New Delhi: More than two years back, the Reserve Bank of India (RBI) named Essar Steel as one of 12 companies whose non-performing assets (NPA) were clogging up the banking system.
In its 13 June 2017 order, the central bank had also asked the lenders to initiate proceedings against these companies under the Insolvency and Bankruptcy Code (IBC) at the National Company Law Tribunal (NCLT).
Accordingly, the NCLT bench in Ahmedabad started hearing insolvency proceedings against Essar Steel the same month.
Ever since, the case has shuttled between NCLT, Gujarat High Court, National Company Law Appellate Tribunal (NCLAT) and the Supreme Court.
The legal wrangles, counter offers and changing rules have stretched the case despite a 270-day deadline, which was later extended by 60 more days, frustrating one of the major purposes of the IBC — to implement a swift insolvency resolution process.
The case has now made its way back to the Supreme Court, which began hearing an appeal earlier this week against a controversial NCLAT order on creditors in the case. The court will also examine the amendments to IBC brought in to undo the impact of the NCLAT order.
ThePrint traces the legal course of the case and explains the concerns raised in the apex court.
The timeline of Essar Steel case
After insolvency proceedings were initiated against Essar Steel in June 2017, the company moved the Gujarat High Court, challenging it. The court issued a notice to RBI and restrained NCLT from conducting any further proceeding against the company.
In July 2017, the HC disposed of the petition, paving the way for the insolvency process to continue.
The Ahmedabad bench of NCLT then admitted the insolvency petition against Essar Steel, appointing Satish Kumar Gupta from Alvarez & Marsal India as Interim Resolution Professional. Gupta invited bids for the resolution process.
While Numetal Ltd and ArcelorMittal India Ltd submitted their bids in the first round, their bids were held ineligible by Gupta. Both the companies challenged their disqualification in the NCLT.
The eligibility question of Numetal and ArcelorMittal eventually reached the Supreme Court, which put the matter to rest in October 2018, while also laying down important precedents for pending and future insolvency cases.
Numetal and ArcelorMittal filed fresh bids.
Meanwhile, Essar Steel’s majority shareholder, Essar Steel Asia Holdings Ltd (ESAHL), offered a settlement proposal to repay the entire debt of Rs 54,389 crore. However, disqualification under Section 29A was introduced as an amendment, laying down that bidders cannot be connected to other defaulting entities.
The Committee of Creditors (CoC) approved ArcelorMittal’s bid of Rs 42,000 crore with 92 per cent majority vote.
While ArcelorMittal’s bid was approved by NCLT Ahmedabad as well as the NCLAT, the latter modified the resolution plan — a step that provoked much debate, resulting in an appeal being filed in the apex court by the consortium of lenders led by the State Bank of India.
Treatment of creditors
In its judgment in July this year, the NCLAT placed financial (secured and unsecured) and operational creditors on the same footing, setting aside the categorisation by the resolution plan.
Financial creditors, like banks, lend money with long-term debt repayment schedules.
Operational creditors are those who provide goods or services to the company and are owed money in lieu thereof. They usually have short-term credit arrangements, which are fulfilled once products/services are sold.
In the case, the CoC-approved plan had provided for 90 per cent recovery for all financial creditors and around 20.5 per cent for all operational creditors with dues of over Rs 1 crore.
However, the NCLAT set aside this arrangement and directed a payment of 60.7 per cent of dues for financial creditors and 59.6 per cent for operational creditors with of dues over Rs 1 crore.
Further, the resolution plan had categorised the distribution of amounts among the financial creditors under four sub-heads: (i) secured financial creditors, having charge on project assets; (ii) secured financial creditors, having no charge on project assets; (iii) unsecured financial creditors, with admitted claims less than Rs 10 lakh; and (iv) unsecured financial creditors, with admitted claims equal to or above Rs 10 lakh.
On the basis of this classification, for instance, Standard Chartered Bank was only provided with 1.74 per cent of the amount it claimed, as against 91.99 per cent for other financial creditors.
This was attributed to the fact that the security given to Standard Chartered Bank against the loan from it was not of a physical property belonging to Essar Steel. Since the bank had given a loan to it on the basis of a security of shareholding in an offshore company instead, it was categorised as an “unsecured financial creditor”.
However, the NCLAT judgment ruled this to be “discriminatory”, holding that financial creditors cannot be discriminated on the grounds of them being secured or unsecured for distribution of the proposed amount.
Issues with NCLAT order
The financial creditors swiftly challenged the NCLAT order in the Supreme Court, objecting to the equal treatment of various classes of creditors.
They also challenged the NCLAT’s opinion on the guarantees and indemnities given by Essar Steel promoter Prashant Ruia. NCLAT had ruled that the guarantee and indemnity would be ineffective once the financial creditors are paid under the resolution plan.
As against this, the financial creditors have claimed that the guarantors should not be absolved unless the resolution plan gives full payment to financial creditors.
Pushed by the NCLAT judgment, the Narendra Modi government amended the IBC in August to give preference to financial creditors over operational creditors.
While the judgment had severely curtailed the powers of the CoC, the amendments empowered the panel to commercially consider the manner of distribution proposed in the resolution plan while deciding its feasibility and viability.
In doing so, it allowed the CoC to evaluate the manner of settlement distribution by taking into account the order of priority among creditors as per the liquidation waterfall in section 53 of IBC, including the priority and value of the security interest of a secured creditor.
As per Section 53(1), the order of priority of creditors at the liquidation stage is: insolvency process costs, dues of workmen, secured creditors, unsecured creditors, statutory dues and then operational creditors.
The amendments further said payment to operational creditors shall not be less than: the amount to be paid to these creditors in the event of liquidation of the company, or the amount that would have been paid to such creditors if the distribution was done based on the priority under Section 53(1), whichever is higher.
The operational creditors have challenged these amendments, contending that they violate fundamental rights under the Constitution of India.
Supreme Court hearings
As hearings started in the case Tuesday, the CoC informed the Supreme Court that operational creditors had been paid over Rs 55,000 crore for goods and services, even while the insolvency resolution process was on, a BloombergQuint report said.
They pointed out that this happened was while a moratorium had been imposed on the dues and claims of financial creditors.
On Wednesday, the CoC further challenged the NCLAT order on the grounds that it should be allowed to exercise its commercial wisdom for distribution of claims.
Senior advocate Kapil Sibal, who is arguing on behalf of Standard Chartered Bank, however, asserted Thursday that the CoC does not have the power to decide on the manner of distribution of claims. He contended that the resolution applicant — ArcelorMittal in this case — should decide on how it plans to deal with each stakeholder, reported LiveLaw.