BS: 51% vote enough for forensic audit of corporate debtor: NCLT

7 March 2019: The city bench of the National Company Law Tribunal (NCLT) on Thursday clarified that a 51 per cent vote of the Committee of Creditors (CoC) was enough to initiate a forensic audit of an insolvent company.

Citing Section 21(8) of the Insolvency and Bankruptcy Code (IBC), the NCLT bench said the provision makes it necessary for all decisions of the CoC to be taken by a vote of not less than 51 per cent and the same goes for forensic audit.

In a case related to Viceroy Hotels, where the resolution professional declined a forensic audit citing Section 28(3) which requires 66 per cent voting for matters mentioned in Section 28(1), the bench said forensic audit did not fall in the category.

While Section 28(1) needs 66 per cent votes to make changes in the appointment of contract of statutory auditors or internal auditors of the corporate debtor, conducting a forensic audit did not amount to changing the terms of the statutory auditors, the bench said.

In several insolvency cases the bankruptcy court, creditors are interested in knowing the actual details of the financial transactions of the company funded by them as it may expose some fraudulent activities that led the company to bankruptcy.

Forensic audit uses financial and qualitative tools to detect fraud patterns. The auditors, who need specific skills to conduct forensic audits, also use special software for financial analysis.


The Business Standard reported

LM: Liquidation cases may rise as resolution plans fall short on valuations

7 March 2019: Liquidation cases are likely to rise as resolution plans fail to give a reasonable valuation, said bankers at the Mint India Investment Summit. They also said liquidation numbers are high due to legacy issues.

“If we really look into the number of liquidation orders, the ratio is 1:4. Partly, we need to understand these figures in the right perspective, because many of these were old Board for Industrial and Financial Reconstruction (BIFR) cases. When Sick Industrial Companies (Special Provisions) Act (SICA) was removed and all the BIFR cases were told to go to National Company Law Tribunal (NCLT), they were given a six-month window. Many of those 300-400 cases came into liquidation stage,” said R.K. Bansal, chief executive officer, Edelweiss Asset Reconstruction Company.

“The second reason it’s happening is that many resolution plans are not even giving liquidation value,” he said.

Some bankers said the insolvency process has created a lot of noise with very little outcome leading to liquidation.

“Because of either objections or the issues around it, we are seeing a lot of liquidation as opposed to resolution,” said Ravi Chachra, co-founder, Eight Capital Management.

“My sense is that more and more liquidations will happen and a lot of it is because resolution professionals are not great. Promoters who are not able to get the company because of section 29 are managing the resolution professionals and potentially CoC (committee of creditors) to get these companies to liquidation,” Chachra said.

Bankers and lawyers also said liquidation was the best option for engineering, procurement and construction (EPC) companies.

“There are EPC companies and there are no solutions. I have asked so many experts like Big four or Big six or people working in the EPC sector, there is no solution other than taking it to the NCLT,” said J.K. Shivan, chief general manager, stressed assets management group, State Bank of India.

“We are seeing the trend. This is probably the only hope for some of the EPC companies,” said Ameya Khandge, partner, Trilegal.

“There are good quality arbitration claims or claims that have been triggers for some of the cases they have been in. Patel Engineering is one example. We have been working with lenders in the case of HCC. These deals can realistically can turn the companies around and prevent them from NCLT, and pave the way for a genuine turnaround,” he said.

Anurag Das, managing director and CEO, International Asset Reconstruction Co., said liquidation allows for cherry-picking the right strategies instead of cheap assets.

“Some part deserves to go as going concern business. Some require new capital to try and turnaround before liquidation. Some merit liquidation. The problem is resolution is not getting enough bids. It’s not creating a market that banks can credibly point to as offering a fair solution whether they like it or not.”

Omer Erginsoy, senior managing director, business intelligence and investigations, Kroll said companies that end up in liquidation are those where the promoter has not been forthcoming to resolve the problem.

