Giving a startling twist to the bankruptcy saga, Essar Steel shareholders have submitted a proposal to the committee of creditors (CoC) for full settlement of the entire admitted claims of financial creditors, operational creditors, workmen and employees that aggregate to Rs 54,389 crore.
The offer came on a day when the CoC voted in favour of ArcelorMittal-Nippon Steel’s Rs 42,000 crore resolution plan for the bankrupt entity that offers the lenders recovery of just about 85 per cent of their exposure to Essar Steel India (ESIL).
The fresh offer for settlement by Essar Steel has been made under Section 12A of the Insolvency and Bankruptcy Code (IBC) that allows for withdrawal of a company from corporate insolvency resolution process. This is allowed only if the person or entity that initiated such proceeding gets 90 per cent of the voting share of CoC for withdrawal of insolvency application.
ArcelorMittal, however, opposed the offer saying its understanding of the IBC’s Section 12A does not apply to the resolution process of Essar Steel.
“Section 12A clearly states that any application to withdraw must be submitted prior to issuance of the invitation for expressions of interest and must be accompanied by a bank guarantee for the specified amounts. The expressions of interest for Essar Steel were issued in October 2017,” it said, adding ArcelorMittal has complied with the Supreme Court order and has settled the overdues of associate firms, Uttam Galva and KSS Petron. “We have the bank guarantees in place for the payment for Essar Steel. We expect the process to continue as per the clear terms of the IBC,” ArcelorMittal added.
Law experts said the offer made by Essar Steel is too late, on weak grounds and would be challenged by ArcelorMittal in the court.
Devesh Juvekar, partner at Rajani Associates, said, “The regulation requires that an insolvency petition can be withdrawn before issuance of the expression of interest. In the Essar Steel matter, the said stage has already passed. This could be a ground on which ArcelorMittal may challenge proposal of Essar.”
Sources said though the IBC in its latest amendment in June this year added the clause to withdraw insolvency application, the CoC would use this window only after being satisfied about the payment mechanism and capability of the entity making the offer.
“A similar situation had arisen in the CIRP of Binani Cements (Binani) wherein Binani had made a proposal for withdrawal of the insolvency proceedings after Rajputana Properties was declared as highest bidder by the CoC. The said issue is pending before NCLAT. However, then Section 12A of IBC was not introduced. Moreover, in the Essar’s case, ArcelorMittal is yet to be declared as the highest bidder,” added Juvekar.
The CoC would also be governed by court orders if existing bidders — ArcelorMittal or Vedanta — decide to take legal recourse against any decision of lenders to cancel the auction process that reached its closure after encountering several legal and procedural challenges.
All this would mean that the insolvency process of Essar Steel would be delayed further.
Under the terms of Essar Steel offer, an upfront cash payment of Rs 47,507 crore is proposed to all creditors, including Rs 45,559 crore to the senior secured financial creditors, which amounts to almost 100 per cent recovery. An Essar Steel statement said the resolution plan currently under the CoC’s consideration takes care of only the secured creditors (i.e. banks), while Essar Steel offer secures payment for all creditors to the company.
“Essar Steel got into difficulty because of external factors…In fact, even after the onset of the insolvency resolution process, shareholders of Essar Steel had made offers to settle the debt of the company, but the lenders did not accept those offers. We believe our current proposal will provide 100 per cent recovery to secured creditors and lenders, and maximum recovery for unsecured creditors. This is well in excess of that offered in the proposal under consideration, and is in line with value maximisation, which is the underlying principle of the IBC process,” said Prashant Ruia, director, Essar.
An insolvency resolution expert said, “No promoter wants to lose his company and we have seen the promoters of Essar Steel trying to derail the resolution process several times. The law states that promoters can bid for their own company if they pay all their dues before the expression of interest. If majority of the lenders approve then the company can be out of the insolvency process. But in case of Essar Steel, the process is at maturity stage and I doubt if the promoters (Ruias) offer can be considered now.”
Essar Steel is among the list of top 12 large corporate debtors, referred as ‘dirty dozen’ that was referred by the RBI for resolution in insolvency courts. Banks and other creditors have total debt exposure of close to Rs 49,000 crore in the company.
Though priority was accorded to resolve this bankrupt entity as per timelines given in IBC, its resolution process has been anything but immediate. The case is way past its 270-day timeline (it’s one year and three months now), even as some of the similar bankrupt steel companies have found new owners. In all these months, the insolvency proceedings have faced several legal challenges on account of interpretation of the newly adopted code.
Though, IBC bars defaulting promoters to participate in the bidding for an insolvent company, first charges arose against Russia’s VTB capital promoted NuMetal (one of the bidder) that had Ruia family member Rewant Ruia as one of the beneficiaries. The other bidder, ArcelorMittal, also faced challenges by virtue of being promoters in past of insolvent entities Uttam Galva and KSK Petron.
All these issues resulted in bids being submitted twice by all interested parties. The matter looked for a closure after a recent Supreme Court judgment that asked both NuMetal and ArcelorMittal to clear all dues within specified time to become eligible resolution applicant. While CoC was evaluating bids of Arcelor and Vedanta, the fresh challenge to the process has come by way new offer by existing promoters of Essar Steel.
While a fresh twist has been added in the resolution drama, it still needs to be seen what funding options the Ruias provide to give comfort of lenders that they would get all their money back. Industry sources said that Essar is looking at the revival cycle currently being witnessed in the steel sector, to salvage the debt-ridden entity and start generating cash.
Moreover, the Essar Group, could bring some funds remaining from its $ 12.9 billion proceeds it received by selling Essar Oil to Russian oil giant Rosneft last year. Though the group decided to pare as much as 67 per cent of its consolidated debt of Rs 1.05 trillion from the sale proceeds.
The steel entity went into problems due to cancellation of supply of natural gas, which is the main raw material for Essar Steel, despite the company having a firm gas allocation from the government. This led to idling of 65 per cent of plant capacity and no compensation was offered for the loss. Moreover, damage by insurgents to the Vizag slurry pipeline that carries iron ore fines to Essar Steel plant also created problems. This led to huge disruption in raw material supply and significant losses because of increase in cost of raw materials.
The Essar Steel statement said that to fund the losses on account of the above, Essar promoters infused an additional corpus of approximately Rs 8,000 crore over and above the contributed equity of Rs 11,000 crore. Even in the period of financial stress, Essar Steel honoured its interest obligations of Rs 12,000 crore mainly by the aforesaid fund infusion by the promoters.
The company successfully mitigated the aforesaid challenges and thereafter a restructuring plan was agreed with the lenders in December 2016 but the company was referred to the IBC by RBI, an action that Essar strongly contested, the statement added.
“Over the last one year, the group has repaid debt of Rs 80,000 crore, and by this proposal plans to repay another Rs 45,000 crore of debt (at no loss to the lenders), thus cumulatively repaying Rs 1,25,000 crore of debt (which is 75 per cent of group debt), which again is the largest by any Indian corporate,” the company statement said.
Essar Steel is among the largest single location steel producers with a 10 million tonnes per annum liquid steel capacity. The integrated facilities comprises hot rolling facilities, cold rolling facilities, plate mill etc. located in Hazira, in the western coast of Gujarat. It also has downstream processing and distribution capacity of 4 MTPA. ESIL also has beneficiation and pellet making capacity of 20 MTPA spread across Vizag and Paradeep. The company employs approximately 4,500 persons directly and more than 30,000 people indirectly.