The Supreme Court’s judgment allowing the appeal of the Committee of Creditors (CoC) of Essar Steel against the National Company Law Tribunal’s (NCLAT’s) order that operational creditors should be treated on par with financial creditors has paved the way for the acquisition of the company by ArcelorMittal. This move is likely to provide a Rs 50,000 crore breather to the country’s banks.

The earlier NCLAT order had only given conditional approval for ArcelorMittal’s bid to acquire Essar Steel; the order had also made major modifications to the CoC’s resolution plan to settle the latter’s debts.

NCLAT held that the resolution plan drafted by the CoC was discriminating between operational and financial creditors by giving primacy to the latter, which was in violation of the provisions of the Insolvency and Bankruptcy Code (IBC).

The appellate body (NCLAT) had recalculated that financial creditors whose claims exceeded Rs 1 crore would receive 60.7 per cent of the debt claimed by them, while operational creditors with claims of the same sum would be entitled to receive 60.26 per cent of the debt. Those creditors with dues below Rs 1 crore would receive the entire amount owed to them.

It was against these modifications in the resolution plan that the CoC had approached the apex court. The bench, headed by Justices R F Nariman, Surya Kant and Ramasubramanian, ruled that while the adjudicating authority (NCLAT) can return the plan to the CoC if it believes that legal requirements were not adhered to, it cannot modify it on its own.

The apex court’s decision now means that the creditors of Essar Steel, among them a large number of private as well as public sector banks, including IDBI, ICICI, SBI and others will be able to the clear their books by substantial amounts.

It’s a much-needed relief for the country’s banking sector, which has, in recent years, been burdened with huge NPAs.

Apart from this obvious benefit to the banking sector, the judgment is also quite significant from a legal standpoint.

The Supreme Court has decided to do away with the 330-day compulsory resolution deadline (introduced by an amendment earlier this year) as per which a firm would face mandatory liquidation.

After this judgment, the adjudicating authority would now be empowered to decide on a case-by-case basis if the 330-day deadline needs to be extended or not.