“Lenders are in a tough situation because they have to rely on the IBC process. They can explore strategies of suing, pre-tribunal, going after money gathering intelligence, getting litigation funding, and hiring corporate investigators, looking at assets abroad.”

The Live Mint reported

BQ: IBC: How Much Essar Steel’s Lenders Have Lost Since The Bankruptcy Filing

7 March 2019: At the time Essar Steel Ltd. was admitted for insolvency resolution it had racked up financial debt of at least Rs 50,000 crore. Another Rs 5,000 crore in claims by financial creditors were rejected by the resolution professional in charge of the insolvency process. The steel company owed Rs 27,000 crore to operational creditors, such as vendors and employees. Less than half those claims were admitted by the resolution professional.

In all, the total amount that creditors claimed Essar Steel owed them is over Rs 82,000 crore, even if all amounts have not been admitted as part of the resolution process.

And yet this is among the initial large companies admitted to bankruptcy that’s taking forever to resolve. The Insolvency and Bankruptcy Code, 2016 mandates that an insolvent asset must be resolved in 270 days.

The Essar Steel case is now on its 583rd day.

The delays are due to litigation.

The case has already made one full round of the National Company Law Tribunal, Appellate Tribunal and the Supreme Court on disputes regarding bidder eligibility. In October last year, the Supreme Court asked the two final bidders to make some amends to become eligible.

One did. The other didn’t.

ArcelorMittal’s bid was accepted by creditors and the only approval pending was that of the Ahmedabad NCLT.

That was on Oct. 25, 2018.

It’s March now and the NCLT has yet to grant approval. One reason is because of fresh cases filed.

On the very day lenders voted in favour of the ArcelorMittal bid, erstwhile promoters of Essar Steel, the Ruia family, offered to settle their dues and reclaim the asset. The NCLT rejected that…but only on Jan. 29, 2019, after three months had passed. And only after the NCLAT directed the NCLT to decide before the month-end.

Cases filed by several operational creditors against ArcelorMittal’s bid are still pending with the Ahmedabad bench. In all, three NCLAT deadlines have come and gone, but the NCLT has yet to decide.

A banker directly involved with the insolvency proceedings at Essar Steel said that even appealing to a higher court to achieve a quicker resolution had not yielded the desired results.

Curiously, on Feb. 28, 2019, another deadline set by the appellate tribunal, the NCLT was scheduled to deliver its final order. But that morning the NCLAT gave it another extension — up to March 8.

Here’s what the delay has cost financial creditors alone.

  • Rs 17 crore a day in lost interest (as per a petition filed by the lenders).
  • Rs 7,718 crore from the day the company was admitted to insolvency till Oct. 25, 2018 —the day ArcelorMittal won the bid.
  • Rs 2,193 crore from that day to March 7.
  • That’s a total Rs 9,911 crore lost just in interest costs.

At say a 10 percent cost of funds, operational creditors have lost Rs 800-5,000 crore depending on the final claim amount admitted.

These judicial delays even prompted State Bank of India, the lead lender to Essar Steel, to put on sale its loans worth over Rs 13,000 crore to the company. For a reserve price of Rs 9,587 crore. However, SBI found only one taker for a small portion of the loans, forcing the lender to call off the sale.

Pessimism around the delay is unfounded, said Suharsh Sinha, partner at law firm AZB & Partners. As despite it the insolvency process has yielded a good result for Essar Steel and its bankers.

“You have to look at the fact that prior to bankruptcy, Essar Steel was not attracting bidders. It was a pittance that the bidders were offering to the banks, in comparison to what is there now. The IBC helped getting bidders in place and they tend to benefit more under the law. There are untested legal issues, which are contributing to the delay. But we must also note that no large bankruptcy process in the world is getting done in nine months. The 270 days period is getting breached, which was the promise of the IBC. But there is alacrity in the legal system to close these issues quickly and move toward resolution. The pessimism, I feel, is a bit unfounded.”

