Essar Steel’s Insolvency: Are Ruias Back In The Game?
Photographer: Susana Gonzalez/Bloomberg

Essar Steel’s Insolvency: Are Ruias Back In The Game?

Legal challenges to Essar Steel Ltd.’s bankruptcy are just like a boomerang — every time courts throw them away, they find their way back. Now, it’s the Supreme Court’s ruling in the Ruchi Soya case that may infuse fresh life in the Ruia family’s case before the insolvency court.

Three erstwhile directors of Essar Steel, including Prashant Ruia, have filed an application before the Ahmedabad bench of the National Company Law Tribunal arguing that:

  • They were selectively allowed to participate in the creditors’ committee meetings. And so, any decision taken by the creditors committee without giving proper notice and full participation to the suspended board will have to be set aside.
  • The suspended board of directors weren’t given a copy of the resolution plans that came in for Essar Steel. And this, these directors are arguing, includes the resolution plan submitted by ArcelorMittal.
  • And so, the resolution plans for Essar Steel need to be deliberated and voted upon afresh.

The three directors have relied on the Supreme Court’s recent ruling in the Ruchi Soya case. The apex court has held that:

  • Members of the erstwhile board must be given copies of the resolution plan and they must be allowed to participate in all the meetings of the creditors’ committee.
  • Only those directors who are related parties of the corporate debtor can be barred from participating in the creditors’ committee meetings.
  • Since this process was not followed in Ruchi Soya’s case, the creditors’ committee has been asked to deliberate upon and vote afresh on the resolution plans.

Will the Ruchi Soya ruling give a fresh lease of life to the Ruias efforts to retain the prized asset? Pooja Mahajan, managing partner at Chandhiok & Mahajan, and Sitesh Mukherjee, litigation head at Trilegal, shared their views on Insolvency Diaries.

Edited excerpts from the conversation

Has the Supreme Court’s ruling in the Ruchi Soya case opened a pandora’s box by laying down that the suspended board must be allowed to participate in all the meetings, given resolution plans and if that hasn’t happened, creditors committees can be asked to deliberate, vote on plans afresh?

Mahajan: Yes, they have opened a pandora’s box. I don’t know where it will lead to. We are already seeing cases where directors are now coming back and asking for information on resolution plans. My worry is what will happen to cases where the CoC has already approved these plans? So, you will find promoters, ex-directors, suspended directors filing applications in courts saying give me copy of the resolution plan and let me read it again, let me give it back to CoC to reconsider. And this will inevitably lead to delays. You will find resolution applicants getting frustrated with the process at some point time and say this is leading to nowhere.

The other issue will be around the conflict of interest. There may be cases where the director or promoter-director themselves have filed resolution plans, assuming they are section 29A compliant, and the question of conflict of interest may arise. In those situations, is it fair to give resolution plans to suspended directors and let them comment when conversely the same right has not been given to the other applicants? We will see some action around these two issues in the coming months.

Mukherjee: I don’t apprehend that it will delay the insolvency process, or it will open some kind of pandora’s box for existing processes where the suspended board of directors have not been fully informed of resolution plans.

The Supreme Court is saying that there is one more source of input which the CoC has and in forming its judgment, it should give an opportunity to the suspended board of directors to provide inputs on resolution plans. Once the input is given and the CoC have considered the input, then the commercial wisdom of the CoC will be allowed to prevail. I don’t see this as a big opportunity for promoters to hang on to and delay the process of insolvency.

As far as ongoing cases are concerned, those which have already been approved by the NCLT, I don’t think this judgment will give them a fresh lease of life. In cases where the plan has been approved by the CoC and may have been pending approval of the adjudicating authority, there is a possibility that the CoC may have to hold one or two more sittings to hear the suspended directors.
Sitesh Mukherjee, Partner, Trilegal

After that, they can decide whether they want to continue with the decisions they have already taken or alter their voting pattern.

Is it as simple as this?

Mahajan: Well, in a lot of our cases, we have already started getting notices from suspended directors and these are cases where the CoC has already approved the plan and it’s pending before the adjudicating authority. The NCLT approval is actually getting delayed. This is just going to further add on that process.

Even if we go back and the committee of creditors actually hears out the promoter-director, it still gives leeway to the suspended directors to file an application and say that their input was not properly considered.

So far, we haven’t seen promoters actively agitating against a resolution plan on one or the other ground. But the minute they get the resolution plan in their hand, they will find some ammunition to say something against the resolution plan. To that extent, they will have to be heard.
Pooja Mahajan, Managing Partner, Chandhiok & Associates

So far, promoter-directors haven’t agitated against resolution plans because they didn’t have access to them.

Mukherjee: There is a very limited room for mischief given that the Supreme Court has ruled in a number of judgments as to the role of operational creditors and that they have rightly been denied a vote in creditors’ committee.

So, the primacy of CoC has been established by various rulings of the Supreme Court. Therefore, there is very little room for mischief by suspended promoter-directors to use this to derail the resolution process. The CoC has been asked to share the plan and take the inputs of suspended directors. The commercial wisdom of the CoC still holds primacy in the eyes of the court.

The logic why operational creditors are not heard or have limited role in the resolution will also apply to suspended promoter-directors/board because they too have no right to vote in CoC meetings.

It will take some time for some of the existing processes to go through now that this requirement has come in. But hearing the suspended directors will only add value to the resolution process; not derail it.
Sitesh Mukherjee, Partner, Trilegal

Based on the outcome in the Ruchi Soya case, can the Essar Steel CoC be asked to deliberate on all the plans again and then vote afresh?

Mahajan: In Ruchi Soya’s case, they have asked the CoC to provide the resolution plan to suspended directors so that they can provide the inputs. The NCLT may say that even though ArcelorMittal’s plan has already been approved by the CoC, it should be shared with the suspended directors and then let them provide their comments. I am not sure that they will reopen everything all over again. The plan has already been approved. The NCLT should be saying let them have a copy of the resolution plan and comment on it.

The other fact which should be taken into account in Essar Steel’s case is that you already have Numetal, which is agitating for its own plan. Then the question is should the suspended directors, who possibly may be aligned with the promoters, be given the right to comment on ArcelorMittal’s resolution plan when the converse right has not been given to ArcelorMittal. This is likely to be argued before the NCLT. 

Mukherjee: If the suspended board of directors raised the issue of information, plans not being shared with them during the insolvency process, they can now ask for this right. There are a number of Supreme Court judgments that say you shouldn’t have slept over your right at the start. You can’t become wiser after a judgment comes from the Supreme Court and claim a cause of action.

If the benefit of Ruchi Soya judgment is given to the suspended board of directors, then all the plans which have come before the committee of creditors would have to be given to these suspended directors. They have to comment on it and the CoC will have to go through the process of voting again. 

It is still possible that if a large number of cases go to the Supreme Court, they can take a view that this judgment can only apply prospectively, and we have to wait for it.

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