Supreme Court order on Essar could have far reaching implications

Indian markets heaved a sigh of relief when the Supreme Court on Friday adjudicated in favor of the Committee of Creditors (COC). A quick background! In the Essar resolution case, Standard Chartered (an unsecured creditor) had approached the NCLAT (NCLT Appellate Tribunal) over the compensation given to it. NCLAT had ruled in favor of a higher compensation to Stanchart. This had resulted in the COC filing a review petition in the Supreme Court. The SC has now struck down the NCLAT order and restored full powers to the COC. This would have a much larger meaning for insolvency cases beyond the Essar case.

Closure for Essar case

Essar case had been stuck in the IBC after the last NCLAT order had led to the COC approaching the SC. The order, effectively, restores the supremacy of the financial creditors represented by the COC in the insolvency settlement process. The order also lays down a clear waterfall regarding how the dues will be prioritized. It states that the financial secured creditors will have the first priority followed by the financial unsecured creditors and finally by the operational creditors. However, the SC order also places the onus on the COC to ensure that the operational creditors are adequately compensated and they are not short changed. This will ensure greater accountability in the process while avoiding frivolous legal cases.

Expedite the IBC process

In a way, the Essar case and the SC order also comes as a larger precedent for all future IBC cases. While secured financial creditors clearly had priority, the issue was pertaining to operational creditors like the vendors, suppliers, consultants, service providers etc. This worked both ways and quite often these operational creditors were in a position to delay the entire IBC process by filing frivolous claims. This had resulted in a lot of such IBC cases getting stuck with no resolution. The judgment puts the entire relationship in perspective. It not only gives full powers to the COC to decide on the distribution but also puts on them the onus of protecting the larger interests of operational creditors and should be beneficial in the long run.

Smooth for banks

But, the biggest advantage could be for the banks that have lent to these bankrupt companies. Recoveries continue to be slow as cases are stuck up in a slew of litigations. In most cases, it is the tiff between operational and financial creditors. Most of the large PSU banks have already provided for most of the losses on account of these loans and any substantial recovery will make a meaningful difference to their bottom lines in the coming quarters. That should certainly be a major plus for Indian PSU banks as locked up liquidity gets freed up for productive use!