The Supreme Court said that the acquisition of Essar Steel would go by the resolution plan of the Luxembourg-based ArcelorMittal, now set to take the Indian steelmaker over. (Bloomberg )
The Supreme Court said that the acquisition of Essar Steel would go by the resolution plan of the Luxembourg-based ArcelorMittal, now set to take the Indian steelmaker over. (Bloomberg )

Opinion: The Essar ruling and a sigh of relief

  • The Supreme Court made it clear that those who had extended loans backed by collateral had a superior claim
  • The ruling appears to have cleared the path for ArcelorMittal to complete its acquisition of distressed steelmaker Essar Steel

In a decision that would reduce litigations and expedite the resolution of a corporate failure, the original purpose of India’s Insolvency and Bankruptcy Code, the Supreme Court on Friday set aside an appellate tribunal’s order that had been challenged. This appears to have cleared the path for ArcelorMittal to complete its acquisition of distressed steelmaker Essar Steel. In July, the National Company Law Appellate Tribunal (NCLAT) had held that financial lenders (banks, etc.) and operational creditors (employees, suppliers, etc.) must be treated on par and thus have an equal claim to the funds recovered by the process—the money offered by ArcelorMittal, in this case.

The NCLAT had observed that no concern can function without operational creditors, and so they too were entitled to priority repayment of dues. Accordingly, both financial and operational creditors were to get three-fifths—two-fifths being the “haircut"—of what was owed to them, against the bankruptcy court’s earlier decision that had awarded 85% to financial lenders and the rest to unsecured creditors.

The Supreme Court made it clear that those who had extended loans backed by collateral had a superior claim. It also said that the acquisition of Essar Steel would go by the resolution plan of the Luxembourg-based ArcelorMittal, now set to take the Indian steelmaker over. This plan, approved by Essar Steel’s Committee of Creditors, had envisaged an upfront payment of 42,000 crore to settle the company’s debt and another 8,000 crore to get operations going. In ending the argument over the seniority of various creditors, the apex court’s ruling comes as relief for the country’s banking sector. Let’s hope this eases lending in the economy.

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