IN THE HIGH COURT OF JUDICATURE AT BOMBAY

APPELLATE JURISDICTION

MiniBankAG

Appellant

v.

Acero Steels Limited

Respondent

1.

Acero Steels Limited is a leading manufacturer and exporter of iron ore pellets.
90% of its inventory is exported, primarily to the United States (US) and to
countries in continental Europe, with a small percentage of its sales flowing
eastward to China and a few ASEAN nations. Acero has been in this business for
over 20 years, and has enjoyed tremendous success. The business was built from
scratch by Mr. Yatin Asher, who was then a metals trader. His son, Mr. Manoj
Asher, is now running the business as the managing director of the company.
While the registered office and corporate office of Acero are in Prabhadevi,
Mumbai, its main plant is located in Panvel, on the outskirts of Mumbai.

2.

In 2006, Acero drew up plans to undertake a significant expansion of its

production capabilities and sought to establish a new plant at Ranjangaon, near
Pune, with a manufacturing capacity of five million tonnes per year. After
prolonged deliberations, the board of Acero approved the expansion plan, which
became inevitable given that Acero had to previously turn down many lucrative
supply contracts on account of its inability to fulfill them due to the lack of
manufacturing capacity.

3.

In order to finance its expansion plans, Acero approached a number of banks and
financial institutions for financial support. In doing so, it enlisted the services of
Brady Advisors Limited, a boutique advisory firm that specialises in debt
financing. Brady and its financially talented managing advisor, Mr. Kunal
Prakash, were well known for driving a hard bargain on behalf of companies that
intend to borrow monies from various lenders. Their expertise also extended to
formulating and implementing plans for restructuring of debts in case any of their
clients faced financial difficulties.

4.

As part of the plans for financing the proposed Ranjangaon plant, Acero and
Brady approached MiniBank AG, a Swiss bank. Although MiniBank had a branch
office in Mumbai from where it carried out its lending operations, the key
financing decisions were taken from its regional office in Singapore. Mr. Pascal
Berger, the Asia Operations Director of MiniBank visited Mumbai to meet with

Acero and Brady, and after some discussions it was agreed that MiniBank would
lend US$ 50 million to Acero.
5.

The transaction was structured as a medium term-loan facility. While the loan was
to be disbursed in two tranches of US$ 25 million each, the repayment by Acero
was to be made upon the expiry of four years from the date of each disbursement.
Interest was payable on a quarterly basis in arrears commencing the date of
disbursement. On December 22, 2006, Acero and MiniBank entered into a
Facility Agreement setting out the detailed terms and conditions of the loan and
the security package. Simultaneously, Coronation Bank, an Indian banking
company, was appointed as facility agent and security trustee under the loan. The
principal terms and conditions of the Facility Agreement are extracted in
Appendix A. Upon the advice of MiniBanks Indian solicitors, M/s. Lex
Legalistics & Partners, the Facility Agreement and the charge created thereunder
were not registered with the Registrar of Companies (RoC) under the Companies
Act, 1956. Simultaneously with the execution of the Facility Agreement, the
disbursement of the first tranche of US$ 25 million was completed.

6.

Acero had also obtained term loans and working capital facilities from other
lenders at the same time, and began the process of acquisition of land for the
Ranjangaon plant. By December 2007, the land was acquired and the construction
of the plant had commenced. In the meanwhile, the order book of Acero was
building up steadily due to heavy demand from around the world for its iron ore
pellets. During quarterly meetings with lenders, Mr. Manoj Asher displayed
tremendous optimism regarding the future financial prospects for the company.

7.

However, by mid-2008, the tide had turned the other way. The world was
beginning to get engulfed in the global financial crisis, triggered by the downfall
of the subprime lending market in the US. Slowly but surely, the impact was
becoming visible on Aceros business. Some of its large orders from the US
markets began getting cancelled. Although Mr. Manoj Asher was beginning to
worry, he very ably disguised his emotions and put up a brave face at the lenders
meeting held for the 2nd quarter of 2008-2009. Matters were, however, drastically
precipitated in September 2008 with the collapse of Lehman Brothers whereby
the already distressed global financial markets began experiencing volatility and
turbulence.

