SCI (15.03.2021) in Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr. [Civil Appeal No. 9664 of 2019] held that;
# 89 At this juncture, it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in Y Shivram Prasad (supra). Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we do take this opportunity to offer a note of caution for the NCLT and NCLAT, functioning as the Adjudicatory Authority and Appellate Authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. As we have noted earlier in the judgment, the IBC was introduced in order to overhaul the insolvency and bankruptcy regime in India. As such, it is a carefully considered and well thought out piece of legislation which sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legislation remains robust by constantly amending it based on its experience. Consequently, the need for judicial intervention or innovation from the NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC. This conscious shift in their role has been noted in the report of the Bankruptcy Law Reforms Committee (2015) in the following terms:
“An adjudicating authority ensures adherence to the process At all points, the adherence to the process and compliance with all applicable laws is controlled by the adjudicating authority. The adjudicating authority gives powers to the insolvency professional to take appropriate action against the directors and management of the entity, with recommendations from the creditors committee. All material actions and events during the process are recorded at the adjudicating authority. The adjudicating authority can assess and penalise frivolous applications. The adjudicator hears allegations of violations and fraud while the process is on. The adjudicating authority will adjudicate on fraud, particularly during the process resolving bankruptcy. Appeals/actions against the behaviour of the insolvency professional are directed to the Regulator/Adjudicator.”
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However, the NCLAT decision in the Essar Steel matter is an example of egregious judicial activism threatening to derail the government’s reform agenda. The NCLAT appears to re-examine the superiority of financial creditors compared to operational creditors by opining that according to ‘liquidation value’ to operational creditors can harm the Indian economy. This is deeply distressing since our constitutional scheme does not confer tribunals with the task of evaluating what is desirable for the Indian economy. Rather, Parliament, being an elected body, must give policy direction to the economy. In any event, the policy of subordinating operational creditors under the IBC was upheld by the Supreme Court (SC) in Swiss Ribbons. Regardless, the NCLAT felt that the proposed payout under any bid must be shared proportionately between operational and financial creditors, since that would be ‘fair and equitable’. ArcelorMittal was roughly proposing a 90% recovery to financial creditors, which the NCLAT has drastically reduced to 60%, leading to heavy losses to banks. Foreign investors had trusted in the IBC process and bought large pools of Essar loans from PSBs with the hope of achieving profitable IRRs. Not only has frivolous litigation entertained by NCLAT inordinately delayed recoveries and suppressed IRRs, but this order has also shrunk their principal recovery.
This leads to an anomalous situation where financial creditors would rather enforce security at the first sign of financial distress in a firm, thereby depriving it of its essential productive facilities, or choose to vote for liquidation of the company, since, in both cases, they stand to make higher recoveries as opposed to under a resolution plan under NCLAT’s formulation. This will cause more companies to be wound-up, even if they are economically viable. This surely could not have been the intention of Parliament. Further, the NCLAT ruled that all lenders deserve the same payout under a resolution plan, regardless of the level and nature of their security. This goes against the grain of core banking practices the world over, defeats the purpose of credit appraisal and eliminates the commercial basis for pricing credit risk.
The SC, in K Sashidhar, emphatically held that the NCLTs should not interfere in the commercial decisions of lenders. However, after the bid was approved by the Essar lenders, the NCLAT fundamentally altered its commercial terms thereby frustrating their financial objective. The NCLAT makes a valiant effort to paint the distribution of proceeds under a bid to be a non-commercial matter and consequently not immune from judicial review. If proposed recovery to lenders is not a commercial matter, then one wonders what is. After imposing an additional 30% haircut on lenders, the NCLAT notes that since the plan clears the debt of the company, the personal guarantees of promoters also abate. Banks not only lose an additional 30%, but also lose their rights to sue promoters for the entire 40% haircut!
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