FACTS

The Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta case arose in the context of the insolvency resolution process of Essar Steel India Limited, a flagship company of the Essar Group. The company owed a significant amount of debt to creditors and was referred to the National Company Law Tribunal (NCLT) for insolvency resolution proceedings by order 2[i] under insolvency and bankruptcy[ii]. During the insolvency resolution process, the resolution applicants, ArcelorMittal and Numetal, submitted their bids for the company. The Committee of Creditors evaluated the bids and decided to accept the ArcelorMittal bid. The resolution plan proposed by ArcelorMittal envisaged a payout of Rs. 42,000 crores to the financial creditors and a minimal payment to the operational creditors. The operational creditors, who had not been included in the payout plan, challenged the Committee of Creditors’ decision before the National Company Law Appellate Tribunal (NCLAT). The NCLAT approved ArcelorMittal’s resolution plan and modified the distribution of amounts so that all creditors (secured, unsecured, and operational) were treated at par[iii].

ISSUE

The Committee of Creditors contended that the decision of the NCLAT to include operational creditors in the distribution of proceeds was incorrect. The issue in the case was the distribution of proceeds from the sale of Essar Steel India Limited to the operational creditors.

The issue was whether operational creditors could be included in the distribution of proceeds alongside financial creditors or not.

RULE

The rule in the case pertains to the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) relating to the distribution of proceeds from the sale of insolvent companies. Section 53 of the IBC[iv] outlines the order of priority in which the claims of creditors are to be addressed.  According to Section 53(1) of the IBC, in case of liquidation of the corporate debtor, the proceeds from the sale of assets are distributed to the creditors in the following order of priority:

1. Insolvency resolution process costs and liquidation costs;
2. Secured creditors;
3. Workmen’s dues for 24 months preceding the liquidation commencement date;
4. Employee’s dues for 12 months preceding the liquidation commencement date;
5. Unsecured creditors; and
6. Any remaining debts and dues.

The rule, as applied in the case, affirms the primacy of financial creditors in the distribution of proceeds from the sale of an insolvent company.

ANALYSIS

The Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta case provides an essential analysis of the provisions of the Insolvency and Bankruptcy Code, 2016, concerning the distribution of proceeds from the sale of insolvent companies. The judgment affirms the primacy of financial creditors over operational creditors and establishes a clear distinction between the two categories of creditors. The analysis of the case highlights the need for clarity and consistency in resolving disputes related to insolvency and bankruptcy, the importance of protecting the rights of creditors, minimizing delays and conflicts, and ensuring an effective and efficient resolution process. The case also emphasizes the need for further reforms in the insolvency and bankruptcy process to strengthen the ecosystem and promote investor confidence. The reforms may include training and capacity building of stakeholders, greater transparency and stakeholder participation in the resolution process, and enhanced regulatory oversight to prevent conflicts of interest.

The arguments of the Committee of Creditors in the case were based on Section 30(2) of the IBC which states that the resolution professional shall examine the claims and determine the amount of debt and the admission or rejection of such claims, in accordance with the provisions of the IBC. The Committee argued that the resolution professional is given the sole authority to determine the admissibility of claims and that it is an integral part of the resolution process. The Committee further argued that giving the power to decide on admissibility to the resolution professional would save time and expedites the resolution process. This is because the resolution professional is entrusted with the task of managing the affairs of the corporate debtor and is best suited to determine the admissibility of claims.

On the other hand, Satish Kumar Gupta’s argument was centered on Section 60(5)(c) of the IBC which states that the NCLT shall decide on the admissibility of claims. Gupta argued that the power to decide on the admissibility of claims rests solely with the NCLT and that the resolution professional is not entitled to decide on the same. Gupta’s argument was based on the principle that the NCLT was established to be the exclusive adjudicatory body for all matters of insolvency and that the role of the resolution professional is limited to that of an intermediary. Gupta further argued that the powers of the NCLT to decide on admissibility were a part of its supervisory role over the resolution process and that it was essential to maintain the NCLT’s role as the ultimate arbiter in the insolvency process.

CONCLUSION

The Supreme Court of India, in its judgment on the Committee of Creditors of Essar vs Satish Kumar Gupta case[v], upheld the power of the Committee of Creditors (CoC) in approving resolution plans in insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) of India. The Court recognized that the CoC’s decision to approve a resolution plan must be based on commercial wisdom, and courts cannot interfere with it unless there is a violation of the provisions of the IBC or any other laws governing the insolvency proceedings. The Court also acknowledged the duty of the CoC to act in the best interests of all stakeholders and ensure a fair and equitable distribution of proceeds. However, it held that the CoC is not required to ensure equal treatment of all stakeholders, and it can approve a resolution plan with discriminatory distributions in certain circumstances. Overall, the Supreme Court’s judgment in the case has important implications for insolvency proceedings in India. It reinforces the powers of the CoC under the IBC and emphasizes the need for transparent and fair decision-making processes in insolvency proceedings. It also highlights the importance of balancing the interests of all stakeholders in insolvency proceedings.

[i] Standard Chartered Bank and another v. Essar Steel India Limited, 2017 SCC OnLine NCLT 10751 [34].

[ii] Insolvency and bankruptcy code, 2016.

[iii]  The NCLAT determined that the security and security interests of the creditors were irrelevant at the stage of resolution for purposes of allocation of payments.

[iv] Insolvency and Bankruptcy Code 2016, s 53. It provides the order of priority in which the proceeds from the sale of the liquidation assets are required to be distributed.

[v] Committee of Creditors of Essar Steel India Limited (through authorized signatory) v. Satish Kumar Gupta and Others, (2020) 8 SCC 531.

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