Essar Steel insolvency case lands in legal ambiguity; NCLT to hear

Standard Chartered bank has alleged bias in the process as top banks held 'illegal' meetings' but all other banks approved

Hurdles in the Essar Steel (ESIL) insolvency case before the National Company Law Tribunal’s (NCLT’s) bench at Ahmedabad continue to pile up. A hearing is slated on Wednesday. 

Last week, Standard Chartered Bank (SCB) filed a petition with the bench against the Resolution Professional (RP) appointed for the case. And, against top banks. The tribunal will also hear a batch of petitions by ESIL’s operational creditors (OCs) against the decision by the company's committee of creditors (CoC) to award the insolvent company to ArcelorMittal.

SCB's plea alleges a ‘core-committee/sub-committee’ (CC/SC) comprising four-member-lenders from the CoC held ‘illegal’ backdoor meetings prior to approving the resolution plan put forward by Arcelor.

Business Standard sent queries to the four —State Bank of India, ICICI Bank, IDBI Bank and Edelweiss Asset Reconstruction Company, and to others. SCB declined to comment in response to the queries; others had not replied at the time of printing this. 

An Arcelor spokesperson said they were "confident that the process will be implemented correctly and according to the law”.

The fact of CC/SCs being formed is not unuusual — it is routine practice for bankers to appoint a core team for day-to-day operational and administrative tasks, on behalf of the entire CoC. The CoC had set up the CC/SC in March this year, for a similar reason, to handle various administrative and operational issues like filings with the court and documentation processing. 

SCB had in May requested that it be included in the CC/SC. This was not heeded, although it is the third largest among the financial creditors (FCs) to ESIL, with 7.5 per cent weightage in the CoC’s voting rights.  Insolvency experts say there are no regulations on such committees under the CoC set-up. 

The NCLT(s) have said this is accepted practice, to complete the Corporate Insolvency Resolution Process (CIRP) in the prescribed timeline of 180+90 days. 

The CC/SC was also asked to handle litigation issues concerning the applicability of Section 29A of the Insolvency and Bankruptcy Code (IBC) for the two potential bidders, Arcelor and Numetal.  According to the SCB petition, the CC/SC and Committee of Lenders (CoL) “misused the machinery of the Code to negotiate exclusively with ArcelorMittal through an illegally constituted CC/SC and have misused their voting rights to create an artificial distinction among secured FCs, to create an inequitable distribution pattern”.

A senior lawyer says the allegation that the CC/SC did not have the mandate is wrong, as the CoC gave permission to the four institutions in question to “negotiate” with the bidders on their behalf. “The CoC voted for the committee to represent them in the negotiations on October 18 and it got over 90 per cent of the members in favour. As far as I know, SCB decided to reject the proposal,” the lawyer said.

When over 90 per cent of the authorised lenders vote in favour of a proposal and one or two abstain or reject it, the grounds for appeal are slim, feel some IBC experts. 

Even so, while the CC/SC was authorised on various procedures on behalf of all members, the SCB allegation suggests it was negotiating with Arcelor before being permitted to do so. On October 25, the CoC decided to vote on the revised resolution plan placed by Arcelor, which SCB says it did not get in time. A source said the plan was sent by the RP on October 18, seven days before. 

According to the SCB plea, the CC/SC “recommended” that it get only Rs 607 million, as against the admitted claims of Rs 34.87 billion or less than 1.5 per cent of the total. The dues on principal to SCB are Rs 26.5 billion.

A source present in the CoC meeting(s) told Business Standard, on condition of anonymity, “Deciding how much goes to the creditors is the domain of the entire CoC. The April plan was presented and after that, it is the domain of the CoC to negotiate, approve the plan and distribute the dues. Any subsequent changes to the plan (the revised resolution one) were also presented to the CoC.”

The source added the reason why SCB’s receivables under the plan are low is because the nature of their security interest is of a corporate guarantee by ESIL, in lieu of a $500 mn loan provided to the former’s subsidiary, Essar Steel Offshore.   

The question for the NCLT is whether SCB has grounds to contest the distribution of the offer and their dues from the plan submitted by Areclor. It might also question the meetings described as 'illegal', through an explanation from the lead bankers, RP and legal advisors.