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Essar Steel Verdict | ET Explains: How Essar Steel's Verdict Changes Game Rules for Future Bankruptcy

In a landmark ruling, the Supreme Court upheld the Creditors Committee, composed of the financial creditors of the failed companies, over the distribution of claims.

The request will finally pave the way for the resolution of Essar Steel, one of the oldest cases in the IBC process. It was one of the original dirty dozen referred by the RBI to NCLT for the corporate insolvency resolution process under the IBC Code.

After this verdict, steel mogul Lakshmi Mittal can now finally bring his global giant ArcelorMittal to India to settle here.

Deciphering the verdict

The Supreme Court overturned NCLAT's previous order, which placed parity between Essar Steel's financial and operating creditors on revenue distribution issues.

Annoyed by the NCLAT ruling, the financial creditors had approached the main court, saying that the NCLAT order exceeds the scope of the IBC. They also argued that secured lenders have the first right to the funds, an argument that had been used to deny Standard Chartered the same treatment as other financial lenders. With the Supreme Court finally retaining the primacy of the CoC over the distribution of funds, a major area of ​​concern was addressed.

Faster IBC Resolution

Delay in resolving bankrupt companies is due to litigation – mainly due to operating lenders expressing their dissatisfaction with the distribution of funds. Their position is that they get a rough agreement from the IBC process and have to get steep haircuts.

The Supreme Court verdict will close these concerns as it said that while the Creditors Committee has a final say on the distribution of funds received, it should also take care of the interests of operational creditors. This decision is premised on the fact that no concern can work without operating lenders.

330 days

The Supreme Court has overturned the mandatory 330-day time limit for resolving insolvency and bankruptcy cases, after which settlement will be invoked.

The 330-day deadline was brought through amendments by the government this year to reduce litigation time. The original 270-day window had been breached in many cases because of litigation. Courts treated the time spent on litigation as outside the 270-day window, causing major delays in the settlement process.

The 330-day timeframe included time spent in litigation. The Supreme Court has given the contracting authority the power to decide whether it needs more time to decide on a specific case.

The mechanism of the waterfall

The IBC follows a cascading mechanism that essentially outlines the order in which the settlement process will be distributed among the different categories of lenders.

According to this formula, secured financial lenders hold the first right over the distribution of funds, followed by unsecured financial creditors and operating creditors, in that order.

According to an ET report, the government – which is considering a fixed ratio for operational creditors in order to reduce frivolous litigation – will have to consider the cascading mechanism because CdCs may favor settlement if they do so. a steeper haircut.

The way forward

IBC's biggest USP was its resolution of bankrupt firms with a fixed deadline, allowing them to remain a concern; The companies are referred for liquidation only in extreme cases.

A faster resolution of the IBC is in the interest of all stakeholders as it will relieve the banking industry from the stress it is currently facing in terms of NPAs. This is important for improving India's business climate and facilitating the creation of new businesses.

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