Essar Steel Insolvency: NCLAT Upholds ArcelorMittal’s Bid But Says Creditors Can’t Decide Allocation

The National Company Law Appellate Tribunal on Thursday upheld ArcelorMittal SA's resolution plan for Essar Steel Ltd. but has also stated that the committee of creditors has no role in distribution of the amount to lenders.

NCLAT had in May reserved its order over a batch of petitions against ArcelorMittal's Rs 42,000-crore bid for Essar Steel as well as the distribution of funds among the creditors of the debt-ridden company. Though the NCLAT had approved ArcelorMittal's resolution plan, it had kept open the issue of allocation between financial and operational creditors.

Delivering that order today, the NCLAT, in what will create a new precedent for insolvency cases, laid down what the Committee of Creditors can decide and what it cannot.

According to what the bench said in court, the resolution plan or bid amount will be distributed thus:

• Employees and those with claims of less than Rs 1 crore will get full repayment. This includes operational and financial creditors.
• Operational and financial creditors with claims of more than Rs 1 crore will get 60 percent repayment.

Essar Steel's Committee of Creditors sought a stay on the judgment, which the NCLAT denied. The CoC said it will challenge the judgment in accordance with the law.

Meanwhile, the Essar (Ruias) spokesperson said in an emailed statement that they are awaiting the detailed order to decide course of action.

The Squabble Over Allocation

The allocation issue arose after the Ahmedabad bench of the National Company Law Tribunal approved the ArcelorMittal resolution plan with a suggestion to the committee of creditors to reconsider the allocation to financial creditor Standard Chartered Bank Plc and 40 operational creditors of Essar Steel.

The NCLT had advised that the committee should allocate 85 percent of the total amount—Rs 42,000 crore—on a pro-rata basis to all financial creditors. The remaining 15 percent—Rs 6,300 crore—can be distributed among operational creditors, it had suggested.

This suggestion was given after Standard Chartered Bank had stated that against its admitted claim of Rs 3,487 crore, the resolution plan has allocated only Rs 60 crore to it—working out to 1.7 percent recovery. Compare this to other financial creditors whose recovery rate is as high as 92 percent, it had pointed out. And so, Standard Chartered Bank had argued that inspite of being a secured financial creditor, it's being discriminated against by the majority members on the committee of creditors.

The discrimination, it had argued, stemmed from the apportionment formula adopted by the committee of creditors—dues weren't being paid based on the proof of admitted claim on pro-rata basis but instead were being determined on the value of security possessed relative to the liquidation value of the company's assets. The bank had further stated that if a pro-rata method were to be adopted and each secured financial creditor given 85.6 percent of its claim, that would ensure a reasonable and fair apportionment of the amount.

In the same vein, some 40 operational creditors, too, had complained of inequitable treatment. The NCLT order had noted that a few operational creditors with outstanding amounts less than Rs 1 crore are being paid in full but others, whose outstandings totalled Rs 4,700 crore, will not be repaid at all.

These arguments by operational creditors had found some favour with the NCLAT, which observed during the hearings that there cannot be any discrimination between secured creditors. It had asked the committee of creditors to convene a meeting to reconsider distribution among financial creditors and consider allocating 10 percent of the amount for clearing the dues of operational creditors.

Even as the case was being heard, the suggestions of the NCLT and NCLAT on resolution plan distribution were appealed by the committee of creditors before the Supreme Court. In April, the apex court had ordered the various parties involved to maintain status quo on the sale of Essar Steel, halting ArcelorMittal from making a payment to purchase the insolvent company. It had directed the appellate tribunal to expeditiously decide on appeals. Now it's likely the CoC will revisit the Supreme Court for a final decision.

Essar Steel was one of the 12 large corporate accounts shortlisted for insolvency proceedings by the Reserve Bank of India in June 2017. State Bank of India and Standard Chartered Bank had filed insolvency proceedings against the company at the Ahmedabad bench of the NCLT.