IBC: What The Supreme Court Ruling Means For The Essar Steel Case

The Supreme Court today upheld the constitutional validity of the two-year-old Insolvency and Bankruptcy Code in its entirety. That means the Ruia family which is trying to retain its prized asset Essar Steel Ltd. has just one hurdle: convincing its lenders.

The Ruias' surprise late bid for Essar Steel proposes to clear all pending dues worth over Rs 54,000 crore unconditionally. That compared with ArcelorMittal's Rs 42,000-crore offer approved by the lenders earlier.

Today's judgment sets two provisions in place. The Section 29A of the IBC bars existing promoters of an insolvent firm from participating in bidding. But Section 12A says that a company can withdraw itself from insolvency proceedings if at least 90 percent of the committee of creditors—a panel of the lenders—vote in favour of the withdrawal.

While the Supreme Court upheld the bar on promoters to come in as resolution applicants, the Section 12A route is open for them, Nilang Desai, partner at AZB & Partners, pointed out. “In more cases than not, 12A is going to give a higher recovery for lenders; it may even be the entire recovery,” Desai told BloombergQuint. “If that is the case, then I see no problem for the promoters coming back and taking control of their company. If they're paying their debts, then what's the problem?”

Yet, convincing the lenders may not be that simple for the Ruias. Its largest creditor State Bank of India Ltd., with Rs 15,431-crore exposure, has put up its entire loans to Essar Steel up for sale, according to information on its auction website. The sale is open for asset reconstruction companies, non-banking finance companies, banks and financial institutions. If loans are sold, then Essar will have to convince the buyers of those loans to vote in favour of withdrawing from insolvency.

The Ruias has found support from billionaire Sajjan Jindal, whose JSW Steel Ltd. had unsuccessfully tried to bid for Essar Steel, the owner of 10-million-tonne steel mill in Gujarat. “They (the Ruias) should be given a chance. It is their company, if they're paying 100 percent of the money, so why not,” Jindal told BloombergQuint in Davos, Switzerland. “The process is not over till it's over. And it is not over yet. The promoters are saying I am willing to repay every dime.”

Jindal added that JSW Steel itself is not out of the race for Essar Steel while hinting a partnership with the Ruias. “There could be. There is a possibility. Whatever deal will happen, it will happen upfront.”

Winning bidder ArcelorMittal isn't amused by either of the Ruias' late offer or Jindal's candour. “These tactics are to delay, to frustrate and prevent the right resolution for the company,” Aditya Mittal, president of ArcelorMittal, told BloombergQuint in Davos. “It's very important that the IBC [Insolvency and Bankruptcy Code] process is followed.”

“India has to be rule based; we must rely on the basic process of law,” he said. “The committee of creditors has decided. They have taken the decision. If you follow the rules,we are the highest value bid.”

The Ahmedabad bench of the National Company Law Tribunal has already reserved its verdict on the maintainability of the bid by Essar Steel Asia Holdings to retake the management of the debt-laden company. The bench comprising BP Chaturvedi and Manorama Kumari has said they will pass an order by Jan. 31.