Govt likely to implead in Supreme Court against NCLAT’s Essar Steel judgement

The government says that treating financial lenders and operational creditors on a par is not in line with the Insolvency and Bankruptcy Code.
Govt likely to implead in Supreme Court against NCLAT’s Essar Steel judgement
Govt likely to implead in Supreme Court against NCLAT’s Essar Steel judgement
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The order by the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel case equating operational creditors with financial creditors has been challenged in the Supreme Court. Now, the government of India wants to be part of the proceedings and is expected to implead itself in the apex court through the Ministry of Corporate Affairs, reports Business Standard

The government’s opposition to the NCLAT judgement arises out of the exactly opposite position spelt out in the Insolvency and Bankruptcy Code or IBC. The primacy of the financial lenders to an organization over the operational creditors is well established there. The government wants to reiterate this point to the Supreme Court and plead that the NCLAT order may be quashed.

The financial lenders of Essar Steel who have been aggrieved by the NCLAT have already filed an appeal in the Supreme Court and it is in this appeal that the Ministry of Corporate Affairs might want to implead itself. The case might come up for hearing in the coming week.

The government is of the opinion that the law as it stands is quite lucid when it comes to the position of the operational creditors in an organization, particularly when it is undergoing insolvency proceedings. The operational lenders are by and large vendors of goods and services to the company and their debts are classified as unsecured debts. The risk and exposure suffered by the lenders of finance to a company are considered greater and therefore cannot be equated with the operational creditors.

The worry for the government surfaces from another angle as well. Already, the operational creditors of some 200 companies have now appealed to the NCLAT to stay the operation of earlier orders where they have been offered a much lower proportion of what they were owed by the companies. The Essar Steel case is being cited as the precedent. This could open a pandora’s box the implications of which can be far reaching.

The government may consider bringing in an amendment to the relevant law to clarify the situation and possibly bring to a close all these disputes.

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