however, said that 40 percent should go to the operational creditors. One of the unsecured creditors, Standard Chartered, was given a higher amount.

Under the insolvency and bankruptcy code (IBC), the operational creditor get 10 percent. But NCLAT argued it, saying it is minimum of 10 percent but the way everybody understood the IBC law is that operational creditors get 10 percent and the CoC shall decide what is the best commercial arrangement because only they know how the company can be run.

If the judges start changing how the whole thing should be ordered then how will one choose the resolution plan?

So two principles are at stake, one whether the CoC’s plan can be set aside by the NCLAT lock, stock and barrel unless it is seriously violating some law and two, whether secured and unsecured creditors can be given the same rights as operational and financial creditors.

This appeal is important because a lot of foreign funds who wanted to invest in distressed assets are backing off. Bankers themselves don’t know how to draw future governance if somebody comes and asks for a loan.

Highlights

The verdict has cut rights of secured creditors and upped the rights of unsecured and operational creditors

It may result in banks preferring to keep all loans unsecured and charge high rates

It can lead to banks preferring taking stressed companies to liquidation than to IBC

There is a need to amend IBC to clearly state superior rights of secured creditors

IBC needs to be amended to clearly state superior rights of CoC