Mumbai: Despite the Supreme Court imposing status quo on the Essar Steel Ltd insolvency case, financial lenders to the stressed steel mill believe they will not have to make any major changes to the current resolution plan.
Two members on Essar Steel’s committee of creditors (CoC) and a lawyer advising on the case said on condition of anonymity that tribunals can only recommend changes to a resolution plan, and the Insolvency and Bankruptcy Code entrusts the final commercial decision to the CoC.
“If you look at the NCLT Ahmedabad offer (dated 8 March), the court advised the CoC and Essar Steel’s resolution professional to consider changes to the resolution plan and take an appropriate decision. It didn’t force the plan to be altered," a banker on the CoC said. “The court suggested that the ₹42,000 crore settlement be split 85:15 in favour of the financial creditors, while the remaining could be split between operational creditors and other stakeholders on a pro-rata basis."
“The CoC took the court’s advice and decided to increase the settlement to operational creditors by ₹1,000 crore. With this, their settlement would be around ₹1,200 crore," he said.
The CoC as well as the bankruptcy tribunal have approved ArcelorMittal’s ₹42,000 crore bid for Essar Steel. However, the Supreme Court on 13 April temporarily halted an NCLAT order asking it to pay Essar’s lenders within 14 days, following a petition from Standard Chartered Bank. The Supreme Court asked NCLAT to dispose all pending appeals in the Essar Steel case first.
The tribunal, NCLAT, will hear the matter next on 23 April. The two parties opposed to the current resolution plan are Standard Chartered Bank and Essar Steel’s operational creditors.
Operational creditors have admitted claims of ₹4,976 crore against which they will receive ₹1,200 crore under the current resolution plan, while Standard Chartered says it has claims of ₹3,487 crore against which it will receive ₹60.71 crore.
Standard Chartered’s claim arises from a $413 million loan it had extended to Essar Steel Offshore Ltd in 2014 which was secured by a guarantee from Essar Steel.
“The NCLAT or any court can’t force a change in the commercial aspects of a resolution plan, they can only talk about legality and whether procedures have been followed or not," the lawyer cited above said on condition of anonymity.
“They don’t really sit in judgement over the commercial decisions of the CoC; so, technically speaking, they can’t ask them to make changes to the commercial aspects. However, we’ve had instances in the past where some of the courts have directed the CoC or encouraged them to make changes to the commercial aspects. With regard to the 85:15 split, the NCLT Ahmedabad used the word “consider": It doesn’t have binding value but it certainly carries some weight and puts pressure on the CoC to alter the plan."
“Essar Steel has paid out nearly ₹55,000 crore to its operational creditors over the last two years as part of business expenses," the second member on the Essar Steel CoC said. “If you take interest on this, that’s ₹5,500 crore; at least that the operational creditors have gained. Meanwhile, the financial creditors haven’t seen a single pie come back to them in the last 600 days of the resolution process and the interest foregone for them since the company was admitted to bankruptcy is about ₹11,000 crore. I don’t think a case can be made that lenders are benefiting unduly from the resolution at the expense of operational creditors."
Another lawyer representing one of the creditors said Standard Chartered’s guarantee by Essar Steel cannot be treated on par with those of the company’s own secured lenders. “But the Essar Steel case will prove a test case on such tricky questions," he said. “There should be clarity once and for all on how to treat first charge, second charge and residual charges on assets under the IBC."
The latest hurdle to resolution has pushed the CoC’s expectation for a final settlement from April-end to the end of the Q1FY20. “We know that the settlement will take a while to come through," the first banker said. “This will finally be settled only at the Supreme Court."