As per the statutory requirement of Insolvency and Bankruptcy Code, 2016, a resolution plan for bankrupt Essar Steel was to be found within 270 days, but here even after 500 days, there seems to be no end in sight as a consortium of lenders led by State Bank of India has filed a petition before the Supreme Court against the ruling of National Company Law Appellate Tribunal (NCLAT) and the Hon’ble Supreme Court has ordered the status quo to be maintained till the final order. How this matter landed into lengthy litigation and what are the turns and twists that took place during the IBC proceedings, are explained herein below:-
Who are Essar Steel’s financial creditors?
There are 65 financial creditors having total claim of INR 55,440 crore, approximately. Public-sector lenders are Essar Steel’s primary financial creditors. List is given Here
Who are Essar Steel’s Operational creditors?
Vendors and suppliers are the operational creditors of Essar Steel. There are 1,936 operational creditor having total claim of INR 27,081 crore, approximately. Apart from the Vendors and suppliers, the claims from employees/workmen are INR 20 crore, approximately and 1 claim from other creditors of approximately INR 24 crore. List is given Here
Chronological Timeline of Essar’s Insolvency Proceedings
| May 2017 | Banking Regulation (Amendment) Ordinance authorized RBI to proceed with bankruptcy proceedings by banks against defaulters. |
| 12 June, 2017 | The RBI identifies 12 accounts for immediate resolution under the IBC |
| 27 June, 2017 | SBI and Standard Chartered Bank filed Insolvency petition against Essar Steel in National Company Law Tribunal (NCLT), Ahmedabad bench |
| 4 July, 2017 | Essar Steel challenged the RBI’s decision in Gujarat High Court. |
| 17 July, 2017 | Gujarat HC dismissed Essar Steel’s petition on the RBI’s insistence that the company was far from the debt-restructuring process. |
| 2 August, 2017 | NCLT admitted Essar Steel for insolvency proceedings under the IBC and Mr. Satish Kumar Gupta was appointed Resolution Professional (RP). |
| 2 October, 2017 | Expression Of Interest (EOIs) is invited by RP for Essar Steel. |
| November, 2017 | Essar Steel’s parent company Essar Group appeared as one of the bidders. |
| 23 November, 2017 | Section 29A was introduced via Ordinance to bar wilful defaulter, defaulter promoters and related parties from bidding |
| 12 February, 2018 | First round of bidding took place: Numetal and ArcelorMittal submitted bids. |
| March 2018 | RP holds both the bidders ineligible |
| 20 March, 2018 | Numetal moved to NCLT challenging the rejection of the bid |
| 26 March, 2018 | ArcelorMittal also moved to NCLT challenging the disqualification |
| 2 April, 2018 | RP invited fresh Bid |
| 19 April, 2018 | NCLT Ahmedabad asked RP to re-examine the first round of bids, on the ground that RP rejected their offer without putting it in front of the Committee of Creditors (CoC) |
| 7 September, 2018 | National Company Law Appellate Tribunal (NCLAT) hold Numetal’s bid valid after it severs ties with Ruias. ArcelorMittal is asked to clear dues of Rs 7,000 crore of Uttam Galva and KSS Petron in three days. |
| 10 September, 2018 | ArcelorMittal revised its offer to Rs 42,000 crore, including Rs 7,000 crore of past dues. Essar Steel had offered Rs 37,000 crore. |
| 12 September, 2018 | Numetal challenged the decision of NCLAT allowing ArcelorMittal a chance to clear dues, before the Supreme Court. |
| 4 October , 2018 | The Supreme Court asked the Numetal and ArcelorMittal to submit revised bids after paying outstanding dues in two weeks and hold that if the account is not resolved in eight weeks, it will go into insolvency. |
| October, 2018 | ESIL’s majority shareholder, Essar Steel Asia Holdings (ESAHL) offers a settlement proposal to repay entire debt of Rs 54,389 crore |
| 25 October, 2018 | CoC of Essar Steel voted with 92% majority to select ArcelorMittal and Nippon Steel joint venture as the winning bidder under IBC, with their offer to repay Rs 42,000 crore upfront to the lenders. |
| November, 2018 | Operational Creditors (OCs) file petitions challenging ArcelorMittal’s plan. Standard Chartered files separate petition against ArcelorMittal’s plan. |
| 29 January, 2019 | NCLT hold that the promoter’s offer to withdraw ESIL from IBC was not maintainable for several reason |
| 8 March, 2019 | NCLT approves ArcelorMittal’s Rs 42000 crore bid for Essar Steel |
| March, 2019 | Mr. Prashant Ruia (Promoter) challenged the order of NCLT on the ground that ‘ArcelorMittal India Pvt. Ltd.’- (‘Successful Resolution Applicant’) is ineligible in terms of Section 29A of IBC |
| 4 July, 2019 | NCLAT has modified and approved the Resolution Plan presented by ArcelorMittal |
| 12 July, 2019 | A consortium of lenders led by State Bank of India has filed a petition before the Supreme Court against NCLAT order |
| 22 July, 2019 | The Supreme Court has stayed the an order passed the National Company Law Appellate Tribunal (NCLAT) |
What is the Present Stage?