Even if the NCLT were to deliver its decision on March 8, the Ruias have already filed an appeal in the NCLAT. Losers in any of the other litigations could also seek relief in a higher court – the NCLAT, and finally, the Supreme Court.

The Bloomberg Quint reported

ET: Deutsche Bank & SC Lowy bid for Central Bank loan auction

7 March 2019: Distressed asset funds of Deutsche Bank and Hong Kong’s SC Lowy have bid for the Essar Steel and Bhushan Power & Steel loan accounts put up for sale by Central Bank of India, said two people familiar with the matter. 

“Both Deutsche Bank and SC Lowy have submitted expressions of interest on Tuesday for the two accounts,” said one of the persons cited above. Those are unbinding bids. 

Central Bank of India and SC Lowy didn’t respond to ET’s email queries. Deutsche declined to comment. 

Central Bank has unpaid dues of Rs 423.61 crore for the Essar Steel loan, and its exposure is Rs 1,550 crore to Bhushan Power & Steel. Reserve prices were pegged, respectively, at Rs 415 crore and Rs 709.50 crore, below which no unbinding bid would be accepted. 

The state-owned bank last Saturday put sticky loans worth Rs 3,300 crore up for sale as it aims to improve its fourth-quarter earnings. 

Such asset sales are aimed at cleaning the bank’s books and reduce bad loan provisions so that the lender could turn profitable at least in the Jan-march quarter. 

The pool of bad loans also included Alok Industries and Bombay Rayon Fashions. 

The bank would evaluate those initial bids and then follow them up with the “Swiss Challenge Method”. This gives an opportunity to other bidders to match or surpass the highest bid, which is achieved through the e-auction process. 

While these loan accounts are going through bankruptcy proceedings at various benches of the National Company Law Tribunal (NCLT), the sluggish progress in resolutions has prompted lenders to put those loans on the block before the close of the financial year. 

Central Bank MD & CEO Pallav Mahapatra had said last week that the lender expects a write-back. “We have made adequate provisions for these loans and have already received binding offers…Whatever bids we receive above the offers we have will be written back in our accounts for the quarter,” Mahapatra had then said. 

A few weeks earlier, SBI had put Essar Steel loans up for sale. Only Bank of America ML showed interest. The lender is believed to have decided to shelve the process in the absence of more than one bid.

The Economic Times reported

LM: Etihad hits the pause button on Jet Airways’ rescue deal

7 March 2019: Seen as the white knight for ailing Jet Airways (India) Ltd, Etihad Airways PJSC seems to have hit the pause button on equity infusion talks and has sought clarity on several contentious issues, two people familiar with the matter said, requesting anonymity.

The recent developments are part of the ongoing negotiations between the two companies and, if the talks fall through, it is expected to cast a shadow on the prospects of Jet Airways’ revival. The airline continues to fight concerns and allay fears of its employees, pilots and investors.

Etihad has not been able to find a local partner to replace Jet’s founder-chairman Naresh Goyal, who will have to step down if Etihad invests in the airline, according to the people mentioned above.

Foreign direct investment (FDI) rules allow a foreign carrier to own up to a 49% stake in a domestic airline but mandate that it must have a local partner to service passengers in India.

Etihad also wants an exemption from the open offer that may be triggered if the ownership structure of the company changes after Goyal’s exit. Most importantly, it wants a commitment from banks on additional loans, once it infuses equity into the company, as the Abu Dhabi-based airline expects that Jet Airways will require more funds to sustain its operations.

Etihad’s board is expected to meet next week to discuss the potential investments, including the likely exit of Indian lenders who are expected to convert a large part of their debt into equity, making them the largest shareholder, the people mentioned above said.

“The banks cannot remain invested in Jet Airways infinitely and they will need to find a buyer for their stake” said one of the persons cited above. “So far all efforts to find an Indian partner who can replace current promoter Naresh Goyal have come to naught,” he said. Etihad and the Indian banks have reached out to several large business groups in India, but none were willing to commit, he said.

