Essar Steel Resolution

Prof. V.K. Unni

Indian Institute of Management Calcutta
E-mail: [email protected]
VK Unni IIM-C
 Essar Steel Resolution
• Essar Steel India Limited (ESIL), is an integrated steel producer with an installed steel-making
capacity of 9.6 million tonnes per annum (MTPA), and its promoters were the Ruia/Essar
group.
• It product portfolio consisted of hot rolled steel, cold rolled steel, galvanised and colour coated
coils, plates, pipes, etc.
ESIL’s manufacturing facilities mainly consist of
❖Beneficiation plant at Odisha and Chhattisgarh and pelletisation plants at Odisha
❖ Integrated steel complex situated in Hazira, Surat
❖. Downstream capability hub located in Pune
❖ Seven service centres in various parts of India to cater to needs of its end-customers
• ESIL is an unlisted public company, with 97.5% shares owned by the Ruia group (the
promoters) and the balance by non-promoter shareholders.
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 Essar Steel Resolution
What caused the Financial Crisis at ESIL
• ESIL’s financial problems were a result of expansion of plant facilities fueled by debt,
addition of plants based on availability of natural gas for production
• ESIL’s performance got affected badly because of the high debt with operations at low-
capacity utilization as a result of non-availability of working capital and thereafter the
account of ESIL also became Non-Performing Asset (NPA) with its banks
• In June 2017, RBI directed banks to start insolvency procedure under the Insolvency and
Bankruptcy Code 2016 (IBC ) against 12 large accounts
• Based on RBI’s direction SBI and Standard Chartered Bank filed application to start CIRP
(Corporate Insolvency Resolution Process) against for ESIL with Adjudicating Authority
(AA) i.e., NCLT Ahmedabad
• On 2nd August 2017 NCLT accepted the CIRP application and thus 2 nd August 2017 became
the Insolvency Commencement Date (ICD) for ESIL and NCLT appointed Mr. Satish
Kumar Gupta as the Interim Resolution Professional (IRP)
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 Essar Steel Resolution
• From ICD, ESIL’s management was vested with IRP and the powers of its Director
Board were suspended and were exercised by IRP.
• Creditors submitted total claims amounting to about Rs 82500 crores out of which
claims worth around Rs 54,500 crore were admitted by IRP after verification
• IRP after verification of claims filed by the creditors constituted the Committee of
Creditors (CoC) and the CoC confirmed the appointment of IRP (Satish Kumar Gupta)
as the Resolution Professional (RP) in its first meeting
• An Expression of Interest (EOI) was issued in October 2017 to resolve ESIL, and
following this some interested bidders did their due diligence of ESIL over a period of
3 months
• Thereafter, in December 2017, Request for Proposal (RFP) was issued by the RP after
getting clearance from CoC
• As per the RFP, Arcelor Mittal India Pvt. Ltd. and Numetal Ltd. a company set up by
ESIL’s promoters, submitted their resolution plans in February 2018
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 Essar Steel Resolution
Amendment to IBC through Introduction of Section 29A
• While the process of due diligence was on the Government of India through an ordinance in
November 2017 introduced Section 29A which prescribed the eligibility criteria that should
be satisfied by the person submitting the resolution plan/ Resolution Applicant (RA)
• The aim of this amendment was to prevent the promoters of defaulting companies from
submitting resolution plans, subsequently in January 2018 the ordinance became the Act i.e.
IBC (Amendment) Act 2018
• On examination of submitted resolution plans in March 2018, RP found both RAs, Arcelor
Mittal and Numetal ineligible to submit resolution plan for ESIL under various provisions of
Section 29A and RAs were informed about the same
• Arcelor Mittal through another enity ArcelorMittal Netherlands owned 29.05% in Uttam
Galva Steels Ltd. and Uttam Galva’s account was classified as an NPA on March 2016 by
Canara Bank and Punjab National Bank (because of this Arcelor Mittal was ineligible)
• CoC thereafter invited fresh resolution plans and fresh resolution plans were submitted by
Arcelor Mittal, Numetal and a new RA, Vedanta Resources Limited

