Essar Steel ruling: PSU bank shares rally

16 Novembre, 2019, 21:22 | Auteur: Auguste Feret
  • A view of the Supreme Court

Analysts said most banks have provided significantly for their exposures to Essar Steel and given the recovery rate of around 90%, there should be significant writebacks. The case had landed up at the Supreme Court because the appellate tribunal of the bankruptcy court had held that the funds from the sale of a bankrupt company should be equally distributed between both financial creditors i.e. banks and operational creditors (suppliers, vendors etc.) who are owed money by the insolvent company.

Shares of public sector banks (PSBs) inched higher at the bourses on Friday, with the Nifty PSU Bank index gaining more than 3 per cent after the Supreme Court said the NCLAT can not interfere with the commercial decisions taken by banks in Essar Steel case. Although the law provides for resolution in a maximum 270 days, a series of cases in various forums resulted in the entire resolution process stretching to almost 28 months. Under IBC, it is the Committee of Creditors that is tasked with taking major decisions along with the resolution professional once proceedings have been initiated by National Company Law Tribunal. "The impugned NCLAT judgment is set aside", the top court said.

The Insolvency and Bankruptcy Code (Amendment) Bill 2019 gives CoC of the loan defaulting company explicit authority over the distribution of proceeds in the resolution process and fixes a firm timeline of 330 days for resolving cases referred to the IBC. There was setback for the government too as the court struck down the provision under IBC making it "mandatory" to complete the insolvency proceedings within 330 days. "This much-awaited judgment also settles to rest numerous points of law under IBC, which were tested in various courts".

A bench headed by Justice R F Nariman clarified that financial creditors enjoy primacy over operational creditors and the adjudicating authority can not interfere with the decision approved by the committee of creditors.

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"If NCLT finds that legal parameters are not met, it can send it back to Committee of Creditors, but it cannot tinker with the plan", reports said.

Essar Steel is reeling under a debt pile of Rs. 30,030 crore from financial creditors and Rs. 11,969 crore from operational creditors.

There is no principal of equality between secured and unsecured creditors, said the bench, also comprising Justices Surya Kant and V Ramasubramanian. "The order restores the contours of lenders' claim on collaterals as per the contractual agreement and seniority of claims and also sets a healthy precedent for further resolution down the line", said Lalitabh Shrivastawa, deputy VP at Sharekhan.

"No doubt the ultimate discretion on distribution is with the Committee of Creditors (CoC), whose decision should balance the interests of all stakeholders", the bench said. "This would defeat the entire objective of the Code which is to first ensure that resolution of 89 distressed assets takes place and only if the same is not possible should liquidation follow", it said.

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