essar steel india limited - corporate insolvency resolution...

MAY 9, 2020 SATISH KUMAR GUPTA ICAI - INDIA

Essar Steel India Limited - Corporate Insolvency Resolution Process

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Overview: Essar Steel India Limited

• An integrated steel producer with an installed steel making capacity of 9.6 MTPA-In top 4 steel manufacturers in India and the largest integrated steel

manufacturer in West India• Manufacturing operations strategically located in Western India in close proximity

to the major steel market• Product portfolio includes hot rolled, cold rolled, galvanised and colour coated

coils, plates, pipes, etc. • 7 service centres in various parts of India

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• Manufacturing facilities primarily comprise:-Beneficiation (Odisha and Chhattisgarh) and pelletization plants (Odisha and

Andhra Pradesh)-Integrated steel complex situated in Hazira, Gujarat Downstream capability hub

located in PunePower, ports, shipping are owned by separate legal entities which are not owned by ESIL

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Iron Ore Iron Ore

Deposits

Mahan

Beneficiation plantSlurry pipeline^Pellet plant

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Bahadurgarh

BhujIndore Kolkata

Chennai

Kirandul

Vizag

Paradip

Hazira

Essar Ports

Essar PowerEssar Shipping

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Hazira steel facility3

Pune downstream facility

Service center

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Pune

Dabuna

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Access to high quality iron ore fines and proximity to large quantities of low grade fines

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Raw material security with largest pellet capacity in India

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Access to port infrastructure enabling ease of movement for raw material and finished goods

Among India’s largest single location flat steel producer

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Complete basket of flat steel products

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Service centers situated in steel intensive competitive locations

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Strategically Located, Integrated Modern Steel Making Facilities

Note: Essar Ports, Essar Power and Essar Shipping are separate legal entities, Essar Ports (represented by square) includes Vizag Port berth operated by Vizag Port Terminal Ltd, Paradip Port berth operated by Essar Bulk Terminal Ltd, Essar Power (represented by Star) includes coal based power plant at Odisha by Essar Power Orissa Ltd, Coal based power plant at Mahaan by Essar Power MP Ltd and Corex Gas/Fines/Dust based captive power plant at Hazira by Essar Power Hazira Ltd, Hazira Port berth operated by Essar Bulk Terminal Ltd.^ Slurry pipeline between Dabuna and Paradip - Ownership under dispute

Gujarat and Maharashtra account for c. 70% of the total domestic revenue

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Pre - IBC litigation/admission

• RBI direction to banks to initiate insolvency against 12 large loan defaulters on June 16, 2017

• ESIL challenges reference to IBC in Ahmedabad High Court • ESIL contends that its operations are very complex involving large number of

stakeholders and highlighted potential risk to its operations and value under the hands of IRP which will also adversely affect the interest of company – Testing time of IBC and IRP/RP

• High Court dismissed ESIL petition on July 17, 2017

Hig

h C

ourt

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CLT

• At the time of admission, ESIL contends inter alia whether IRP can manage such complex operations

• NCLT states that as per Code IRP runs the operations along with the existing management

• NCLT admits insolvency petition on August 12, 2017

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ESIL - Key CIRP Events

Jul 2017 2 Aug 2017 5 Aug 2017 1 Sep 2017

23 Nov 201718 Dec 201724 Dec 2017

23 Jan 2018

12 Feb 2018

SCB and SBI initiated insolvency proceedings against ESIL in NCLT Ahmedabad under IBC

IRP constituted CoC and convened 1st CoC meeting. CoC appointed IRP as RP

NCLT passed order to extend the CIRP period by a further period of 90 days

RP filed an application for extension of CIRP period for 90 days

Potential RAs were provided Information Memorandum and access to Virtual Data Room (VDR) for conducting due diligence

RP issues RFP with 29 Jan 2018 as the last date for submission of resolution plans

Resolution plans were received from: Numetaland ArcelorMittal India (“Round 1 RAs“)

RP published an ad for inviting EOIs for a resolution plans for ESIL. RP received 8 responses, of which 7 were in the requisite format

Public Announcement providing notice regarding CIRP & inviting creditors to submit their proof of claims

Application against ESIL admitted by NCLT. Satish Kumar Gupta was appointed as IRP

6 Oct 2017

2 registered valuers were appointed for determination of liquidation value

9 Aug 2017

26 Sep 2017Liquidation value of ESIL as per Valuation Reports presented to CoC during 2nd CoCmeeting

31 Oct 2017 & 1 Nov 2017

IBC (Amendment) Ordinance, 2017 promulgated pursuant to which, Sec 29A was inserted to the Code

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20 Mar 2018 21 Mar 2018 23 Mar 2018 19 Apr 2018

8 May 201815 May 201822 May 2018

Based on media reports, Numetalfiled an application before NCLT in relation to its ineligibility u/r 29A

