Essar Steel Case

ESSAR STEEL CASE
BACKGROUND –
Essar Steel owes Rs 54,547 crore to its creditors — financial creditors and operational
creditors combined. The company had been put on the block under IBC to recover the unpaid
dues.
The Ahmedabad-bench of National Company Law Tribunal (NCLT) had on March 8 okayed
the bid submitted by ArcelorMittal, led by steel tycoon Lakshmi Mittal, for the takeover of
Essar Steel. The operational creditors had opposed the bid on the basis that they were getting
notional payment, while 92.5 per cent of the financial creditors' dues were being paid.
Public-sector lenders are Essar Steel's primary financial creditors. Vendors and suppliers are
the operational creditors, the most prominent ones being Dakshin Gujarat, Gujarat Energy,
Bharat Petroleum, Indian Oil, GAIL, ONGC, and the NTPC.
A consortium of banks led by the SBI had moved the Supreme Court against a National
Company Law Appellate Tribunal (NCLAT) order in the case. The NCLAT had held that
Essar Steel's operational creditors be treated on par with financial creditors when settling the
claims.
Essar Steel's Committee of Creditors (CoC) had sought the quashing of NCLAT's July 4
order that approved the Rs 42,000-crore bid for the debt-laden firm by ArcelorMittal. This
was to be divided between the financial creditors who are owed Rs 30,030 crore and the
operational creditors who are owed Rs 11,969 crore.
NCLAT’s ORDER-
The NCLAT, in its order, said financial creditors would get 60.7 per cent of their admitted
claims of Rs 49,473 crore, about the same as operational creditors. The operational creditors
with admitted claim amount of less than Rs 1 crore would get 100 per cent, while above Rs 1
crore would get 60.26 per cent and workmen and employees would get 100 per cent. The
tribunal had said that the CoC will have no role in the distribution of Rs 42,000 crore and
allowed claims of the operational creditors. ArcelorMittal had told the NCLAT that it would
pay Rs 42,000 crore, including a minimum guarantee of Rs 2,500 crore as working capital,
for acquiring Essar Steel under the insolvency process.
The financial creditors — in this case state-run banks — comprise the committee of creditors.
While financial creditors are secured creditors, the operational ones are not. That's why
financial creditors are up in arms against the NCLAT's equal status order, which they say is a
disincentive to lenders and investors. According to the lenders and the CoC, the IBC
framework does not envisage such a parity between the two categories — operational
creditors are expected to be paid only after all secured creditors have been paid off.
IMPLICATIONS OF THE ESSAR STEEL CASE JUDGEMENT –
The recent Supreme Court Judgement on Essar Steel is a similar landmark judgement and
affirms basic principles of Insolvency and Bankruptcy Code (IBC), 2016. A few of these are:
1. Commercial Decisions left to Commercial entities- Committee of Creditors-
For Commercial aspects of a resolution plan, its viability or otherwise, and,
distribution of proceeds amongst stakeholders, Committee of Creditors (CoC) is the
competent authority. The role of a resolution professional (RP) is only administrative
and not adjudicatory. The adjudicating authority cannot trespass upon a business
decision taken by a majority of CoC.
IMPACT - Huge Positive for the financial sector, as the Supreme Court (SC)
reinforces the inalienable and unfettered right of financial creditors over the
business/assets created out of bank finance.
2. Inequality and differentiation amongst creditors based on security held-
If an "equality for all" approach recognising the rights of different classes of creditors
as part of an insolvency resolution process is adopted, secured financial creditors will,
in many cases, be incentivised to vote for liquidation rather than resolution, as they
would have better rights in liquidation.
IMPACT - The judgement appreciates the complex charge and security interests in
the Indian financial landscape dominated by consortium lending and adopts a flexible
approach rather than one-size-fits-all.
3. Objective of IBC is resolution of distressed assets, only when if it is not possible,
liquidation follows-
IMPACT - In the backdrop of 4 in 5 IBC cases closed till Sept 19, going for
liquidation, this statement reiterates the importance of having a resolution plan in
place. In the Indian context, lending is dominated by Public Sector Banks and when a
unit is liquidated, capacity created and employment generated gets lost besides the
value erosion.
4. No last minute shock from 'unknown' claims-
A successful resolution applicant cannot suddenly be faced with "undecided" claims
after the resolution plan submitted by him has been accepted as this would amount to
a hydra head popping up which would throw into uncertainty amounts payable by the
successful resolution applicant.
IMPACT - This is one of the most relevant observations. In many cases, claims crop
up after the resolution plan is finalised and even thereafter, and activism by various
authorities completely change the dynamics of a resolution plan and act as a
dampener for any investor who can not price such risk/uncertainty.
5. IBC Process can not 'mandatorily' end after completion of Timeframe-
"Mandatory" end of resolution process after 330 days of commencement of process
struck down as an excessive interference with a litigant's fundamental right to non-
arbitrary treatment under Article 14 and unreasonable restriction on a litigant's
fundamental right to carry on business under Article 19(1)(g) of the Constitution.
IMPACT - In terms of recent IBC amendment in August 2019, the resolution process
had to end by 330 days. Time taken by legal proceedings is certainly beyond the
control of a resolution applicant and as such , while efforts must be made to close it an
early date to retain time value of money, the process cannot be abruptly halted
mandatorily on a specific date writing off all efforts to zero.
SUMMARY -
This judgement will clarify the position and help the disposal of several cases in
NCLT/NCLAT. In addition, there were 535 cases with >270 days, out of ongoing 1497 cases
as on September 2019. In terms of an August 2019 amendment, in cases resolution is not in
place within 90 days of the amendment, the process had to end.
The SC Judgement will be a breather for these companies if the resolution process is ongoing
and they may not be forced to be liquidated just because of lapse of a certain time.
The Essar verdict not only gives the single largest realisation from any asset to financial
creditors- Rs 42,000 crore upfront cash, the most successful IBC case in the quantitative
term, qualitatively also this is the biggest for the financial sector in getting their due rights
and primacy in the scheme of things. Value maximisation and quest for successful resolution
will strengthen the macro ecosystem.

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