Supreme Court paves way for ArcelorMittal's takeover of Essar Steel in ₹42,000 crore deal

The Supreme Court allowed Arcelor to pay creditors for Essar Steel India Ltd. and scrapped a bankruptcy appellate tribunal’s order that had given secured and unsecured lenders equal right over the sale proceeds, a three-judge bench headed by Justice Rohinton F. Nariman ruled Friday.

“There is no principal of equality between secured and unsecured creditors," Justice Nariman said while reading out the judgment in court. Bankruptcy courts don’t have a say in deciding the distribution of funds between creditors. They can only examine the legality of the resolution plan approved by the panel of lenders of an insolvent company, the court ruled.

The acquisition of Essar Steel will make Arcelor the fourth-biggest producer in a nation where the government is investing trillions of rupees in infrastructure and comes at a time when the global demand for steel is faltering. The verdict is likely to be the final approval in a more than yearlong battle by Arcelor to take over Essar. While companies can seek a review of decision by the same bench of judges, the success of review petitions is rare.

The world’s largest steelmaker, ArcelorMittal, and its partner Nippon Steel Corp. had offered to pay ₹42,000 crore ($5.8 billion) in cash to creditors and pump another ₹8,000 crore in the mill last year. While that offer was approved by a bankruptcy tribunal in March under the insolvency process, the payment was kept on hold by the Supreme Court after a dispute arose between lenders on the distribution of funds.

“We are very pleased with the judgment that our resolution plan has been approved," Arcelor said in a statement. “We look forward to the closing of the acquisition soon."

The ruling will set a precedent for other insolvencies that are awaiting resolution over the distribution of funds between different class of creditors.

“The Supreme Court has made it very clear that the decision taken by the committee of creditors is final and binding," said Prashant Kumar, chief financial officer of the State Bank of India, the biggest lender to Essar. “This clarity is not only important for the Essar case, it would also be very important for all other cases which go through the process of IBC," he said referring to the law known as the Insolvency and Bankruptcy Code.

Lenders’ Gain

India’s currency, and creditors to Essar extended gains after the ruling. The rupee rose 0.3% at 1:36 p.m. local time, while State Bank of India added 4.5% and Canara Bank surged as much as 7.2%. Syndicate Bank, which expects ₹1,200 crore of recovery from the sale, also gained 4%. Arcelor jumped as much as 2.5% in Amsterdam.

“To look at secured and unsecured creditors in the same way is a bit of a disaster," Nilang Desai, partner at AZB & Partners, said in an interview with BloombergQuint. “It destroys the basis of new lending. And therefore by definition you must look at secured and unsecured lenders differently."

The Supreme Court on Friday also said the timeline for insolvencies can be extended in exceptional cases and the 330-day deadline prescribed by the government for completing insolvencies, including the litigation period, cannot be mandatory.

Of the nation’s 12 largest delinquent borrowers only about half have been resolved so far, data compiled by Bloomberg shows. Time-bound resolutions under the bankruptcy law are the key to cleaning up $190 billion of stressed loans quickly, helping banks dodge higher provisions attached to missing resolution timelines.

The orders given on the Essar case on numerous occasions “leave less room for delays in future cases," according to Sitesh Mukherjee, partner & head of disputes at Trilegal. “It was a test case" and it will shorten the timelines for future cases, he said.

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