CoC deliberated the communication of AM India regarding transfer of alleged overdue amount in relation to Uttam Galva and KSS in an escrow account in SBI London

CoC gave the Round 1 RAs further opportunity to make oral representations in regard to their eligibility to submit Res. Plan

NCLAT, as an interim order, passed directions to the RP, CoC and NCLT that they will not pass any order approving or rejecting plan(s) nor pass any order of liquidation

NCLT issued an order upholding the ineligibility of Round 1 RAs and declaring the Res. Plans submitted in Round 2 as invalid. NCLT directed RP/CoC to reconsider their decision on ineligibility of RAs

RP presented 29A report as per which both RAs were ineligible to submit resolution under Sec 29A. Accordingly, the Res. Plans of these RAs were not presented to the CoC

28 Apr 2018

2 Apr 2018

25 & 26 Apr 2018

In Second round Res. Plans submitted by Numetal, AM India and Vedanta (“Round 2“)

2 May 2018

Communication was sent to both the Round-I RAs informing them that they were ineligible under Sec 29A of the Code as decided by the CoC

• RP informed RAs their respective ineligibility under Section 29A

• II addendum to the RFP issued inviting EOI qualified applicants to submit fresh Res. Plans as approved by CoC

Appeals filed by Numetal and AM India respectively before NCLAT against the decision of NCLT

CoC issued show cause notice(s) to Round 1 RAs to submit as to how they were eligible to submit Res Plan by 1 May 2018

Sect 29A analysis was conducted.( approx. 2,000+ connected persons)

Feb – Mar 2018

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7 Sep 2018 4 Oct 2018

22 Oct 201825 Oct 201826 Oct 2018

NCLAT order• Upheld the decision of RP on ineligibility of Round 1 RAs• Held Numetal to be eligible under Sec 29A in respect of its

Res. Plan dated 2 Apr 2018• AM India to be ineligible under Sec 29A given that it was in

control of both UGS and KSS (which were NPAs as on ICD)• Further, AM India was given opportunity to make payment of

overdue amounts within 3 days, i.e., by 11 Sep 2018

AM India’s Res. Plan was approved by CoC with a majority of 92.24%by value vide e-voting

RP submitted the Res. Plan as approved by theCoC to the NCLT for its approval

Supreme Court order held both RAs ineligible under Sec 29A(c) in relation to both rounds of Res. Plans as the corporate debtors related to the R1 RAs had not paid off their respective NPAs. SC provided another opportunity to both RAs under Article 142 of the Constitution to pay off their respective NPAs within a period of 2 weeks from Order

19 Oct 2018

10 Sep & 13 Sep 2018

18 Oct 2018

AM India and Numetalchallenged NCLAT order before Supreme Court on the respective dates

20 Oct 2018

AM India presented key features of its Res. Plan dated 2 Apr 2018

AM India informed RP/CoC that it had made the payment of overdue amount in compliance of SC Order

RP invited AM India and Vedanta to present their Res. Plans. AM India was declared as the RA with the highest score (“H1 RA”). CoC sought to further negotiate the terms of the Res. Plan with H1 RA

H1 negotiations with CoC

Plan approved by AA on March 8, 2019 with directions to CoC

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Various Important Work Streams during CIRP

Operations Compliance

Creditors/ Claims

Resolution Plan

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Managing as ‘Going Concern’ – Major Issues

• Immediate challenge was to arrest ramp-down of capacity. Low inventory of raw materials

• Accounts payables increased by Rs 900 crore from March 2016 to July 2017. Accounts payable exceeding 120 days

• Major raw materials such as coke, iron ore, gas, etc purchased on cash basis only. Creditors refused to supply on credit

• Reduced production of value-added products such as galvanised sheets

• Banks also restricted opening of LCs, only with 100% cash margin

• Low morale as salaries were delayed

• Immediate challenge was to stabilise production and have confidence of vendors and customers

• Group companies support in operations

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Managing as Going Concern – Some of Day 1 critical tasks

• Taken control of disputed critical asset – Odhisa Slurry pipeline under Section 18(f)(vi) : very important for viable operations

• Director (Technical), who was factory occupier, had resigned one day prior to admission. Was requested by IRP to continue

• Meeting with major lenders and suspended Board members to know their immediate concerns and issues

• Threat of critical suppliers to stop supply

• Concern of key customers on supply disruption

• Disruption in supplies from group/sister concerns

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1 - Centralized control of bank accounts

2 - Close monitoring of inflows and collections - Focus on liquidity

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- Pre-payment checks/verification

- Prioritization of payments – critical vs. urgent (Want vs. Need)

- Tagging by banks discontinued

4 - Sustenance/Normal capex

5 - Explored Interim Finance

Managing as ‘Going Concern’

