Secured lenders to Essar Steel Ltd. are “not satisfied” with the appellate tribunal’s judgment removing the creditor hierarchy in settlement of claims, according to the head of India’s largest bank.
Bankers are in the process of filing an appeal at the Supreme Court to get their concerns about distribution of claims addressed, Rajnish Kumar, chairman at State Bank of India, the lead bank of the lending consortium, told BloombergQuint in an interview. The lenders may also decide to represent to the government, seeking amendments to the Insolvency and Bankruptcy Code, he said.
The National Company Law Appellate Tribunal, while upholding ArcelorMittal SA’s bid for Essar Steel, stripped the Committee of Creditors of a key power. Calling its distribution of funds unfair to operational creditors, it ruled that the committee has no role in how the claims are allocated. The NCLAT said the financial creditors and operational creditors seeking more than Rs 1 crore would receive only 60 percent of their claims.
ArcelorMittal is offering Rs 42,000 crore against lenders’ claims worth over Rs 49,000 crore, making it the highest recovery under the bankruptcy law. Certain secured financial creditors would have recovered in excess of 80 percent, had the appellate tribunal approved the distribution proposed by the committee of creditors.
Kumar said Section 230 of the Companies Act recognises different class of creditors. “So, it is not that the law does not recognise the different class of creditors. But within IBC, because there is no waterfall mechanism (during resolution), and rightfully also because it is resolution,” he said.
When resolution happens, whoever is the creditor has to be satisfied with it, but that does not mean that the secured financial creditors and the operational creditors, who are essentially not equal, become equal. So, that is our primary response or reaction (to the NCLAT judgment).Rajnish Kumar, Chairman, SBI
Kumar added that if the IBC process takes away the credit hierarchy and secured creditors get no preferential treatment, “then this becomes the worst option for the secured creditors.”
Deadline Concerns
Another thing that is of concern to lenders is extension in deadline for resolution. While the insolvency code provides for the 270-day rule, the deadline has been breached in a number of key cases. This has led to delays in resolution of cases such as Essar Steel and Jaypee Infratech Ltd.
“It is my view, 270-day should become mandatory for the resolution to happen. Otherwise, it should be taken out of that process and it should go into liquidation,” Kumar said. “If this is discretionary, then we will continue to have this condition.”
If cases end up taking two or three years for resolution, then the insolvency code is going down the way debt recovery tribunals went, he said. This coupled with limited creditor rights would make the code the worst option for lenders, Kumar said.
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