The Ministry of Corporate Affairs is likely to present a detailed submission, citing the intent of the government to give preference to financial creditors over operational creditors, a senior government official told CNBC-TV18.

The decks are now cleared for the government as the Cabinet on Wednesday announced key amendments in the IBC, further clearing the air on the superiority of financial creditors against operational creditors.

The Cabinet approved amendment says: "A specific provision that financial creditors who have not voted in favour of the resolution plan and operational creditors shall recieve at least the amount that would have been received by them if the amount to be distributed under the resolution plan had been distributed in accordance with section 53 of the code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with section 53 of the code, whichever is higher. This will have retrospective effect where the resolution plan has not attained finality or has been appealed against."

This implies that financial creditors will be preferred over and above operational creditors, as per the waterfall mechanism stated in the IBC.

CNBC-TV18 was the first to report that the government might come up with amendments in the IBC to clarify it's intent and take it up in the Supreme Court.

"The Ministry of Corporate Affairs (MCA) is against giving the same status to operational and financial creditors as it does not go with the intent and the spirit of IBC," said the government officials.

"Cabinet decision on amendments in IBC provides further clarity on the intent of the government that financial creditors come first, followed by operational creditors. The amendment will form the basis for the govt for the submission before the supreme court," one of the senior government officials told CNBC-TV18 on the condition of anonymity.

Explaining the rationale, the official said, “Essar NCLAT judgement in a way erased distinction between secured, unsecured and operational creditor at resolution stage by saying a pro-rata distribution of resolution value is needed to make it fair and equitable.”

“The government found it was not in accordance with the provisions of the law. The operational creditor shall be guaranteed a minimum amount which shall not be less than what operational creditors would have received under the distribution scheme given in section 53 of the code.”

“The amendments guarantee that operational creditors get the economic value of the company (offer price by the buyer) or the liquidation value, whichever is high, distributed as per the hierarchy specified in section 53,” the official added.

The issue came to the fore when the National Company Law Appellate Tribunal (NCLAT) verdict in the Essar Steel insolvency case upheld ArcelorMittal’s bid but put secured creditors at par with operational creditors.

NCLAT also observed that secured and unsecured creditors, too, should be given the same treatment, when it comes to settling the claims, despite the clear distinction in classes.

Post the announcement of amendments by Cabinet, Rajnish Kumar, the chief executive officer of India’s largest bank State Bank of India, which is also the largest lender to Essar Steel, recently said, "If secured creditors are given the same treatment as operational creditors, then it is a huge disincentive for secured creditors and an incentive for operational creditors."

Meanwhile, the NCLAT ruling in the Essar Steel case has been challenged by the steelmakers’ lenders and is set to be heard by the Supreme Court on July 22.

It has been over 700 days and counting since Essar Steel was first admitted into the bankruptcy court on August 2, 2017.

It was one of the twelve large defaulters identified by the Reserve Bank of India (RBI) in June of 2017 to be resolved under the IBC but has faced tremendous delay after the promoters filed various suits to try to get back control of the company and withdraw it from NCLT proceedings.

Essar Steel, with over Rs 49,000 crore of claims against it, is causing the banks a loss of Rs 17 crore daily, with each additional day of delay.

First Published:Jul 17, 2019 7:03 PM IST