8.

In its meeting in October 2008, the board of directors of Acero took the position
that this was only a minor blip in the global financial markets and that this is
unlikely to substantially affect commodities prices, which would hold up. Hence,
it decided to press on with its long-term plans. Consistent with this outlook, on
October 17, 2008 Acero issued a notice to MiniBank under the Facility
Agreement for drawdown of the second tranche of the loan of US$ 25 million.
Within two days of receipt of the notice from Acero, MiniBank responded in
writing to state that it was under no obligation to disburse the second tranche
under the terms and conditions of the Facility Agreement. Although Acero
2

initiated discussions with MiniBank to persuade them of the need for the second
tranche, their pleas fell on deaf years as MiniBanks management had by then
taken a strategic view of imposing a lending freeze as a result of the market
downturn due to which they would not make any further disbursements of loans.
9.

Due to a deadlock in the discussions between Acero and MiniBank regarding the
drawdown of the second tranche under the Facility Agreement, Acero initiated
legal proceedings before the Bombay High Court seeking specific performance of
MiniBanks legal obligations under the Facility Agreement. A single judge of the
Bombay High Court granted Aceros pleas, against which MiniBank preferred an
appeal before the division bench of the High Court (Appeal No. 1).

10.

By the end of 2009, it became evident to Aceros board that the global financial
crisis was much more serious and impactful than it had initially thought. By then,
the business of the company was adversely affected, and it did not have sufficient
cash flow to service its debts, primarily due to default in payments by its
customers. Acero was unable to meet its interest payment obligations from the 3rd
quarter of 2009-2010, and it also defaulted on repayment obligations (of principal
amounts) under two facility agreements with different lenders that became due
during that period. Upon the first default by Acero of the interest payments under
the Facility Agreement with MiniBank, MiniBank informed Acero in writing of
the occurrence of an Event of Default under the Facility Agreement.
Approximately 10 weeks after the occurrence of the Event of Default, MiniBank
registered its charge pursuant to the Facility Agreement with the RoC under the
Companies Act. This it did so upon receiving further advice from Lex Legalistics
& Partners.

11.

After declaring an Event of Default under the Facility Agreement, MiniBank

instructed Acero to deposit all amounts received from its customers under the
Nominated Account maintained with it in accordance with the terms and
conditions of the Facility Agreement. Although Acero immediately began making
payments into the Nominated Account, MiniBank issued standing instructions
permitting Acero to withdraw monies from the Nominated Account without any
restrictions. These standing instructions were revoked only about six months after
the date of the occurrence of the Event of Default, following which Acero was
unable to withdraw amounts from the Nominated Account.

12.

Acero had no choice but to go back to the drawing board with the assistance of its
advisor, Brady. In early 2010, it was decided that the only way Acero can survive
this onslaught was by initiating a corporate debt restructuring. On February 9,
2010, Acero convened a meeting of its creditors where it proposed a debt
restructuring package. It proposed that all unsecured creditors would receive 70
cents on the dollar in full repayment of the amounts due to them. In other words,
the unsecured creditors will be required to take a 30% hair cut on their amounts.
In the meeting, almost all of the unsecured creditors indicated their preference for
this proposal since they were better off receiving partial repayment up front rather
3

than to remain with the uncertainty that they may not be able to recover their
amounts in a timely manner, if at all. As far as secured creditors are concerned,
the proposal was that they would be eligible to receive the full amounts owed to
them, but only in 2017, regardless of their contractual dates of repayment. In other
words, the secured creditors will be required to grant a moratorium on principal
repayments until then. Interest will accrue until then, although they will now
become payable annually regardless of the contractual periodicity of interest
payments.
13.

