Impact of the Essar Steel Judgement
The Supreme Court, on Friday, 15th November,
2019, paved the way for Arcelor Mittal to take over Essar Steel. The
much awaited decision by the Apex court is being considered by bankers
and lawyers to be a major judgement that will help facilitate and speed
up the resolution of the largest bad debts in the country. The judgement
has settled numerous points of law under Insolvency & Bankruptcy
Code (IBC) which were being tested in various courts.
Some of the highlights of the judgement include:
- The Apex court restored the primacy of financial creditors over operational creditors, setting aside the ruling of the National Company Law Tribunal (NCLT), which has stated that financial and operational creditors are at an equal status. (Financial creditors are creditors to whom financial debt is owed - for example, through loans taken from banks. Operational creditors are creditors to whom operational debt is owed, i.e., through claims in respect of provision of goods or service, including employment, by the creditor to the debtor.)
- The court also held that the Committee of Creditors (COC) will have the final say in the resolution plans made under IBC, and the NCLT and the National Company Law Appellate Tribunal (NCLAT) cannot interfere with the commercial decisions taken by the COC.
- The court also said that though 330 days was the outer deadline within which a corporate resolution plan must be made, exceptions can be made in rare cases in which a plan is on the verge of being finalised. Otherwise, if the plan is not cleared in time, the liquidation process must be allowed to start.
In
terms of impact on profitability, the judgement is expected to bode
well for banks. After the previous NCLT judgement, lenders had made
provisions against their exposure of approximately Rs 49,000 crore to
Essar Steel, with some banks making provisions up to 100% of their
exposure. As a result of the judgement, banks are now expected to
recover almost 90% of their exposure, compared to the 60% expected
earlier. This is likely to result in an increase in profitability of
banks as they reverse their provisions to the extent of recovery.
Overall, the decision is hailed to be
quite positive for the banking sector. Not only will a significant
amount stuck in resolution for long be freed up, but experts say that
the Supreme Court reiterating the primacy of the committee of creditors
(COC) may strengthen the position of banks in negotiating resolutions.
Banks may, as a result, have higher recoveries than before, as this
judgement creates a precedent for upcoming resolutions. The verdict may
have allayed investor concerns on debt recoveries, with most bank stocks
gaining in the stock market.
However, it will be interesting to
observe how quickly future pending resolutions actually get resolved in
the aftermath of this judgement.
Sources:
Various publications
Disclaimer: The
information provided herein is based on publicly available information and
other sources believed to be reliable, but involve uncertainties that could
cause actual events to differ materially from those expressed or implied in
such statements. The document is given for general and information purpose and
is neither an investment advice nor an offer to sell nor a solicitation. While
due care has been exercised while preparing this document, we do not warrant
the completeness or accuracy of the information. We will not accept any
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should rely on their investigations and take their own professional advice.
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