Podcast | Digging Deeper: The Essar Steel saga

HARISH PUPPALA | RAKESH SHARMA
Moneycontrol Contributors

It has not been a happy new year for the promoters of Essar Steel. On February 4, the National Company Law Appellate Tribunal (NCLAT) directed the Ahmedabad bench of the National Company Law Tribunal (NCLT) to decide on the insolvency plea filed against Essar Steel (India) Ltd. by February 11. A two-member NCLAT bench headed by Justice SJ Mukhopadhaya said the appellate tribunal would hear the matter on 12 February, but only after it had been heard at NCLT, Ahmedabad.

The appellate tribunal asked that operational creditors choose a sole representative as the bench will not be hear all of them individually. It issued such a directive as it was hearing a petition filed by the committee of creditors (CoC) of Essar Steel, through State Bank of India, against resolution professional Satish Kumar Gupta and others.

A week ago, the Ahmedabad bankruptcy court had snubbed a bid by Essar Steel Asia Holdings Ltd (or ESAHL) to regain control over debt-ridden Essar Steel. That snub came as a major setback to the Ruia family, who are the promoters of the company. The Ruias have sought the withdrawal of the petition under Section 12A of the IBC, or the Insolvency and Bankruptcy Code, that allows such a move subject to the approval of 90% of the creditors as well as the NCLT. Their offer came on a day that saw more than 92% of creditors to Essar Steel vote in favour of handing over the company to ArcelorMittal Netherlands BV. Yes, the ArcelorMittal.

A recap of the saga

Ruia-family promoted Essar Steel ran into debt troubles some years ago and, following directions from the Reserve Bank of India, was among the first 12 large cases admitted to insolvency proceedings in 2017. However, the insolvency resolution process has been beset by litigation. The Ruias attempted a backdoor entry into the resolution process via equity interest in Numetal -- a consortium led by Russian financier VTB. For the record, the IBC disallows a promoter of a corporate defaulter from participating in the insolvency process. Among the bidders eyeing Essar Steel were the world’s largest steel company ArcelorMittal, Anil Agarwal’s Vedanta Group and Sajjan Jindal-led JSW Steel Ltd. The race eventually narrowed down to Numetal and ArcelorMittal but a Supreme Court order placed stipulations on each for their bids to be considered valid. ArcelorMittal paid Rs 7,469 crore dues pending towards another NPA, or non-performing asset, -Uttam Galva Steels- for its bid to earn eligibility. Numetal failed to cure its ineligibility and repay Ruia related debt.

Last week, Moneycontrol had reported that the Ruias had presented a Rs 54,389 crore proposal to withdraw Essar Steel from insolvency courts. The withdrawal is allowed under Section 12A of the Insolvency and Bankruptcy Code. Their offer was higher than the Rs 42,000-crore bid from ArcelorMittal, which, as per the report, had the backing of lenders. ArcelorMittal’s resolution plan includes the upfront payment of 42,000 crores to lenders and an additional 8,000 crores towards capital expenditure. Livemint reported that Standard Chartered Bank had also approached the bankruptcy court challenging the resolution plan approved by the majority of the financial lenders. Standard Chartered, which has more than 7.5% weight in the voting process, voted against ArcelorMittal’s resolution plan.

A BloombergQuint report stated that, according to Mohit Saraf -senior partner, L&L Partners- the order by the Supreme Court upholding the validity of the IBC and all its segments under the constitution was enough to stop any discussion around promoter’s rights in the matter. L&L Partners advised ArcelorMittal during the bidding process for Essar Steel.

The tribunal then stated that withdrawal of the insolvency case can only be done by the applicant who had initiated the process - in this case, State Bank of India, the lead lender. In a body blow to the Ruias’ hopes of retaining the crown that is jewel Essar Steel, the NCLT rejected the promoters' plea to repay the debt of the company. There were rumors that the Ruias would move the NCLAT against that order. (Which they did this week, of course. More about that in a bit.)

An Essar spokesperson read out a statement that said, “We continue to believe that our offer of Rs 54,389 crore is the most compelling proposal available to Essar Steel creditors. It seeks to repay all classes of creditors and fulfills the IBC’s overriding objective of value maximisation that has been established time and again by courts at all levels.”  He added, “We submitted the proposal under the recently introduced Section 12A of the IBC and the recent judgement of the Supreme Court has established that the section's provisions are applicable retrospectively. We are awaiting a copy of the full NCLT order, and will take a call on next steps after we have thoroughly gone through the contents.”

Babu Sivaprakasam, Partner, Economic Laws Practice, explained to Moneycontrol, “A borrower can argue that if they are ready to repay the entire debt including all dues to all the creditors then it’s no more an IBC resolution, not even a settlement but repayment of all the dues by a borrower. It will not be an easy proposition for any party to take a stand that a borrower or guarantor shall be barred from not paying their dues in entirety and once all dues including CIRP costs are fully paid the IBC petitions become infructuous as no resolution is warranted.”

Worryingly for the Ruias, a statement by the chairman of SBI, Rajnish Kumar (the lead lender to Essar Steel) alluded to the recent Supreme Court judgment that upheld the validity of the IBC and clarified the provision for withdrawal of insolvency proceedings. Kumar said, “The Supreme Court order last week on IBC was a speaking order. That has put to rest all debate around promoters finding a way to get back into the company. We will be waiting for the adjudicating authority to decide on the resolution plan submitted by the committee of creditors. As far as the sale of Essar Steel loan is concerned, we’ve already deferred it to Feb. 11. Hopefully, a decision in this matter is reached before that. We will wait and see.”