Aceros debt restructuring plan was taken up in accordance with the Corporate
Debt Restructuring (CDR) mechanism prescribed by the Reserve Bank of India
(RBI). However, since some of the lenders (including MiniBank) were not within
the CDR mechanism prescribed by the RBI, it was decided to implement the
restructuring through a scheme of arrangement under the Companies Act, 1956.
Acero drafted and proposed a scheme, and approached the Bombay High Court to
convene meetings of the different classes of creditors. It proposed meetings of
four classes of creditors, each of which had to approve the scheme in accordance
with the Companies Act. The classes are as follows:
(a)
(b)
(c)
(d)

Secured creditors with fixed charge;

Secured creditors with floating charge;
Unsecured creditors; and
Preferential creditors.

14.

The class meetings were convened under the auspices of the Bombay High Court
on June 23, 2010. The scheme received overwhelming approval of each class of
creditors as required under the Companies Act. Returning to MiniBank, it was
against the debt restructuring proposal from the outset. Despite its strong
objections voiced at the initial lenders meeting, Acero decided to ignore them
and to proceed with the scheme. MiniBank was placed under the category of
unsecured creditors. This class comprised of the largest number of creditors and
those holding the largest amounts of credit in value. Hence, MiniBanks
objections were overshadowed by the brute majority possessed by the other
unsecured creditors. It is also the case that MiniBank would not have been
successful in preventing the scheme from proceeding had it been classified as a
secured creditor with floating charge, as it would have been the lone dissenting
voice in that category. The class of secured creditors with fixed charge had only
one creditor with a small outstanding, and hence the only possibility of a
successful dissent from MiniBank was if it was classified as a secured creditor
with fixed charge.

15.

As a next step, Acero filed a petition before the Bombay High Court for sanction
of the scheme of arrangement for debt restructuring of the company as it had
received the requisite majority of the different classes of creditors. MiniBank, in
the meanwhile prepared and filed strong objections to the petition insisting that
the class meetings were wrongly convened and held, and that the requisite
4

majorities were incorrectly obtained. Accordingly, its case was that the scheme
must not be sanctioned or permitted to be implemented. Although MiniBank
could have initiated winding up proceedings against Acero, it resisted itself from
doing so upon advice from M/s. Lex Legalistics & Partners. As such, there are no
winding up proceedings pending against Acero. Also, Acero does not qualify as a
sick industrial company.
16.

While Aceros petition for the sanction of the scheme of arrangement and
MiniBanks objections were being heard by a single judge of the Bombay High
Court, Mr. Pascal Berger was shell-shocked as he received some further facts and
information in August 2010 regarding the restructuring proposal from another
foreign bank that was also a lender to Acero. That bank had initially objected to
Aceros scheme, but subsequently caved in to support it as it realised it was better
off going with the majority and recovering some amount of its loan rather than
holding out and remaining exposed. Mr. Berger was informed that about two
months prior to Aceros default on interest payments on various loans (including
from MiniBank), Acero had struck a deal with Coronation Bank, its largest lender
in value, to make a prepayment of about 25% of the debts due to it. Acero duly
made that repayment to Coronation Bank. Mr. Berger was of the view that by
structuring the transaction to occur prior to the default and the debt restructuring
process, Coronation Bank was effectively obtaining a benefit that was unavailable
to the other creditors upon whom the restructuring scheme was simply being
thrust. Moreover, it also came to light that at the time of such prepayment, Acero
also granted a floating charge in respect of part of the borrowings from
Coronation Bank (representing Rs. 20 crores) that was hitherto unsecured. To the
extent of that amount, Coronation Banks status was converted from that of an
unsecured creditor to that of a secured creditor with floating charge. At the same
time, it was also the case that the alteration of the status of Coronation Bank to the
extent of Rs. 20 crores outstanding was unlikely to alter the majorities in respect
of each of the classes that had approved the scheme of arrangement.

