Litigation hurdles abound for RBI-recommended insolvency cases at NCLT

The cases of insolvent firms on the Reserve Bank of India’s (RBI’s) second list are being referred to the National Company Law Tribunal (NCLT), but the cases of the first 12 have become entangled in complicated litigation.

The 270-day moratorium period for most of these cases will end in April.

“It is not surprising that so many of these cases are ending up in courts,” said Sumant Batra, managing partner at Kesar Dass B Associates. “The insolvency law is a principle-based law, not everything can be answered by it.” 

There have been a few strong bids for some of the biggest stressed assets: Bhushan Steel, Bhushan Power & Steel, and Electrosteel Steels. The resolution processes, however, have been stymied by litigation.

Take the case of Electrosteel Steels. Vedanta was the highest bidder, but competitor Renaissance Steel India, has questioned its — as well as second-highest bidder Tata Steel’s — eligibility. Taking a cue from this, Bhushan Steel employees have raised objections against Tata Steel’s bid. 

In both cases, Section 29A of the Insolvency and Bankruptcy Code (IBC) has been cited. This prevents a “connected person” — those in the management of a stressed company — from bidding for other assets.

The Delhi Bench of the NCLT has asked the committee of creditors to examine the objections.

Larsen and Toubro, an operational creditor of Bhushan Steel, has also moved NCLT, Delhi, and has asked to be treated as financial creditor, not operational creditor.

The resolution process of Bhushan Power & Steel has been stopped by the NCLT, Delhi, after UK-based Liberty House submitted a bid for it beyond the deadline. Liberty’s plea will be heard before the insolvency proceedings can resume.

Some companies did not get bidders in the first round. A second round has been called for Alok Industries; for ABG Shipyard, a third round of bidding is underway.

The most discussed resolution is for Essar Steel — once the world’s largest steelmaker. The eligibility of both its bidders, VTB-backed Numetal and ArcelorMittal, was challenged under Section 29A.

Both their bids were rejected on Wednesday by a committee of creditors. 

Numetal’s bid was found to be ineligible because 25 per cent of its shares are owned by a Mauritius-based trust, with Rewant Ruia, a Ruia family member, as a beneficiary. The Ruias are promoters of Essar Steel, which defaulted on loans of Rs 440 billion.

ArcelorMittal’s bid was rejected because it had a 29 per cent stake in Uttam Galva Steels, whose debt has turned into a non-performing asset. ArcelorMittal Chief Executive Officer Laskhmi Mittal sold his 29 per cent stake to the Miglani family, the promoter of Uttam Galva Steels, on February 7, just before submitting the bid for Essar Steel. But that was yet to be reflected in records of the market regulator, the Securities and Exchange Board of India (Sebi). 

An amendment to IBC Section 29A is expected shortly. This might take care of some of the problems. 

According to sources, a panel set up by the Ministry of Corporate Affairs  could recommend changing the definition of “connected people”.