The bigger picture

To see it from a larger perspective, we must zoom out, as it were, to get the bigger picture. The central government set a March 2019 deadline for lenders and resolution professionals to speed up resolution plans of nine of the twelve high-value insolvency cases. This is being emphasised in order to complete the resolution of large stressed accounts, and there does seem to be special focus on Essar Steel and Jaypee Infratech, according to a report by Business Today.

The twelve accounts -which include Bhushan Power, Alok Industries, ABG shipyards, Amtek Auto, Lanco, Era Infrastructure and Jyoti Structures- owe nearly Rs 2.5 lakh crore to various lenders. After 18 months, insolvency proceedings against them are yet to be completed. A Times of India report said that exceeds the 270-day deadline specified in the law.

Under the IBC, or the Insolvency and Bankruptcy Code, when a case is admitted by the NCLT, a resolution plan must be in place within 180 days, or 6 months, of admission. This is extendable by up to 90 days, or three months. In case the turnaround doesn't happen, the company's assets will be liquidated.

These cases have tended to be high profile. For instance, Tata Steel had acquired Bhushan Steel under the Corporate Insolvency Resolution Process in April 2018 for a princely sum of Rs 35,200 crore. Then there was the Anil Agarwal-controlled Vedanta that took over the bankrupt Electrosteel Steels. JSW Steel, and its promoters, acquired something like 88% in Monnet Ispat and Energy Ltd, or MIEL, after the completion of insolvency resolution proceedings.

Another high profile case that consumed a lot of newsprint was that of Jaypee Infratech. It is a subsidiary of Jaypee Group's flagship firm Jaiprakash Associates, and is yet to deliver over 20,000 apartments, villas and plots to home buyers. According to Business Today, the centre has directed resolution professionals to initiate steps, including seeking legal remedy to speed up a decision. In the second half of January, various creditors and home buyers of Jaypee Infratech extended the deadline till February 15 for shortlisted bidders to submit proposals to revive the debt-ridden realty firm.

ArcelorMittal’s entry into India’s steel sector is a landmark, according to Amit Dixit, an analyst at Edelweiss Research. He told BloombergQuint, “We consider it a landmark in Indian ferrous space as: 1) the company will be a significant player in the ferrous space acquiring a running capacity of 6.5-7 mtpa; 2) In the medium term, we see imminent consolidation in domestic steel sector with 3 strong players operating capacity of 20 mtpa plus each and; 3) ArcelorMittal’s strong product line and cutting edge technology will spur similar development in India by the incumbents, a welcome relief from the race for capacity aggrandizement.”

The home team’s counterpunch

But Essar’s promoters haven’t thrown in the towel just yet. Yesterday, Essar Group director Prashant Ruia has moved a fresh application before the NCLT Ahmedabad bench seeking the quashing of ArcelorMittal's takeover bid of the insolvent steelmaker. Business Standard reported that the petition moved on February 1 includes Essar Steel's former MD Dilip Oommen and project director Rajiv Kumar Bhatnagar as joint petitioners. Media reports claim the Ruia family is making an attempt to delay Essar Steel's insolvency - the petition calls for a stay on “any further proceedings in Interlocutory Application No.431 of 2018, preferred by the Resolution Professional under Section 30(6) of the Code.”
Taking a cue from the recent Supreme Court judgment in case of Ruchi Soya, the petitioners who have sought that the suspended Board of Directors be included in all CoC, or Committee of Creditors, meetings now onwards.

The Economic Times reported that the petition claims though Oommen and Bhatnagar were removed after the insolvency process began, they “continue to be part of the day-to-day management of Essar Steel and hold the designations of managing director and director (projects), respectively.” The SC order cited in the application says resolution plans submitted by applicants should also be shared with the suspended board of the directors. Supreme Court judges RF Nariman and Navin Sinha had said on January 31, in the hearing on Ruchi Soya Ltd, the country's largest edible oil maker that is now in the insolvency courts, “The appellants (the director) will be given copies of all resolution plans submitted to the CoC within a period of two weeks from the date of this judgment. The resolution applicant in each of these cases will then convene a meeting of the CoC within two weeks thereafter, which will include the appellants as participants.”

However, according to a BloombergQuint report, the Essar Steel directors “...claimed that they were asked to step out of multiple CoC meetings as the matters being discussed were deemed to be confidential. This was against the insolvency code, the application said, adding that a letter to the resolution professional in October 2017 didn’t change the conduct of the CoC.”

Based on those words, the directors of Essar Steel sought to "quash and set aside" the lenders' decision to accept ArcelorMittal's lower bid to take over Essar Steel, claiming the process prescribed by the SC on January 31 was not followed in this instance.

The petition also requests the NCLT Ahmedabad bench to direct Essar Steel's resolution professional Satish Kumar Gupta “to convene a meeting of the Committee of Creditors, wherein the Resolution Plans submitted by the potential Resolution Applicants be deliberated and discussed afresh and thereafter voted upon.”

The Essar Steel insolvency case has seen extraordinary delays due to endless litigation. The company was admitted for insolvency action way back in August 2017. Over 500 days have passed, nearly double the stipulated time of 270 days. The creditors of Essar Steel have said in various courts that they have been losing Rs 500 crore per month in interest earnings due to the delays in the insolvency process.

As the high profile Essar Steel case seems to go on interminably, all eyes will be on the Ahmedabad bench of the NCLT on February 11.