Why Supreme Court ruling today on Essar Steel will test the IBC

Essar Steel, promoted by the Ruias, was admitted to the National Company Law Tribunal, Ahmedabad, in August 2017. The company, which runs a 10 million tonne steel plant in Hazira, Gujarat, owed its bankers over ₹54,550 crore at the time that it couldn’t pay back. The steel mill brings with it an iron ore pelletization plant each at Visakhapatnam and Paradip, and a downstream steel hub in Pune, close to one of India’s automotive manufacturing hubs, offering a high-margin business of selling auto grade steel.

There were several suitors for the asset - these included Numetal (which, in its first iteration, had members of the Ruia family), Vedanta and JSW Steel. However, the winning bidder was Lakshmi Mittal’s ArcelorMittal, the world’s largest steel company, in partnership with Japan’s Nippon Steel and Sumitomo Corporation, which offered to take over the asset by paying ₹42,000 crore and a further ₹8,000 crore of equity infusion into the plant.

The bid wound its way through the Ahmedabad bench of the court, the National Company Law Appellate Tribunal (NCLAT), the Supreme Court and all the way back again, till the committee of creditors in October 2018 approved ArcelorMittal’s bid. Through this process, ArcelorMittal had to pay ₹7469 crore to qualify as a valid bidder, paying off the outstanding debt of two other insolvent assets - Uttam Galva and KSS Petron - in which Lakshmi Mittal held some equity stake.

The Ruias then made a last-ditch attempt to save the asset by offering to pay back lenders the full ₹54,550 crore, which again the courts turned down.

The NCLT approved of ArcelorMittal’s bid on March 8, 2019. But here, the second stretch of their struggles began.

The NCLAT, while approving ArcelorMittal’s bid, was unhappy with the payout given to operational creditors. Operational creditors to the stressed steel mill have admitted claims of ₹4,976 crore against which they will receive only ₹1,200 crore under the current resolution plan, while Standard Chartered Bank, one of the formal lenders, said it has claims of ₹3,487 crore against which it will receive ₹60.71 crore. The rest of the RS 42,000 crore would go to the secured lenders.

Instead, the appellate tribunal ruled that lenders and operational creditors will get 60.7% of their outstanding claims and proportionately share the money that ArcelorMittal has offered to pay for the Indian firm, which in rupee terms entails a payment of ₹30,030 crore to financial creditors and ₹11,969 crore to operational creditors.

Operational creditors with admitted claim amounts of less than RS 1 crore would get 100%, while for those with claims of more than ₹1 crore, the payment would be 60.26%.

This order had upset secured financial creditors, as it diminished their priority rights to the proceeds generated from the sale or liquidation of a bankrupt entity, including the settlement mechanism in future insolvency cases. The day after the NCLAT judgement, the Union cabinet approved several changes to the bankruptcy law, including upholding secured creditors’ priority rights on the sale or liquidation proceeds of insolvent companies.

All eyes are on the Supreme Court today to see if it will uphold the supremacy of secured financial creditors over other lenders in a stressed asset.