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 Essar Steel Resolution
• In April 2018 NCLT ruled that for determining eligibility, the ICD of ESIL i.e. 2/8/2017 is
relevant and directed that CoC of ESIL should follow due procedure while rejecting the bids
of Arcelor Mittal and Numetal
• NCLT further held that CoC should give a chance to both the bidders to pay the overdue
amount and remove their disqualification
• In May 2018, CoC found that both ArcelorMittal and Numetal are ineligible and held that for
becoming eligible, both the bidders should pay the overdue amounts and interest pertaining
to the NPAs of their related companies
• In September 2018, National Company Law Appellate Tribunal (NCLAT) ruled that
Numetal's second bid for Essar Steel was eligible but the same by Arcelor Mittal can be
considered only if it clears within three days the dues of companies it was previously
associated with
• At the time of submitting the second resolution plan in March 2018, NCLAT noted that
Numetal was eligible as it did not have any shareholder from the family of ESIL's promoter
and the remaining shareholders were eligible under Section 29A (during the submission of
the first resolution plan Mr. Rewant Ruia son of ESIL's promoter was a shareholder in
Numetal)
• The decision of NCLAT was challenged before the Supreme Court (SC) which delivered its
judgement in October 2018 VK Unni IIM-C
 Essar Steel Resolution
• The main issue in ESIL case to be decided by the SC revolved around whether
ArcelorMittal and Numetal were eligible under Section 29A of IBC
• SC noted that the object of Section 29A was to keep out undesirable persons from bidding
as a resolution applicant and held that such persons cannot be allowed to hide behind
complex structuring.
• Since Numetal itself relied entirely on the credentials of each of its constituent
shareholders to satisfy the minimum tangible net worth Numetal itself lifted its corporate
veil
• SC held that Numetal was ineligible as per Section 29A for both resolution plans because
of the presence of Rewant Ruia, son of Ravi Ruia, promoter of ESIL
• Even though Rewant Ruia exited Numetal completely before the submission of its second
resolution plan in April 2018, SC applied the test of ‘reasonable proximate state of affairs’
to hold Numetal ineligible for submitting the resolution plan
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 Essar Steel Resolution
• Arcelor Mittal was also held ineligible because of its connection with Uttam Galva which had
become an NPA
• Thus, SC held in October 2018 that both ArcelorMittal and Numetal were not qualified to bid
for ESIL under the IBC
• However the SC invoked its power under Article 142 of the Indian Constitution and gave an
opportunity to both Arcelor Mittal and Numetal to clear the NPA dues of their related corporate
debtors for being eligible to bid for ESIL
• SC opined that this would do ‘complete justice’ in the matter, and secondly, the law on section
29A of the IBC has been laid down for the first time by this decision
• Immediately Arcelor Mittal complied with the SC order by paying Rs 7,500 crore to lenders of
Uttam Galva and became eligible and they also got approval from Competition Commission of
India for ESIL’s acquisition
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 Essar Steel Resolution

• ArcelorMittal’s resolution plan consisted of an upfront payment of ₹42,000 crore towards

ESIL’s debt, with a further ₹8,000 crore of capital injection into ESIL to support operational
improvement and increase production levels and the same was approved by ESIL’s CoC
• The resolution plan of Arcelor Mittal was conditionally approved by the NCLT in March
2019 and it suggested that the CoC reconsider the manner of distribution of funds to ensure
higher recovery to OCs and Standard Chartered Bank
• Based on this CoC set aside an amount up to a maximum of Rs 1,000 crore for OCs from
their share in addition to amount being paid to OCs as per the Resolution Plan and retained
the amount payable to SCB under the plan
• Thereafter a monitoring committee consisting of four members from CoC and four members
from Arcelor Mittal with RP as Chairman was set up to manage day-to-day affairs of ESIL.
• The decision of NCLT was challenged before the NCLAT
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 Essar Steel Resolution
• NCLAT in its July 2019 decision approved the NCLT resolution plan but it modified the resolution
plan by placing financial (secured and unsecured) and operational creditors on the same footing
• NCLT approved plan had in fact provided for 90% recovery for all financial creditors and around
20.5% for all operational creditors with dues of over Rs 1 crore
• But NCLAT set aside this plan and directed a payment of 60.7% of dues for Financial Creditors (FC)
and 59.6% for Operational Creditors (OC) with of dues over Rs 1 crore
• The NCLAT decision caused lot of concern to FCs because they felt that the present decision would
make secured lending unattractive which can cause serious consequences to the Indian banking sector.
• Furthermore NCLAT interpretation that the distribution of amounts under a resolution plan is not a
commercial decision also affected the rights of CoC
• Thus the FCs challenged the NCLAT decision before the Supreme Court (SC)
• While the appeal was pending in the SC the Parliament amended the IBC in August 2019 and the
Amendment restored the order of priority of FCs vis a vis OCs in crystal clear terms
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 Essar Steel Resolution
• The Amendment also recognized the inter-se hierarchy amongst secured and unsecured creditors, a
crucial distinction removed by the NCLAT in its July 2019 decision mentioned earlier
• The Amendment also restored the powers of a CoC to evaluate a resolution plan based on commercial
consideration which was severely restricted by the NCLAT decision in July 2019
Supreme Court’s Final Decision on ESIL (15th November 2019)
• The SC Judgment categorically held that the principle of equality could not be interpreted to mean that
all creditors (irrespective of their security interest or their status as OCs or FCs) are eligible for equal
recovery under a resolution plan.
SC further held that
• With respect to OCs, the IBC itself envisaged OCs as a separate class of creditors
• If the provisions of the IBC were complied with, the CoC has the authority to approve resolution plans
which differentiated between FCs and OCs regarding payment
• Under no circumstances can NCLT and NCLAT interfere with the commercial decision of the CoC,
and the ultimate discretion of what to pay and how much to pay each class or sub-class of creditors
lies with the CoC VK Unni IIM-C
 Essar Steel Resolution
• On 15 December 2019, AMNS India, the 60:40 joint venture between Arcelor Mittal
and Japan’s Nippon Steel Corporation, completed acquisition of ESIL by payment of
Rs 42,785 crore after more than 800 days of commencement of insolvency process i.e
2nd August 2017
• AMNS India has committed to invest around Rs 18,000 crore in ESIL for streamlining
its operations
Given below is the final distribution of the payment to various classes of creditors
• Secured FCs - 90.95%
• Secured FC- Standard Chartered Bank 1.72%
• OCs with claim < Rs 1 crore 100%
• OCs with claim > Rs 1 crore 20.49%
• Workmen 100%

VK Unni IIM-C
Essar Steel Resolution

Prof. V.K. Unni

Indian Institute of Management Calcutta
E-mail: [email protected]

VK Unni IIM-C