17.

After these facts came to light, MiniBank amended its objections to the scheme of
arrangement before the Bombay High Court by adding an additional ground on
which it sought the court to reject the scheme as these arguably important pieces
of information were not disclosed to the creditors or the court by Acero while
proposing the scheme of arrangement. After prolonged hearings on the various
objections placed by MiniBank, the single judge of the Bombay High Court
sanctioned the scheme of arrangement in November 2011. Aggrieved by this
decision, MiniBank has preferred an appeal before the division bench of the
Bombay High Court (Appeal No. 2).

18.

Having felt it was a victim of a conspiracy, MiniBank decided it was necessary

for it to take a bold and aggressive stance against Acero. It replaced its solicitors
with M/s. Amittessay & Co. On October 25, 2010, it initiated criminal
proceedings before the Sessions Court in Mumbai against Acero, its board, some
of its officers as well as Coronation Bank and some of its officers, for fraud and
5

criminal breach of trust on account of Acero having made preferential payments

to Coronation Bank and created security in its favour, both in a manner that
caused significant detriment to the interests of the other creditors.
19.

Upon receipt of a copy of the complaint filed by MiniBank, Acero filed a petition
before the Bombay High Court under section 482 of the Criminal Procedure
Code, 1973 seeking to quash the criminal proceedings filed against it. Among
other grounds raised by it, Acero stated that neither Mr. Manoj Asher nor its
board were aware of the arrangement between Acero and Coronation Bank for the
prepayment of part of the loan and for creation of security. The entire transaction
was given effect to on behalf of Acero by the Finance Manager of Acero, Mr.
Shiv Sheth. Although Mr. Sheth was not on the board of Acero and was reporting
directly to the chief financial officer Mr. Pramath Shah (who was a director of
Acero), Mr. Sheth was authorised to undertake all interaction on behalf of Acero
with its lenders. Mr. Sheth was also responsible for spearheading the corporate
debt restructuring on behalf of Acero. After hearing the parties, in November
2011, a single judge of the Bombay High Court exercised his jurisdiction under
section 482 to quash the criminal proceedings against Acero. Aggrieved by this
decision, MiniBank has preferred an appeal before a division bench of the
Bombay High Court (Appeal No. 3). This appeal concerns Acero only, and
separate appeals were filed on behalf of its board, officers, Coronation Bank and
its officers, which are the subject matter of separate proceedings.

20.

It has been decided to club the three appeals preferred by MiniBank against
Acero, and to hear them in a composite fashion. The hearing of the appeals was
being considerably delayed. In the meanwhile, MiniBank received an attractive
proposal from Vulture Distressed Assets Fund LP. (Vulture Fund), a debt fund
specialising in distressed debts, whereby Vulture Fund was willing to purchase
50% of the outstandings from Acero to MiniBank at a discounted rate of 20%.
Hence, for half of the outstandings, MiniBank would be able to obtain 80% of the
debt value from Vulture Fund as opposed to 70% from Acero under the debtrestructuring scheme (even if continued to be treated an unsecured creditor). The
amount representing 50% of the outstandings from Acero were assigned by
MiniBank in favour of Vulture Fund pursuant to an Agreement for Assignment by
Way of Securitisation entered into between MiniBank and Vulture Fund. Under
this Agreement, while the part of the debt (representing 50%) under the Facility
Agreement was assigned to Vulture Fund, MiniBank was appointed as a
collection agent of Vulture Fund by which it would continue to collect the dues
from Acero, and carry out such actions as may be necessary, to give full effect to
the Agreement for Assignment by Way of Securitisation with Vulture Fund.

----- x -----

Appendix A
Principal Terms and Conditions of the Facility Agreement dated December 22, 2006
Entered Into Between Acero and MiniBank

2.

Definitions
Material Adverse Change means any material adverse change in the business,
results of operations, assets, liabilities, or financial condition of Acero, as
determined from the perspective of a reasonable person in MiniBanks position.

