The Supreme Court on Friday has given its final verdict of how the resolution proceeds are to be split between different classes of creditors in Essar Steel’s insolvency case. The apex court has overruled the NCLAT’s decision and has said that the court should not interfere with the decisions of the committee of creditors (CoC). In doing so, the SC has given more weight to the financial creditors.
The Supreme Court decision overrules NCLAT’s July 5 judgment that operational creditors should be treated on a par with financial creditors for distribution of funds from ArcelorMittal’s bid in the Essar Steel insolvency case. The verdict paves the way for Arcelor’s takeover of the bankrupt company.
NCLAT had also said all the operational creditors including employees with claims below INR 1 crore were to recover 100% of their dues. The court had also observed that CoC was discriminatory in splitting the funds between financial and operational creditors and had said the committee was not authorised to decide on funds distribution.
Essar Steel’s Insolvency case Timeline
Essar Steel’s inclusion in RBI’s NPA list: In 13 June 2017, 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 and had asked the company’s lenders to initiate proceedings against these companies under the Insolvency and Bankruptcy Code (IBC) at the National Company Law Tribunal (NCLT).
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 thus inviting bids for the resolution process.
Arcelor Mittal and Numetal submit bids: 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.
CoC approves Arcelor Mittal’s bid: The Committee of Creditors (CoC) approved ArcelorMittal’s bid of INR 42,000 crore with 92% 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.
NCLAT’s alters CoC’s plan: The CoC approved plan had provided for 90% recovery for all financial creditors and around 20.5 per cent for all operational creditors with dues of over INR 1 crore. However, in Jul’19, the NCLAT set aside this arrangement by CoC 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 INR 1 crore.
Financial creditors move to Supreme Court: 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.
Now with SC’s today’s verdict, the long drawn insolvency case of Essar Steel seems to clear way for Arcelor Mittal’s acquisition of the company.
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