Reading about the new Supreme Court judgment on the Essar Steel insolvency in my morning newspaper, I was convinced all was well. ArcelorMittal had won, which surely meant: (i) NCLAT’s tedious, formula-heavy reworking of Arcelor’s bid to give all creditors, financial or operational, about 60% of their admitted claims had been set aside (I was right); and (ii) the 2019 amendments to the IBC had been held to be constitutionally valid (I was mainly right, as we shall see).
Moreover, Justice Nariman, a seasoned IBC hand on the Court, had written the opinion.
Nodding appreciatively, I guiltlessly put off reading the judgement till a couple of days back. To my befuddlement, I found that my laziness was ill-advised. The Supreme Court had, mystifyingly, created an entirely new opening for judicial review of the insolvency resolution process – a fresh avenue for the ceaseless litigation that has tyrannised the Code.
Now, the old Supreme Court decision in K. Sashidhar v. Indian Overseas Bank is a very good judgment. Its virtue lies in the fact that it held exactly what the IBC provided – Tribunals can review resolution plans to see if they are in accordance with law, but they cannot scrutinise the deliberations of the Committee of Creditors. In Essar Steel, the Supreme Court has abandoned this principle.
In Essar Steel, the Court decided that even the CoC was fair game for judicial review. The Court now expects Tribunals to satisfy themselves that the Committee has taken into account three things – that the interests of all stakeholders are being “adequately balanced”, the value of the company’s assets is being maximised and the corporate debtor will remain afloat as a going concern. The Court considered these three to be “key features” of the Code.
I fear what fresh horrors await us if Tribunals apply these principles as creatively as they were divined by the Hon’ble Court.
Let us take the first principle – “adequately balancing” the interests of all. The Code was amended specifically to ensure that the Tribunals do not apply their minds to the fairness of resolution plans. If a resolution plan provides for the payment of debts in accordance with the mechanism provided in Section 30(2), then it is expressly deemed to be fair and equitable as per that Section. The resolution professional only submits plans which conform to Section 30(2) to the Committee. So why should the Committee bother with fairness? And why should Tribunals?
The second principle, maximising the assets of the company, was derived by the Court from the preamble to the Code. There is no statutory requirement for a Committee to consider such a thing.
As for the third, there is already a requirement in Section 30 for the CoC to take into account the feasibility and viability of the resolution plan. Yet the Supreme Court does not refer to this at all.
In another part of the judgement, we are told that the mandatory requirement of 330 days for completion of the insolvency resolution process is not mandatory at all, and in fact the word “mandatory” makes the whole provision unconstitutional and has to be read down.
The reason all this is so bothersome is because litigation has ruined the IBC. Instead of the swift redeployment of money from bad assets to productive ones, we have repeated appeals to the NCLAT and Supreme Court, overworked Tribunals, inscrutable Tribunal Orders and, ultimately, frustrated and dissatisfied creditors.
Don’t expect this to change any time soon.