3.

Facility; Disbursements
The facility of US$ 50 million (the Facility) shall be disbursed by MiniBank to
Acero in two tranches. The first tranche of US$ 25 million shall be disbursed on
the date of this Agreement. Within a period of two years from the date of this
Facility Agreement, Acero shall be entitled to draw down the second tranche of
US$ 25 million by providing at least 30 days written notice to MiniBank. Within
the period stipulated in the notice, MiniBank shall disburse the second tranche
amount to Acero, so long as there has not occurred a Material Adverse Change
or any event or circumstance that would reasonably be expected to result in a
Material Adverse Change.

15.

Security
(a)

In consideration of MiniBank granting the Facility to Acero, Acero as

beneficial owner hereby agrees that upon the occurrence of any of the
Events of Default, all outstandings under the Facility shall become due
and payable immediately and MiniBank shall be entitled to a charge over
all the debts due to Acero from its customers. Acero hereby
unconditionally and irrevocably agrees that such charge shall be deemed
to be granted to MiniBank immediately upon the occurrence of the Event
of Default, without the need for any further consent, agreement, conduct
or act on the part of either party.

(b)

For the purposes of Clause 15(a) above, the following events shall
constitute Events of Default:
(i)

failure of Acero to pay on the due date any amount payable to

MiniBank pursuant to this Facility Agreement;

(ii)

failure of Acero to comply with any material provision of this

Agreement that does not relate to any payment obligation;

(c)

16.

(iii)

where any representation or statement made or deemed to be made

by Acero in this Facility Agreement or any other document
delivered by or on behalf of Acero under or in connection with this
Facility Agreement is or proves to have been incorrect or
misleading in any material respect when made or deemed to be
made; and

(iv)

where any legal action or proceeding has been initiated in relation

to the appointment of a liquidator, receiver, administrator, or any
other similar officer in respect of Acero or any of its assets.

Upon the occurrence of an Event of Default, Acero shall pay any amount
received from its customers into a nominated and blocked bank account
(the Nominated Account) of Acero maintained with MiniBank. Unless
otherwise indicated by MiniBank in writing, Acero shall not utilise the
funds deposited into the Nominated Account except for paying the sums
owed by Acero to MiniBank under this Agreement. Upon full satisfaction
of all the Outstandings, Acero shall be free to utilise the funds available in
the Nominated Account without the prior consent of MiniBank.

Covenant
So long as any part of the Facility or any other amount under this Facility
Agreement remains outstanding, Acero shall not, except with the prior written
consent of MiniBank, create or permit to be created any mortgage, charge,
pledge, lien, or other encumbrance on any of its property to secure any
indebtedness.

20.

Ranking of Obligations
All the obligations and liabilities of Acero hereunder rank, and will rank, either
pari passu in right of payment with or senior to all other unsubordinated
indebtedness of Acero.

23.

Assignment of Rights
Acero expressly recognises and accepts that MiniBank shall be absolutely entitled
to, and has full power and authority to sell, assign or otherwise transfer in such
manner and on such terms as MiniBank may decide (including if deemed
appropriate by MiniBank reserving a right to MiniBank to retain its power to
proceed against Acero on behalf of the purchaser, assignee or transferee) any or
all outstandings and dues of Acero, to any third party of MiniBanks choice.
Acero shall not assign this Facility Agreement or any of the rights, duties or
obligations of Acero hereunder, except with prior written consent of MiniBank.

25.

Governing Law
This Facility Agreement and any dispute or claim arising out of or in connection
with it or its subject matter, existence, negotiation, validity, termination or
enforceability (including non-contractual disputes or claims) shall be governed
by, and construed in accordance with, the laws of India.

26.

Dispute Resolution
The parties submit all their disputes arising out of or in connection with this
Facility Agreement to the exclusive jurisdiction of the appropriate courts in
Mumbai, India.

----- x -----