Supreme Court guides IBC process – Essar Steel judgment


‘The Supreme Court of India (“SC”) has rectified the error that the National Company Law Appellate Tribunal (“NCLAT”) had committed in the Essar Steel Casei . In fact, the issues relating to the aforesaid had been highlighted by my colleague Abhishek Naik in his update “Insolvency and Bankruptcy (Amendment) Act, 2019 – The ‘change’ the ‘changes’ will bring”ii. Now the SC in its a judgment in the matteriii has sought to allay fears that threatened operational creditors being on same footing as financial creditors with regard to their claims. This update briefly looks at position taken by the SC to provide clarity on the matter.

The SC refinements

Giving powers back to the Committee of Creditors (“CoC”)
The NCLAT had taken a view that the CoC is not empowered to decide the manner in which claims of creditors are to be dealt with. This practically left the CoC toothless. The SC vide the Judgment has armed the CoC with same powers as existed before the NCLAT’s judgment. In this regard, the CoC is free to suggest modifications with regards to distribution to different classes of creditors in accordance with the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Resolving primacy of claims of different class of creditors
The NCLAT in its judgment in the Essar Steel Case had held that there are no differences between secured and unsecured financial creditors or financial creditors and operational creditors in terms of their claims and amounts that are to be paid as per the resolution plan. This in a way effectively was taking the whole IBC process to a very different understanding from what it stood. Thankfully, the SC vide its Judgment has corrected the said position and to what ‘equal’ position under IBC should be. The SC has stated that CoC based open the primacy and class of creditors accord different payment to the various category of creditors. Hence, the position is back to where it started as under the IBC. The SC has reiterated that the claims of financial creditors rank higher than others and have to be addressed first. However, the Judgment also calls for not ignoring the dues of operational creditors to ensure that they also are entitled to certain equitable payments.

Guarantors covered under resolution and not for setting of their liability
The NCLAT had vide the Essar Steel Case tried to relieve the guarantors from payments once their debt payable by the corporate debtor is cleared from any responsibilities. The SC has turned it to suit the view of the approval plan. As per the IBC, resolution plan is binding on the guarantors.

The 330 days period
Earlier this year the certain amendments were carried out to the IBC viz. the Insolvency and Bankruptcy (Amendment) Act, 2019 (“Amendment”). The Amendment required that the corporate insolvency resolution process be “mandatorily” completed in a period of 330 days from the insolvency commencement date (including legal proceedings). The SC has struck the word “mandatorily” and it appears that the position is primarily relating to an “ordinarily” time period.


SC in allowing the appeal and providing its stand point vide the Judgment has greatly clarified the legal position under the IBC. Not only has it allayed fears into tumultuous interpretations and constant meddling from the NCLT or NCLAT (by addressing the issue of prominence of creditors), it has also given freedom by not adding pressure for the resolution process as with regard to time of 330 days and arming the CoC as envisioned at the time the IBC was rolled out.

Further, it also provides an array of stakeholders a cheer to look back to the IBC and the resolution process. Not only will the banks have a decent stance to claim their recoverable, the foreign investors will also eye such investments which have decent infrastructure in terms of machinery, workforce and other aspects but failed financially due to certain reasons.

(i) Standard Chartered Bank v. Satish Kumar Gupta, R.P., Essar Steel & Ors. Company Appeal (AT) (Ins.) no. 242 / 2019


(iii) CIVIL APPEAL NO. 8766-67 OF 2019

This Article is by Rohitaashv Sinha, Advocate & Associate Partner at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: or Mob: (+91) - 9999565393