IBC: How Much Essar Steel’s Lenders Have Lost Since The Bankruptcy Filing

The Essar Steel insolvency – 583 days and counting. As for the monetary cost of delays this.

Cleaning and maintenance of the south clock face of Big Ben, London. (Photographer: Shaun Curry/Bloomberg News)
Cleaning and maintenance of the south clock face of Big Ben, London. (Photographer: Shaun Curry/Bloomberg News)

At the time Essar Steel Ltd. was admitted for insolvency resolution it had racked up financial debt of at least Rs 50,000 crore. Another Rs 5,000 crore in claims by financial creditors were rejected by the resolution professional in charge of the insolvency process. The steel company owed Rs 27,000 crore to operational creditors, such as vendors and employees. Less than half those claims were admitted by the resolution professional.

In all, the total amount that creditors claimed Essar Steel owed them is over Rs 82,000 crore, even if all amounts have not been admitted as part of the resolution process.

And yet this is among the initial large companies admitted to bankruptcy that’s taking forever to resolve. The Insolvency and Bankruptcy Code, 2016 mandates that an insolvent asset must be resolved in 270 days.

The Essar Steel case is now on its 583rd day.

The delays are due to litigation.

The case has already made one full round of the National Company Law Tribunal, Appellate Tribunal and the Supreme Court on disputes regarding bidder eligibility. In October last year, the Supreme Court asked the two final bidders to make some amends to become eligible.

One did. The other didn’t.

ArcelorMittal’s bid was accepted by creditors and the only approval pending was that of the Ahmedabad NCLT.

That was on Oct. 25, 2018.

It’s March now and the NCLT has yet to grant approval. One reason is because of fresh cases filed.

On the very day lenders voted in favour of the ArcelorMittal bid, erstwhile promoters of Essar Steel, the Ruia family, offered to settle their dues and reclaim the asset. The NCLT rejected that...but only on Jan. 29, 2019, after three months had passed. And only after the NCLAT directed the NCLT to decide before the month-end.

Cases filed by several operational creditors against ArcelorMittal’s bid are still pending with the Ahmedabad bench. In all, three NCLAT deadlines have come and gone, but the NCLT has yet to decide.

A banker directly involved with the insolvency proceedings at Essar Steel said that even appealing to a higher court to achieve a quicker resolution had not yielded the desired results.

Curiously, on Feb. 28, 2019, another deadline set by the appellate tribunal, the NCLT was scheduled to deliver its final order. But that morning the NCLAT gave it another extension — up to March 8.

A pedestrian passes in front of the Essar Group corporate offices in Mumbai, India (Photographer: Prashanth Vishwanathan/Bloomberg)
A pedestrian passes in front of the Essar Group corporate offices in Mumbai, India (Photographer: Prashanth Vishwanathan/Bloomberg)

The Cost Of Delay

Here’s what the delay has cost financial creditors alone.

  • Rs 17 crore a day in lost interest (as per a petition filed by the lenders).
  • Rs 7,718 crore from the day the company was admitted to insolvency till Oct. 25, 2018 —the day ArcelorMittal won the bid.
  • Rs 2,193 crore from that day to March 7.
  • That’s a total Rs 9,911 crore lost just in interest costs.

At say a 10 percent cost of funds, operational creditors have lost Rs 800-5,000 crore depending on the final claim amount admitted.

These judicial delays even prompted State Bank of India, the lead lender to Essar Steel, to put on sale its loans worth over Rs 13,000 crore to the company. For a reserve price of Rs 9,587 crore. However, SBI found only one taker for a small portion of the loans, forcing the lender to call off the sale.

Pessimism around the delay is unfounded, said Suharsh Sinha, partner at law firm AZB & Partners. As despite it the insolvency process has yielded a good result for Essar Steel and its bankers.

“You have to look at the fact that prior to bankruptcy, Essar Steel was not attracting bidders. It was a pittance that the bidders were offering to the banks, in comparison to what is there now. The IBC helped getting bidders in place and they tend to benefit more under the law. There are untested legal issues, which are contributing to the delay. But we must also note that no large bankruptcy process in the world is getting done in nine months. The 270 days period is getting breached, which was the promise of the IBC. But there is alacrity in the legal system to close these issues quickly and move toward resolution. The pessimism, I feel, is a bit unfounded.”

Even if the NCLT were to deliver its decision on March 8, the Ruias have already filed an appeal in the NCLAT. Losers in any of the other litigations could also seek relief in a higher court - the NCLAT, and finally, the Supreme Court.