NRI billionaire and founder of UAE’s Lulu Group, M.A. Yusuf Ali, who had initially evinced interest in Jet Airways, has decided against it. India’s Adani Group, which was also approached by Etihad for an investment, also declined the offer, the people mentioned above said.

Etihad has aggressively invested in several foreign carriers as part of its strategy to expand market share, but things haven’t turned out the way it hoped. In 2015, Etihad had written off its investment in Italian carrier Alitalia, which filed for bankruptcy after posting a loss of more than $117 million. It took another hit in 2017 when Germany’s Air Berlin filed for insolvency, after Etihad said that it was no longer in a position to provide financial support to the airline which had run into losses of close to $1 billion over six years.

Goyal’s share can drop from 51% now to 20%. Banks, led by State Bank of India (SBI), are expected to convert a portion of their debt into equity, making them the largest shareholder.

Indian laws also say that management control of a domestic airline should remain with a local entity.

Under the Securities and Exchange Board of India’s takeover code, any company acquiring control in a listed company, or when its stake crosses 25%, must make an open offer to its minority investors. Therefore, any additional equity infusion by Etihad, which owns 24% in Jet Airways, could go past the open offer threshold.

The Live Mint reported

ET: ArcelorMittal announces pricing of $750 million bond issue

7 March 2019: ArcelorMittal has said it has completed the pricing of its bond issue that will be used for repayment of existing debt including $1-billion outstanding under a $7-billion term facility it recently entered into for acquisition of Essar Steel through a joint venture with Nippon Steel Sumitomo Metal Corporation (NSSMC). The company had on Wednesday announced the launch of an offering of USD-denominated notes.

In a statement issued on Thursday, the company said it has completed the pricing of its offering of US$750,000,000 aggregate principal amount of its 4.550% notes due in 2026. 

“The proceeds to ArcelorMittal (before expenses), amounting to approximately $745 million, will be applied towards repayment of existing debt including the $1 billion outstanding under a $7 billion term facilities agreement entered into in connection with the proposed acquisition of Essar Steel India Limited through a joint venture with Nippon Steel and Sumitomo Metal Corporation.” the statement added.

The offering is scheduled to close on 11 March, 2019, subject to satisfaction of customary conditions.

The joint venture agreements provide that ArcelorMittal and NSSMC will own 60% and 40%, respectively, of the joint venture’s share capital and will have equal representation and voting rights on its board of directors, such that the joint venture will be considered by the parties to be a jointly controlled entity, an official statement announcing the launch of the USD notes. ArcelorMittal also said it anticipates that its investment in the joint venture will be equity accounted.

ArcelorMittal, which has submitted a Rs 42,000 crore resolution plan for Essar Steel, has said is hopeful of getting NCLT nod to acquire Essar Steel India Ltd (ESIL) by the first quarter of 2019. It also informed shareholders that it entered into a $7 billion term facilities agreement with a group of lenders in connection with the acquisition of ESIL which has a one-year term valid till November 2019. 

In 2018, ArcelorMittal had revenues of $76 billion and crude steel production of 92.5 million tonnes, while produced 58.5 million tonne of iron ore on its own.

The Economic Times reported

MC: ArcelorMittal makes progress on Karnataka project, but all eyes now on Essar Steel

7 March 2019: Even as it waits for the final word on the Essar Steel insolvency case, ArcelorMittal is also gradually, albeit slowly, progressing on its greenfield project in Karnataka.

“The company has completed all the necessary formalities for acquiring the land by signing and executing a lease cum sale agreement for 2,643.25 acres of land on December 26, 2018 and the project is currently under review,” said the world’s largest steelmaker in its recently released 2018 annual report.

ArcelorMittal had in 2010 signed an agreement for setting up the Karnataka plant, with a capacity plan of six million tonne a year. The facility, which would include a captive power plant of 750 MW, needs an investment of $6.5 billion.

