You are here: Home » Companies » News
Business Standard

Will challenge IBC amendments: Essar Steel operational creditors tell SC

Supreme Court agrees to hear operational creditors on August 19, asks them to file amended applications in a week

Aashish Aryan  |  New Delhi 

IBC
Illustration: Binay Sinha

The operational creditors of on Wednesday told the (SC) that they would challenge the latest amendments made to the (IBC), which gave preference to financial creditors over operational creditors. The apex court has agreed to hear the operational creditors on the issue and given them a week to file amended applications challenging the changes brought to the IBC.

The case would be next heard on August 19, when the apex court is also likely to hear other challenges made to the IBC, such as the extension of the corporate insolvency resolution period to 330 days from 270 days and other changes which may apply retrospectively. During the hearing on Wednesday, the court observed that since the Committee of Creditors (CoC) comprised only of secured financial creditors, it was possible that they could be discriminated against.

“When you have a CoC only of financial creditors, and the operational creditor is only given a hearing…nothing beyond, then it is possible that operational creditor can be given nothing. There can be challenges to it,” a two judge Bench led by Justice Rohinton Fali Nariman said.

This observation prompted the operational creditors to submit that even the latest amendments to IBC added to their woes instead of solving it. The court further observed that if the law allowed banks to decide that while they would take haircuts, they could give nothing to the operational creditor, “it was bad law”.

“If this is not addressed even in the amendments, it is a major lacuna. The amendments, instead of addressing the issue, aggravate it,” the court said. The financial creditors tried to justify the latest amendments made to the IBC by claiming that the difference between them and the operational creditors was that they were secured lenders as opposed to the latter. The court, however, observed that as there was “no monopoly” of any operational creditor, it was possible that a new management could switch to another service provider instead of the old one.

Supreme Court’s Observations

  • Some new amendments to IBC will impact operational creditors
  • If problems not addressed, court will look into them
  • Questions possibility of OCs getting nothing in resolution plan

Will look into amendments made to IBC to see if they are ‘bad law’


The apex court on Wednesday also asked the lawyers for CoC as to why the operational creditors should also be disadvantaged to possibly receive nothing if the purpose of Corporate Insolvency Resolution Process (CIRP) was “to resuscitate” the company instead of liquidating it.

“In case of liquidation, everyone stands in line and gets what they get. When the plan is to resuscitate, why is it that the operational creditor is given nothing? Why had the been driven to interpret it in that way?” the two judge Bench observed.

The questions to the CoC by the SC on Wednesday came after the operational creditors submitted that changes to IBC had been approved by the government and passed by both the Lok Sabha and Rajya Sabha, but was only pending presidential nod. The government had in July cleared about seven changes to the IBC in which it had clarified that the commercial consideration and decision taken by the Committee of Creditors (CoC) would be taken into account when it came to distribution of funds as proposed by a resolution applicant in the resolution plan.

Finance Minister Nirmala Sitharaman had on July 29 told the Rajya Sabha that the new changes to IBC had been brought to clarify the interpretation problems that had arisen due to the National Company Law Appellate Tribunal (NCLAT) ruling in insolvency case. The interpretation, Sitharaman had then said “was trying to treat secured creditors, operational creditors at par”, which “defeated the purpose and also the spirit” of IBC.

The had on July 4, while clearing the resolution plan submitted by ArcelorMittal for Essar Steel, ruled that both the financial and operational creditors would get nearly 60 per cent of their claims. The earlier arrangement where the CoC comprising of financial creditors had decided that they would get nearly 90 per cent of their admitted claims and the operational creditors would get only 10 per cent of their claims, had been struck down by the NCLAT. Essar Steel’s financial creditors should not have distributed the amount among themselves by keeping the “maximum amount in favour of one or other financial creditors and minimum or NIL in favour of some other financial creditors or the operational creditors,” the NCLAT then said.

Aggrieved by the NCLAT judgment, the CoC has approached the apex court with a plea that appellate authority’s decision to equate financial creditors with operational creditors and disregarding the security interests of the former would lead to “severe plunge in recovery rate of banks and financial institutions” during the CIRP, which could lead them to “grave financial distress,” the CoC has said in its plea.

The insolvency case, which has been going on for more than 700 days now, has seen various rounds of litigation. Currently, Lakshmi Mittal owned ArcelorMittal is the only bidder. Its Rs 42,000 crore resolution plan has been accepted and approved by the CoC, the National Company Law Tribunal, as well as the NCLAT.

First Published: Wed, August 07 2019. 21:01 IST
RECOMMENDED FOR YOU