The recent National Company Law Appellate Tribunal (NCLAT) judgment in the Essar Steel case effectively obliterated the distinction between financial creditors and operational creditors. It also perhaps obliterated the distinction between secured creditors and unsecured creditors.

Consequently, banks who have been taking large defaulters like Essar Steel to the bankruptcy court may now likely get much less from those who are buying the distressed companies and therefore these banks may prefer to take the companies into liquidation rather than to bankruptcy court which may result in destruction of economic value.

Under the current judgement of the NCLAT a large share may go to the operational creditors, who under the current understanding of the bankruptcy law, get only 10 percent of the sale value of the distressed asset.

To check whether this is the way the law ought to be understood and, if yes, what may be the consequences Latha Venkatesh is joined by Shardul Shroff of Shardul Amarchand, Bahram Vakil of AZB and Partners, VG Kannan, CEO of the Indian Banks Association and Sunil Srivastava, former deputy managing director of the State Bank of India.

Shroff of Shardul Amarchand said: "I think to state that distinct is obliterated may be excessive but certainly what has happened is that NCLAT has arrogated to itself the ability to re-write these resolution plans submitted by resolution applicant to change the consent of the resolution applicant, to change the consent of the committee of creditors and to substitute their judgement by its judgement and that in some sense has disrupted the rights and obligations between secured creditors and unsecured creditors under the Insolvency and Bankruptcy Code (IBC).

"These are defined terms under the IBC and to therefore effectively negate the advantage that a secured creditor has, the rights that he has and equate the secured creditors in terms of the distribution as if they were entitled to only that much amount as would be paid to the unsecured creditor, is completely making a nonsense of the IBC."

Vakil of AZB and Partners: "I fear it does and I am extremely worried about its import and therefore if I could just have short time I will go through it as quickly as I can. Section 30 clearly says that as long as the operational creditor’s gets a minimum of liquidation value the committee of creditors (CoC) can decide.

"Section 31 says once again that the CoC as approved by the creditors committee subject to 30 which is as I just said that for minimum liquidation plan the NCLAT shall — the word again used is shall so I totally understand that the architecture of the law whether you may agree with it not agree with it, the idea was most of the money was from the banks, that is the ground reality in India and they are well versed with commercial and financial matters and because of the speed at which we need things to move these decisions, all commercial decisions should be taken by the CoC."

Kannan, CEO of the Indian Banks Association, said: "As Bahram actually mentioned if there is not going to be any distinction between secured creditors and unsecured creditors technically all of them become unsecured.

"So there is no need for me to go and do any perfection of security. If you remember February 12 circular which was started on and subsequent circular of the Reserve Bank of India (RBI) always insists on perfection of security to be done to ensure that the loan is given against security which has been credited. If the entire purpose of this security is going to be completely removed then there is no need for all these activities. Since all of us are going to be in the same boat you will probably have everyone giving loans at 16-17 percent, 18 percent and so on.

"The secured and unsecured creditors were actually distinguished only to ensure that they don’t go and enforce the security during the period of the resolution being and prepared by the NCLAT. Nowhere does it say that they are given to have same treatment. It is going to be nightmare and I think all the people should come together and try to find out that there this clear distinction between secured and unsecured creditors. Otherwise it will cause mayhem."

Srivastava, former deputy MD of the SBI, said: "Perhaps we should go back to the genesis of why the NCLAT was first in a setup because providing a legal framework to the creditors to have a more expeditious realisation of re-stressed assets and therefore the entire concept was empowering the CoC to come to a resolution or a realisation process under the legal framework. Now the argument given that the committee of creditors has created a subcommittee, but the subcommittee only recommends. Only the COC which votes so that argument will really not hold."