Industry executives, however, say that the company may pace the project execution according to the verdict on the Essar Steel insolvency.

The LN Mittal-company was selected as the preferred bidder by Essar Steel lenders late last year. But a last-minute proposal by the Ruias and scores of legal cases relating to operational creditors of Essar Steel has slowed down the insolvency process. The Ruias’ proposal stands at Rs 54,000 crore as against ArcelorMittal’s Rs 42,000 crore.

Despite Ruias’ higher amount, the insolvency courts have not faulted  lenders for choosing ArcelorMittal’s bid. Hearing on a petition to speed up the process, the National Company Law Appellate Tribunal (NCLAT) has asked the Ahmedabad bench of National Company Law Tribunal (NCLT) to pass an order on the case by March 8.

A senior industry executive said that an order may be expected on March 8.

Making a choice

ArcelorMittal has its nose ahead at the moment, and if the company does manage to bag Essar Steel, then the company could go slow on the greenfield project in Karnataka.

The Essar Steel acquisition will be among its biggest, and ArcelorMittal has already readied a $7-billion term facility agreement with lenders.

Apart from the upfront payment of Rs 42,000 crore, ArcelorMittal’s resolution plan for Essar Steel also includes an investment of a further Rs 8,000 crore “to support operational improvement, increase production

levels and deliver enhanced levels of profitability. The company provided a $0.6 billion performance guarantee in connection with the execution of the resolution plan,” the annual report cited above said.

ArcelorMittal had signed the agreement for the Karnataka project after facing setbacks in its planned investments in Odisha and Jharkhand. It has since scraped the Odisha project, which was signed with much fanfare in 2005. It was LN Mittal’s first step inside his home market, a moment underlined by his emergence in the world steel industry.

At the moment though, all eyes will be on the insolvency court’s order.

Moneycontrol reported

FE:Insolvency process: Jaypee Infra suitors’ plans factor in Rs 750 crore with NCLT

7 March 2019: Resolution applicants for Jaypee Infratech — state-run NBCC and Sudhir Valia-promoted Suraksha ARC — have factored in their respective resolution plans the Rs 750 crore deposited by the insolvent developer’s parent firm, which is lying with the National Company Law Tribunal (NCLT) as per the Supreme Court directive.

While Suraksha intends to utilise the fund for construction of the unfinished housing units, NBCC wants to utlise it for payment as penalty to the homebuyers on account of delaying the hand-overs.

Though not clearly objecting to their proposals, in the last meeting of the committee of creditors (CoC), Cyril Amarchand Mangaldas, the law firm advising the lenders, suggested that the two should spell out an alternate resolution plan without factoring in the amount of Rs 750 crore.

The Supreme Court in November 2017 had asked Jaiprakash Associates (JAL), JIL’s parent company, to deposit Rs 2,000 crore in instalments so as to cover part of its subsidiary JIL’s liability towards 30,000 homebuyers. Till May last year, JAL had deposited only Rs 750 crore with the SC registry, which was transferred subsequently to the NCLT.

In relation to 858 acres that was mortgaged for loans by JAL, both the applicants opined that it should vest with JIL. However, the law firm said, “This cannot be a condition or an assumption for the implementation of the resolution plan.”

Separately, in its resolution plan, NBCC has said statutory liabilities, including I-T, GST and stamp duty, which could arise in the future on account of transfer of land shall be borne by the secured financial creditors. Suraksha also suggested that the liabilities should be borne by the lenders.

However, the legal advisor observed that the responsibility and liability for GST, I-T and stamp duty should be with the resolution applicant/JIL and not to the account of the secured financial creditors.

During the course of the CoC meeting, the resolution plan evaluation advisor, RBSA Capital Advisors, pointed out that though Surakhsa has proposed a Rs 3,000-crore capital infusion, the amount is actually far less at Rs 2,450 crore.

The Financial Express reported