Monday, April 22, 2019

Judicial activism and the IBC

The argument in favour of having Tribunals is that they offer a specialised and dedicated forum for settling specific categories of disputes which are otherwise likely to get stuck in the regular judicial channels. But this assumption holds only if the regular judiciary exercises restraint and does not insert itself into the proceedings pending before Tribunals. 

Unfortunately, this assumption is deeply questionable given the pervasive tendency of Indian Courts to interfere indiscriminately with the work of Tribunals. In the circumstances, the Tribunals (with their appellate level) becomes two additional layers of litigation.

The example of the latest Supreme Court order staying the the sale of Essar Steel, one of the first of the twelve cases taken up under the new Insolvency and Bankruptcy Code (IBC), is a case in point.

In October, 2018, after following the due process of inviting bids, the Committee of Creditors (CoC) had accepted the resolution plan submitted by ArcelorMittal SA, the highest bidder at Rs 420 billion. The approved plan had proposed providing financial creditors Rs 419.87 bn out of their total dues of Rs 493.95 bn and Rs 2.14 bn out of Rs 49.76 bn to operational creditors. The apportionment of the payouts between the operational and financial creditors under the resolution plan was disputed by the largest of the operational creditors, Standard Chartered Bank. It said that it was receiving just 1.7% of its dues, whereas the financial creditors were receiving over 85% of their dues. 

The takeover of Essar Steel by ArcelorMittal SA was then approved by the NCLT on March 8, 2019. However, the NCLT order also asked ArcelorMittal and the COC to consider giving a higher 15% of the upfront cash settlement (of Rs 420 bn) to the operational creditors. The decision itself came after the resolution of a protracted series of allegations of ineligible criterion under Section 29(c) of IBC on related party defaults involving Essar, Numetal, and Arcelor.

On being approached by Standard Chartered Bank on appeal, the NCLAT too, on March 19, 2019, while approving the takeover plan had also ruled that the apportionment among different creditors will be decided separately. It had also directed the CoC to meet and decide on the apportionment. Further, the Insolvency and Bankruptcy Board of India (IBBI) submitted before the NCLAT that in the 88 successfully resolved IBC cases till date, the financial creditors and operational creditors have received 48.24% and 48.41% respectively. Subsequently, on April 9, 2019, the NCLAT also asked all creditors to filed their claims and had posted the case for April 23, 2019. 

Also, it was reported that internal discussions were afoot among the financial creditors to offer more to the operational creditors, so as to expedite the bankruptcy sale. However, while the proposed payouts may appear unfavourable to the operational creditors, the financial creditors point out that the former have already benefited over the last two years in receiving payouts whereas they had not received any repayments. And in any case, the Courts cannot have no jurisdiction over the commercial aspects of such apportionment taken by the CoC, and can adjudicate only on the procedural and legal aspects. 

In fact, based on the NCLT orders, ArcelorMittal initiated the process to recruit a team to manage Essar Steel. While the matter stood, Standard Chartered approached the Supreme Court. On April 13, 2019, the Supreme Court stopped ArcelorMittal from making any payment to lenders to buy Essar Steel, and also ordered status quo on the resolution plan. It directed the bankruptcy appellate tribunal to expeditiously decide on the appeals. 

The Supreme Court's intervention and status quo order may have set an unhealthy precedent to the bankruptcy process, besides undermining the market confidence in the institutional strength and credibility of the IBC and the Tribunals.

For a start, the main issue, one of apportioning the payments among creditors, was already under the consideration of the NCLAT and the matter was posted for next hearing on April 23rd. The Supreme Court could have allowed the Tribunal proceedings to be exhausted before inserting itself. Second, even if it had to intervene, it could have legally separated the matter of Essar Steel's takeover by ArcelorMittal from that of apportionment of the payments. The former could have gone ahead without the latter, which could have been decided in due course.

Finally, the Supreme Court's directive to the NCLAT to decide on the apportionment of the dues among the different types of creditors may actually be a lever (mis)used in future by Tribunals or Courts themselves in expanding their jurisdiction to cover what are essentially commercial decisions taken by creditors based on certain defined principles and guidelines.

This was a good opportunity to exercise judicial restraint and increase the credibility of the nascent bankruptcy regime. Unfortunately, instead business as usual has taken precedence. 

No comments: