BS: Will challenge IBC amendments: Essar Steel operational creditors tell SC

8 August 2019: The operational creditors of Essar Steel on Wednesday told the Supreme Court (SC) that they would challenge the latest amendments made to the Insolvency and Bankruptcy Code (IBC), which gave preference to financial creditors over operational creditors. The apex court has agreed to hear the operational creditors on the issue and given them a week to file amended applications challenging the changes brought to the IBC.

The case would be next heard on August 19, when the apex court is also likely to hear other challenges made to the IBC, such as the extension of the corporate insolvency resolution period to 330 days from 270 days and other changes which may apply retrospectively. During the hearing on Wednesday, the court observed that since the Committee of Creditors (CoC) comprised only of secured financial creditors, it was possible that they could be discriminated against.

“When you have a CoC only of financial creditors, and the operational creditor is only given a hearing…nothing beyond, then it is possible that operational creditor can be given nothing. There can be challenges to it,” a two judge Bench led by Justice Rohinton Fali Nariman said.

This observation prompted the operational creditors to submit that even the latest amendments to IBC added to their woes instead of solving it. The court further observed that if the law allowed banks to decide that while they would take haircuts, they could give nothing to the operational creditor, “it was bad law”.

“If this is not addressed even in the amendments, it is a major lacuna. The amendments, instead of addressing the issue, aggravate it,” the court said. The financial creditors tried to justify the latest amendments made to the IBC by claiming that the difference between them and the operational creditors was that they were secured lenders as opposed to the latter. The court, however, observed that as there was “no monopoly” of any operational creditor, it was possible that a new management could switch to another service provider instead of the old one.

Supreme Court’s Observations

  • Some new amendments to IBC will impact operational creditors
  • If problems not addressed, court will look into them
  • Questions possibility of OCs getting nothing in resolution plan
  • Will look into amendments made to IBC to see if they are ‘bad law’

The apex court on Wednesday also asked the lawyers for CoC as to why the operational creditors should also be disadvantaged to possibly receive nothing if the purpose of Corporate Insolvency Resolution Process (CIRP) was “to resuscitate” the company instead of liquidating it.

“In case of liquidation, everyone stands in line and gets what they get. When the plan is to resuscitate, why is it that the operational creditor is given nothing? Why had the NCLAT been driven to interpret it in that way?” the two judge Bench observed.

The questions to the CoC by the SC on Wednesday came after the operational creditors submitted that changes to IBC had been approved by the government and passed by both the Lok Sabha and Rajya Sabha, but was only pending presidential nod. The government had in July cleared about seven changes to the IBC in which it had clarified that the commercial consideration and decision taken by the Committee of Creditors (CoC) would be taken into account when it came to distribution of funds as proposed by a resolution applicant in the resolution plan.

Finance Minister Nirmala Sitharaman had on July 29 told the Rajya Sabha that the new changes to IBC had been brought to clarify the interpretation problems that had arisen due to the National Company Law Appellate Tribunal (NCLAT) ruling in Essar Steel insolvency case. The NCLAT interpretation, Sitharaman had then said “was trying to treat secured creditors, operational creditors at par”, which “defeated the purpose and also the spirit” of IBC.

The NCLAT had on July 4, while clearing the resolution plan submitted by ArcelorMittal for Essar Steel, ruled that both the financial and operational creditors would get nearly 60 per cent of their claims. The earlier arrangement where the CoC comprising of financial creditors had decided that they would get nearly 90 per cent of their admitted claims and the operational creditors would get only 10 per cent of their claims, had been struck down by the NCLAT. Essar Steel’s financial creditors should not have distributed the amount among themselves by keeping the “maximum amount in favour of one or other financial creditors and minimum or NIL in favour of some other financial creditors or the operational creditors,” the NCLAT then said.

Aggrieved by the NCLAT judgment, the CoC has approached the apex court with a plea that appellate authority’s decision to equate financial creditors with operational creditors and disregarding the security interests of the former would lead to “severe plunge in recovery rate of banks and financial institutions” during the CIRP, which could lead them to “grave financial distress,” the CoC has said in its plea.

The Essar Steel insolvency case, which has been going on for more than 700 days now, has seen various rounds of litigation. Currently, Lakshmi Mittal owned ArcelorMittal is the only bidder. Its Rs 42,000 crore resolution plan has been accepted and approved by the CoC, the National Company Law Tribunal, as well as the NCLAT.

The Business Standard reported

LM: Apex court stays NCLAT verdict in Essar Steel insolvency case

23 July 2019: The Supreme Court on Monday put on hold the sale of Essar Steel India Ltd to ArcelorMittal after lenders to the bankrupt Indian steel maker challenged an appeals court ruling that said operational creditors have to be treated on a par with financial creditors.

The Supreme Court agreed to “expeditiously” hear the plea filed by banks against the National Company Law Appellate Tribunal (NCLAT) order of 4 July.

The bankruptcy appeals court order, approving ArcelorMittal’s ₹42,000 crore offer for Essar Steel, had upset secured financial creditors, as it diminished their priority rights to the proceeds generated from the sale or liquidation of a bankrupt entity.

A division bench of Justices Rohinton Fali Nariman and Surya Kant said the NCLAT order not be given effect to as of now. The bench added that the monitoring committee comprising the committee of creditors and the resolution professional shall continue its work till the next hearing on 7 August. A consortium of lenders, led by State Bank of India, challenged the NCLAT order on 16 July.

On the following day, the Union cabinet approved several changes to the bankruptcy law, including 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.

A status quo implies that “everything remains as it is, no party should do anything and the NCLAT judgement is stayed”, a senior lawyer said on condition of anonymity. “The Supreme Court will revisit the positions of all the parties on the next date. I believe it is in the banks’ interest to wait till the amendments to IBC are passed in Parliament; it will boost their case. So, they will have no intention to hurry this along.”

A member of the Essar Steel’s CoC said it is confident the apex court would reverse the NCLAT order to the original set forth in the resolution plan, which gives priority in payment to secured creditors. “With the cabinet approving the amendments to IBC, we feel the judges will have more clarity on how the payment should be done,” this person said, requesting anonymity.

In the Essar Steel case, the appellate tribunal had ruled that lenders and operational creditors will get 60.7% of their outstanding claims and proportionately share the money that ArcelorMittal has offered to pay for the Indian firm, which in rupee terms entails a payment of ₹30,030 crore to financial creditors and ₹11,969 crore to operational creditors.

Operational creditors with admitted claim amounts of less than ₹1 crore would get 100%, while for those with claims of more than ₹1 crore, the payment would be 60.26%, according to the NCLAT ruling.

The LiveMint reported

FE: Essar Steel insolvency: Arcelor Mittal moves SC against NCLAT order

19 July 2019: ArcelorMittal, which was declared the highest bidder for debt-laden Essar Steel, on Thursday moved the Supreme Court against a part of the order of the National Company Law Appellate Tribunal (NCLAT) which had 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 profit should be distributed among all the financial and operational creditors on a pro-rata basis of their claims.

The NCLAT had on July 4 said if ArcelorMittal did not pay the total dues to the creditors – financial creditors or operational creditors – “but pays lesser amount than the claim, then in such case, the profit should be distributed among all the creditors”.

It directed that “after the distribution of Rs 42,000 crore, if any amount is found to have been generated as profit during the CIRP after due verification by the auditors, it should be distributed among all the creditors… on a pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim”.

Last week, State Bank of India-led committee of creditors of the insolvent firm had moved the Supreme Court against the NCLAT’s order that reduced their share of sale proceeds and also put financial creditors and operational creditors at par in the settlement of claims.

The petitions are coming up for hearing on July 22.

The Financial Express reported

BS: Govt likely to oppose NCLAT’s Essar Steel order in Supreme Court

17 July 2019: The Ministry of Corporate Affairs (MCA) is likely to implead in the Supreme Court (SC) against the recent National Company Law Appellate Tribunal (NCLAT) judgment in the Essar Steel case treating secured lenders and operational creditors on a par, said a senior government official.

The order, the government said, is not in line with the Insolvency and Bankruptcy Code (IBC). “We will clarify the intent of the law in the apex court. The latest order is deviating from the Code,” said a senior official.

Lenders to Essar Steel have appealed against the NCLAT order in the SC, which will be heard next week. 

The Cabinet on Wednesday approved amendments to the IBC to give preference to secured lenders over operational creditors effective retrospectively.

The MCA wants to make it ‘abundantly clear’ in the law, the limit to the protection available to unsecured and operational creditors, a senior government official said, adding, “All options are open in front of the government.”

Operational creditors — supplier of goods and services such as vendors — are kept at a different footing from secured lenders who bring in finances into the company and have greater risk exposure.

Experts feel that the proposed retrospective amendment will have far-reaching impact. “It will directly affect even such plans which have long ago attained judicial finality, on merely there being an appeal pending against such finality. This may result in opening the floodgates to fresh challenges and would be interesting to see how the courts react to the same,” said Diwakar Maheshwari, dispute resolution partner, Khaitan & Co.

According to people in the know, operational creditors in nearly 200 cases have approached the NCLAT to seek a stay on the resolution plan in the hope that they would get a better deal after the Essar Steel case.

In the case of Bhushan Power & Steel, some of the operational creditors, too, had moved against the resolution plan filed by JSW Steel in the National Company Law Tribunal in March this year. JSW had offered to pay operational creditors a sum of ~350 crore against their admitted claims of ~733 crore.

The latest proposed amendment, however, could put a lid on these cases. “The proposed clarification that how much dissenting financial creditors and operational creditors will get after comparing under the resolution plan and in liquidation will definitely reduce the litigation which were initiated because of issues in respect of distribution of value between the stakeholders,” said Ashish Pyasi, principal associate, Dhir & Dhir Associates.

The Business Standard reported

BQ: IBC: Axis Bank Joins SBI To Protest NCLAT Order On Essar Steel

11 July 2019: Private sector lender Axis Bank Ltd. also joined State Bank of India by going public with its displeasure on the recent National Company Law Appellate Tribunal judgement putting secured creditors at par with the operational creditors.

SBI chairman Rajnish Kumar had Wednesday gone public with his anguish on the same order of the NCLAT awarding higher payout to Essar Steel’s operational creditors and treating them on par with secured lenders and said the banks would challenge the order at the Supreme Court.

“The NCLAT order does beg the question if this is how the proceeds will be shared, then secured creditors will ask why is the need to go to the IBC and not wait for liquidation,” Axis Banks managing director and chief Amitabh Chaudhry told reporters.

He said it is still unclear on what is the formula which was adopted by the NCLAT while approving ArcelorMittal’s Rs 42,000-crore bid for the bankrupt flagship company of the Ruias-led Essar Group, which gave operational creditors equal status as the secured lenders.

Chaudhry said the banks will exercise their right of taking the matter to the Supreme Court and hoped clarity can emerge in the matter from the apex court.

The appellate tribunal said secured creditors would get only 60.7 percent of their Rs 49,473 crore claims as it ordered the rest of the money to be paid to operational creditors, treating them at par with the financial creditors.

“What has happened here is that secured, unsecured and operational creditors have been ranked equal,” Axis Bank’s chief of corporate lending Rajiv Anand said.

Drawing from the statutes, including the provisions in the Companies Act, SBI’s Kumar had pointed out that there was a distinction between secured and operational creditors, and that the former had a greater right on an asset at par with the employees of company facing bankruptcy resolution.

“If secured creditors are given the same treatment as operational creditors, then it is a huge disincentive for secured creditors and an incentive for operational creditors,” Kumar had said.

He also warned that with this ruling, bankers would be hesitant to use the IBC provisions for resolving bad assets till such a time that the principles of the law were clearly laid out and hoped that the Supreme Court would clarify the same once they challenge the Essar Steel order by the NCLAT.

BloombergQuint reported

ET: Lenders, Ruias plan to move SC on NCLAT Essar order

8 July 2019: The latest ruling by the bankruptcy appellate tribunal in the Essar Steel resolution case may not mark the end of the long-drawn legal tussle. Bankers and the Ruias plan to appeal against the decision by the National Company Law Appellate Tribunal (NCLAT) in the Supreme Court, said the people aware of the matter.

The lenders are unhappy with the tribunal ruling that operational creditors should be treated at par with financial creditors at the time of settling claims. The Ruias, the original promoters of Essar Steel, have been trying to regain control of the asset, so appealing against the NCLAT decision that went in favour of ArcelorMittal’s bid is the next logical move.

Bankers told ET they had no option but to move the Supreme Court as the NCLAT order slashes their recoveries to Rs 30,000 crore or 60 per cent of the overall claims against 89 per cent earlier. More importantly, the order undermines the essence of the Insolvency and Bankruptcy Code (IBC), which gives financial creditors a superior claim in the recovery process, they said.

“We are filing an appeal next week because this order has ramifications beyond the Essar case,” said one of the bankers. “Financial creditors are treated as secured creditors according to the code but this order, by giving even operational creditors an equal share, has destroyed this distinction. If secured creditors are treated like operational creditors, then we might as well give loans at 16 per cent to 18 per cent per annum without any security.”

On July 4, the appellate tribunal held that the committee of creditors (CoC) had “no role to play in the matter of distribution of amount among the creditors, including the ‘financial creditors’ or the ‘operational creditors.” Essar Steel owes a total Rs 69,192 crore to financial and operational creditors. As per the NCLAT decision, financial creditors will get 60.7 per cent of their dues, while operational creditors with claims over Rs 1 crore will get 59.6 per cent. Creditors with claims of up to Rs 1crore will be paid in full.

“The NCLAT has relied on its recent decision in Binani Industries Ltd while passing the order. The judgement of Binani Industries was also appealed before the Supreme Court and it was upheld. What remains to be seen is whether the SC would take a different view given the unique facts of Essar Steel,” said Ashish K Singh, managing partner of law firm Capstone Legal. “Any detailed decision by the SC on this important matter would set the precedent for many pending cases. Moreover, it would help financial institutions manage their risk at the time of lending as well.”

As part of the resolution plan, ArcelorMittal will also infuse another Rs 8,000 crore of working capital in Essar Steel. The earlier plan approved by the committee of creditors (CoC) had provided for 89 per cent recovery for all financial creditors and around 20.5 per cent for operational creditors with dues of more than Rs 1 crore.

The NCLAT held that the CoC could only look at the viability of a resolution plan and not the distribution of the amount. It also said CoCs were not allowed to form subcommittees to negotiate with resolution applicants.

The Economic Times reported

FE: Essar Steel: Lenders may take a Rs 20,000 crore hit

5 July 2019: ArcelorMittal’s `42,000-crore resolution plan for Essar Steel was on Thursday approved by the National Company Law Appellate Tribunal (NCLAT), but lenders are staring at a `20,000-crore hit after the appellate tribunal said operational creditors be given 60.7% of their admitted claims.

The lenders are expected to challenge the decision on the distribution of funds in the Supreme Court.

The erstwhile promoters — the Ruias — who had challenged the eligibility of ArcelorMittal under Section 29(A) of the Insolvency and Bankruptcy Code (IBC), which bars promoters of defaulting firms from bidding for stressed assets, are also likely to move the SC next week challenging the tribunal’s decision.

The two-member NCLAT bench, headed by chairperson Justice SJ Mukhopadhaya, was adjudicating on the alleged discrimination in the distribution of funds, among others.

“On Thursday, the NCLAT held that such distribution is “not only discriminatory but also arbitrary…We have noticed a huge discrimination made by the committee of creditors (CoC) in distribution of proposed amount to the operational creditors qua financial creditors.”

The tribunal cited Regulation 38 of the IBC which provides that operational creditors under a resolution plan should be given priority in payment over financial creditors. “…the regulation strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of OC’s rights, together with priority in payment over financial creditors,” it noted.

The bench held the “the CoC has no role to play in the matter of distribution of amount amongst the creditors, including the ‘financial creditors’ or the ‘operational creditors.”

It said the CoC is only required to look into the viability and the feasibility of the resolution plan and should have requested ArcelorMittal to distribute the amount among various creditors and other stakeholders.

Operational creditors had made total claims of `19,719 crore and could get `11,969 crore if lenders lose the appeal in the SC. The bench also directed that the `4,000-crore profit earned by Essar Steel during the resolution period should be distributed between financial and operational creditors on a pro-rata basis.

Ashish Pyasi, principal associate with Dhir & Dhir Associates, said the NCLAT has noticed that discrimination among the same class of creditors is not justifiable and cannot be permitted. “The secured and unsecured financial creditors are also discriminated in the plan. This judgment is reinforcement of what was held by the NCLAT in the matter of Binani Industries that within a class of creditors there should not be any discrimination,“ Pyasi, said.

Against their admitted claims of `45,559 crore, bankers including State Bank of India, IDBI Bank and Canara Bank stand to recover `30,030 crore, or 60.7%. At its October 25, 2018 meeting, the CoC had decided to retain `41,909 crore or 91.99% of the receivables; operational creditors were to get very little. After some prodding by the NCLAT, the lenders pruned their share to `40,910 crore or 89.80% of the receivables, leaving the rest for the operational creditors.

Virtually rejecting the plea by the Ruias challenging ArcelorMittal’s eligibility, the appellate tribunal said, “….no ground is made out to entertain the appeal”. The NCLAT said that the matter had been settled by the Supreme Court and it can’t be “re-agitated again and again”.

The Financial Express reported

BS: Essar Steel: NCLAT approves ArcelorMittal’s bid with modifications

4 July 2019: The National Company Law Appellate Tribunal (NCLAT) on Thursday approved Lakshmi Mittal-led ArcelorMittal’s plan for Essar Steel India Limited. The appellate tribunal had on May 21 heard the contentions of all the parties and reserved its judgment in the case. The distribution of amount for all operational and financial creditors will be reflected in ArcelorMittal’s resolution plan. The Committee of Creditors (CoC) will have no role in this distribution.

The NCLAT allowed the claims of Dakshin Gujarat, Gujarat Energy, BPCL, IOCL, GAIL, ONGC and NTPC.

ArcelorMittal had told NCLAT that it would pay Rs 42,000 crore, including a minimum of guarantee of Rs 2,500 crore as working capital, for acquiring debt-laden Essar Steel under the insolvency process.

In April, the Supreme Court had halted distribution of funds among operational and financial creditors from the Luxembourg-based firm’s Rs 42,000-crore resolution plan for Essar Steel India. This was after the lenders to Essar Steel had challenged a direction of the NCLAT asking the resolution professional (RP) to call a fresh meeting of the committee to consider the redistribution of funds among the creditors.

ArcelorMittal’s Rs 42,000 crore resolution plan for Essar Steel was approved by the NCLT on March 8. In its judgment, the NCLT had observed that though it did not want to change the resolution plan approved by the CoC, it would suggest the lender to reconsider distribution of dues and give 15 per cent of the total offer to operational creditors.

The Lakshmi Mittal-led company has been fighting for the control of Essar Steel for well over 600 days now. The case has seen many twists and turns, including a settlement plan of Rs 54,389 crore made by the promoters of Essar Steel, who offered to pay off the entire debt. The plan was, however, rejected by the NCLT.

ArcelorMittal’s bid, on the other hand, includes an upfront payment of Rs 42,000 crore towards the debt resolution of Essar Steel, with an additional Rs 8,000 crore of capital infusion into the company to support operational improvement, increase production levels, and deliver enhanced levels of profitability. In October 2018, the CoC of Essar Steel had voted to approve ArcelorMittal’s plan and a letter of intent was issued.

The Business Standard reported

BS: Posco inks Rs 5,000 cr MoU to lift one mn tonnes of HR products from Essar

2 July 2019: Posco India has signed an offtake agreement with Essar Steel valued at around Rs 5,000 crore.

Sources said that the agreement was for procuring one million tonne of hot rolled products and it was the fourth such memorandum of understanding signed between the two companies.

Commenting on the MoU, G H Bang, MD, POSCO Maharashtra said, ”We have found Essar Steel to be a very dependable partner to meet our requirements. They are able to meet our stringent quality standards and delivery timelines. I am happy that this partnership has stood the test of time and the bond between the companies has become stronger. The way our partnership has progressed is a showcase story of how an Indian company can support a global company to make ‘ Make in India’ a reality”.

Bang also mentioned that irrespective of the pending matter related to the ownership of Essar Steel, the company had continuously improved its operational and financial performance which is commendable.

Insolvency proceedings against Essar Steel started in August 2017 and the matter is still pending in court though ArcelorMittal’s resolution plan has been approved by the National Company Law Tribunal (NCLT).

Posco’s partnership with Essar Steel started with a trial order of 1,000 tonnes in 2014-15 which was followed up by a bulk order of 10,000 tonnes in 2015-16 and ended the year with a total supply of 62,000 tonnes. The completion of this order finally led to the first MoU in 2015-16 for an order of 650,000 tonnes. The quantity was enhanced the following year to 850,000 tonnes. This were further enhanced to one million tonne in 2017. 

During this period,  16 new grades of steel have been developed for auto and other special applications. 

Essar Steel has been ramping production over the last few years and is currently operating at around 85 per cent. Last year it produced 6.9 million tonnes of crude steel and is expected to cross over seven million tonnes in the current fiscal.

Essar’s revenues grew to Rs 5,545 crore in April-May 2019,  as against Rs 5,106 crore in the same period last year while Ebitda grew by 17 per cent to around Rs 770 crore from Rs 660 crore.

Posco Maharashtra, on the other hand, is a two million tonne unit at Mangaon Maharashtra and is part of the Posco Group, fifth largest steel producer in the world. 

The Business Standard reported

ET: ArcelorMittal, Resurgent said to mull joint bid for Essar plant

27 May 2019: ArcelorMittal is exploring a joint offer with Resurgent Power Ventures Pte to buy an Essar Power generation plant in India, according to people with knowledge of the matter.

The companies have held preliminary talks on a potential joint bid for the 1,200-megawatt power plant in the central Indian state of Madhya Pradesh, said the people, asking not to be identified because the information is private. Arcelor had previously made a non-binding offer of 48 billion rupees ($690 million) for the asset, Bloomberg News reported in February.

Adding Resurgent Power to the bid would help Arcelor, the world’s largest steel producer, gain control of the power plant without putting as much strain on its balance sheet. Tata Power Co. owns 26% of Resurgent Power, while ICICI Bank Ltd. and the sovereign wealth funds of Oman and Kuwait hold the rest, according to a January statement.

Deliberations on the joint offer are still ongoing, and there’s no certainty a deal for the power plant will emerge, the people said. Representatives for Arcelor and Essar declined to comment. A representative for ICICI Ventures also declined to comment. Tata Power said in an emailed statement that it doesn’t comment on market speculation.

Arcelor, led by steel tycoon Lakshmi Mittal, and the Essar group’s founding family have been slugging it out in court for control of Essar Steel India Ltd., which was being sold under India’s bankruptcy process. The Madhya Pradesh power plant, which supplies electricity to Essar Steel, would boost Arcelor’s attempts to gain a foothold in the Indian market.

Last year, a consortium including Arcelor was picked by lenders as the winning bidder for Essar Steel with an offer of 420 billion rupees. The plan was halted by the nation’s top court last month pending a review by a bankruptcy tribunal hearing appeals.

The Economic Times reported