On 4th July 2019, the NCLAT had approved the ₹42,000-crore bid of ArcelorMittal to take over Essar Steel which was challenged before the Hon’ble Supreme Court, and the Supreme Court has ordered ‘status quo’ on the National Company Law Appellate Tribunal’s approval of ArcelorMittal’s bid to acquire the insolvent Essar Steel.
What was the NCLAT Order?
The resolution plan to Essar Steel, proposed by ArcelorMittal, was questioned by both operational creditors, who alleged that they were not treated on par with financial creditors, as well as some financial creditors such as Standard Chartered Bank that alleged that its claims were not honoured adequately. The NCLAT held that the Committee of Creditors (CoC) had discriminated between creditors.
While approving the Resolution Plan, NCLAT ruled that Essar Steel’s operational creditors have to be treated on a par with financial creditors at the time of settling claims and held that lenders and operational creditors will get 60.7% of their outstanding claims and proportionately share the ₹42,000 crore that ArcelorMittal has offered to pay for the debt-laden firm, which in rupee terms entails a payment of ₹30,030 crore to financial creditors and ₹11,969 crore to operational creditors.
Why was the NCLAT ruling problematic?
The NCLAT ruling goes against the order of Hon’ble Supreme Court given in Swiss Ribbons Pvt. Ltd. v. Union of India, wherein a two-judge Bench of the Supreme Court had clarified as to why under the IBC process, paying off financial debts, which are secured, needs to be prioritised over operational debts, which are unsecured. The Supreme Court had prioritised the financial creditors because they generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of a business. The Supreme Court had concluded that “while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.”
What is the Issue before Supreme Court now?
As per the case of K Sashidhar vs Indian Overseas Bank, there is no provision in the Insolvency and Bankruptcy Code that empowers the resolution professional, the adjudicating authorities (NCLT & NCLAT), to reverse the “commercial decision” of the CoC. Therefore, the main issue before the Supreme Court is to decide whether the NCLAT has the power to amend the Resolution Plan approved by the CoC.
The lenders of Essar Steel had stated in the appeal that the NCLAT’s impugned judgment had misconstrued and misinterpreted the provisions of the Insolvency and Bankruptcy Code, 2016, (IBC) to such an extent that it almost rewrote the statute itself, and thus suffered from fatal jurisdictional errors apart from basing itself on glaring factual errors.
As per the consortium, by virtue of the impugned judgement the entire CIR (Corporate Insolvency Resolution) process with respect to the corporate debtor being one of the largest non-performing assets of the country has been put under jeopardy and the shocking unsettling of otherwise settled principles of law recognising and protecting the rights of the secured creditors on account of complete misreading of the code (Insolvency and Bankruptcy Code) has endangered the national economic interest of the country overall.
ArcelorMittal has also challenged a part of the NCLAT order that ruled that the profit of Rs 3,495 crore generated during the corporate insolvency resolution process cannot be given to it. The appellate tribunal had held that the profits should be distributed amongst all the financial and operational creditors on a pro-rata basis of their claims.
According to the steel giant, the modified order has made it liable to pay an amount in excess of Rs 42,000 crore provided for in its resolution plan. “If the order is read as compelling the appellant (ArcelorMittal) to pay Rs 42,000 crore plus the difference between the value of the actual increased working capital and the assumed figure of Rs 2,500 crore, then it would amount to a modification of its bid, which is not agreeable and thus would be illegal,”.
What next?
The Supreme Court while ordering status quo, directed that the monitoring committee comprising the committee of creditors and the resolution professional to continue its work till the next hearing on 7 August.
Amendments to the Insolvency and Bankruptcy Code, that are likely to be passed by the Parliament next week will have a direct bearing on this case as it proposed upholding secured creditors’ priority rights on the sale or liquidation proceeds of insolvent companies.
The proposed changes to the insolvency law are likely to help the secured creditors of Essar Steel. The modifications make the rights of financial and operational creditors explicit. The Insolvency and Bankruptcy Code (IBC) gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds. Therefore, the financial creditors will get the first right to proceeds from bankruptcy resolution
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