Essar Steel Insolvency Case: What The NCLT Order Said
Why the NCLT asked Essar Steel’s RP and CoC to review the bids by Numetal Mauritius and ArcelorMittal.
The Ahmedabad bench of the National Company Law Tribunal had, on Apr. 19, 2017, asked lenders to Essar Steel Ltd. to reconsider resolution plans submitted by Numetal Mauritius and ArcelorMittal India. The two firms had submitted resolution plans in the first round, but saw their bids rejected as the resolution professional - Satish Kumar Gupta - declared they were ineligible.
The detailed order of the Ahmedabad NCLT, put out on the court’s website on Sunday, shows that the tribunal did not dispute the resolution professional’s view on eligibility but said that due process was not followed.
In addition, the order makes some key observations on the individual bids of Numetal Mauritius and ArcelorMittal India and extends the insolvency resolution process timeline - to effectively 300 days.
CoC Did Not Follow Due Process
According to the order placed on the NCLT’s website, the CoC met on March 21, where the resolution professional recommended that both ArcelorMittal India and Numetal Mauritius were disqualified under Section 29(A) of the IBC. This is the section introduced a few months ago to restrict defaulting promoters from bidding for their own companies.
However, the creditors did not assess the plans themselves, as they had asked the resolution professional to present only those plans which were eligible for consideration.
The NCLT, in its order, found that the committee did not act as per the procedure laid down under the code.
Also, according to the tribunal, Section 30(4) of the IBC says that the committee should have provided a period of 30 days to both ineligible applicants to repay any overdue amount and rectify the issues under Section 29(A). Thus the CoC has been directed to reconsider both bids and take a fresh decision in the matter.
In its order, the tribunal also said that both Numetal and ArcelorMittal are at liberty to challenge the new decision by the CoC, if they so wish
RP Not Wrong In Disqualifying Numetal’s Bid
In his arguments, the resolution professional pointed out that Numetal Mauritius was simply an entity created to bid for Essar Steel’s assets.
- At the time of formation, the company was fully held by Aurora Trust, where Rewant Ruia - a member of the Essar Steel promoter family - was the ultimate beneficiary.
- Later, the stake was distributed among Crinium Bay (a subsidiary of VTB Bank), Indo International Ltd and TPE.
- The VTB Bank-backed entity held 40 percent stake and was the largest shareholder in Numetal, while Aurora Trust’s shareholding was reduced to 25 percent.
Since Numetal by itself does not have any relevant background in the steel industry, it was pertinent, according to the resolution professional, to consider the eligibility of its shareholders, including Aurora.
Further, the resolution professional argued, according to his affidavit reproduced in the order, that while the Numetal Resolution Plan made several averments that Rewant Ruia has no control over it or management rights or rights to appoint board members, the document submitted by Crinium Bay did not categorically state that Numetal's shareholders did not have any agreement with the promoters of Essar Steel.
"On the contrary the document submitted by the Applicant (Numetal) clearly contemplated there could be such agreements," said the resolution professional’s affidavit.
According to the NCLT, the resolution professional in the Essar Steel matter considered diverse legal opinions in determining ineligibility of the bid submitted by Numetal Mauritius. Thus, the tribunal did not find his actions to be arbitrary or illegal.
...we do not find any patent illegality in the decision of the RP for declaring ineligible to applicants which is a prudent decision where there is possibility of more than one legal view then this court at this stage is not expected to substitute its view and to interfere with the conclusion of the RP.NCLT Order
Was ArcelorMittal Eligible?
According to the resolution professional, at the time the Essar Steel insolvency resolution process started, associate entities of Arcelor Mittal India and its founder LN Mittal, owned a controlling stake in defaulting steel company Uttam Galva Steels Ltd. and also exercised negative control in another defaulting company KSS Petron Ltd.
ArcelorMittal Netherlands subsequently sold the stake it held in Uttam Galva but the declassification of its promotership was not complete at the time ArcelorMittal India submitted its resolution plan for Essar Steel. Hence the resolution professional found ArcelorMittal India ineligible to bid.
In its order, the NCLT observed that the law required that ArcelorMIttal be given 30 days to remedy its ineligibility. And that mere sale of stakes in the defaulting companies or declassification as promoter would not make it eligible.
Any person who is either promoter or in the management or in the control of the business of the corporate debtor and in default is ineligible. Mere sale of shares and declassification as promoter after the companies have gone into default cannot be absolved from responsibility.NCLT Order
The NCLT said that overdue amounts to lenders in both companies, Uttam Galva and KSS Petron, should be paid before ArcelorMittal can become eligible.
Fresh Bids Or Rebid?
Faced with ineligible bids the Essar Steel CoC considered two options presented to it by the resolution professional.
The first was to issue a fresh request for proposal and seek fresh bids from any interested party. The second option was to allow only entities which had submitted an expression of interest in the previous round of bidding to bid in the second round.
Considering time constraints, the CoC chose to go with the second option.
The tribunal opined that the first option would have been more transparent and would have maximised value received from the asset.
While the rebid was not the subject matter of the NCLT order, the tribunal advised the CoC to relook at the first option keeping time constraints in mind.
If the CoC is pressed to make such a choice again, after review of the two bids, then in picking the first option it may open the door for companies like JSW Steel Ltd. The Sajjan Jindal- led company did not submit an expression of interest in the first round but has subsequently partnered with Numetal to get a foot in the door.
The Applicable Timelines
In the Essar Steel insolvency process, the NCLT has ordered that the 30 days of litigation so far not be counted towards the 270 day insolvency resolution process deadline. That was due to end this month.
Timelines have been extended in other cases too, although there seems to be no consistency in the argument or process for extension.
An earlier NCLT order, in the Bhushan Power case, had set a precedent by stating that "...the period which is to be consumed in litigation would not prima facie be part of the period prescribed for CIRP under the IBC".
In the case of Binani Cement, the court has extended the tenure of the resolution professional till further orders. Technically, his term ended on Apr. 21 when the 270 day deadline ran out.