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1 - Dissemination of information of initiation of CIRP

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- Explain impact to various stakeholders

- Structured reviews with Executive Management

- Communication with Promoters, Directors, KMPs, Banks, suppliers,customers

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- Roles as per IBC to be clearly communicated in writing

- Make aware of consequences of non-compliance (Sec 19(2)9d) and failure of Resolution Process

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- Moratorium under Section 14 of IBC

- Dealing with Statutory Authorities and coercive action by them

- Claim to be filed by creditors

5 - Authorizations and signatories for various operations

Communication – Key to Success

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Managing as ‘Going Concern’ – Results

• Cash and Carry facility from MSTC and other bulk suppliers of raw materials

• Tagging was deferred by banks and eventually stopped after NCLT order in case of Amtek Auto

• Trust of vendors/customers

• Employees trust and co-operation gained. Employees salary were paid in first week of month against 15-20th day of month pre-IBC period

• Production level reached level of 550 K tonnes. Production stabilised

• Co-operation from sister/group concerns in continuing operations

• Monthly monitoring and business results presented to CoC on monthly basis – what can be measured, can be monitored (Peter Drucker)

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Year-wise Production

1,568

1,425

1,5461,591

1,682 1,666 1,677

1,7581,811

1,735 1,758

73%

66%

72%74%

78% 77% 78%

82%84%

81% 82%

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Stronger operational efficiencies led ESIL to achieve its highest ever production volume

Volume in KT, Asset Utilization (%)

Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Key highlights for quarter ending Dec’19:

•Highest Rolled Steel Volume ever achieved in Dec’19 - 618 K MT

•Nov’19 and Dec’19 sales volume crossed 600 K MT milestone0

Stabilization Phase: Put in place governance and controls Consolidation Phase: Invest in growth

Growth Phase: Rationalize costs, De-risk external dependencies

8 Months 12 Months 9 Months

A B C

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Creditors' Claims – Overview As on March 5, 2019

S. NO. Category of Creditor Amount Claimed (INR in Crore)

Amount Admitted (INR in Crore)

Amount – Not admitted (INR in

Crore)

1 Financial Creditors55,440 49,473 5,967

2Operational Creditors other than Workmen and Employees 27,081 5,074 22,007

3Operational Creditors -only Workmen and Employees 20 18 2

TOTAL (INR in Crore) 82,541 54,565 27,976

Below is a summary of claims received and Admitted

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Major Claims not admitted/ disputed

Sr. No. Particulars

1 Essar Steel Jharkhand Ltd – FC claim of Rs 2,827 crore

2 Essar Steel Jharkhand Ltd – OC claim of Rs 2,498 crore

3 FC claim in respect of Odisha Slurry Pipeline Ltd of Rs 1,671 crore

4 Claim of Rs 5,882 crore from Dakshin Gujarat Vij Co Ltd – under litigation

5 Sales Tax claim of Rs 545 crore under various appellate authorities

6 OC claim of Rs 827 crore from Gujarat Energy Transmission

7 Other disputed claims from GAIL, IOC etc.

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Verification of Claims – Various Relevant Orders 1/3

• ESIL NCLT Order dated March 8, 2019 – Role and duty of RP is to collate the information by verifying the claims and update it in the list of creditors and place it before the CoC for its consideration

• Verification – Completeness of documentation• RP has not been vested with the power of adjudicating the claim such issues

can be dealt with and decide by a competent court/authority. • In case of dispute, RP to disclose the dispute and include the same in

Information Memorandum (ESIL – Orissa Slurry NCLT Order) • Sec 5(7) and 5(20) of IBC – creditors include to whom debt has been legally

assigned • All assignments to be legally reviewed as same will impact constitution of

CoC and amount of claims

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• NCLT order dated March 8, 2019 - Para 8 - Claim not admitted by the Resolution Professional due tonon-payment of requisite stamp duty on underlying document and for non-completing the statutoryformalities for not without furnishing the proof of making payment of requisite stamp duty as per theIndian Stamp act. Hence, such agreement cannot be looked into as evidence nor can it be treated asvalid claim.

• SC Order dated November 15, 2019 - Para 99 - The Resolution professional has rejected the claim ofthe Appellant on the grounds of non-availability of duly stamped agreements in support of their claimsand the failure to furnish proof of making payment of requisite stamp duty as per Indian Stamp Actdespite repeated reminders sent.

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• Various disputed claims by operational creditors (~INR 14,000 crores) were admitted by NCLAT in itsjudgment dated July 4, 2019 and NCLT had asked resolution professional to register these claims.

Supreme Court held (para 102) that the resolution professional was correct in only admitting theclaim at a notional value of INR 1 due to the pendency of disputes with regard to these claims

• Claim filed after approval of resolution plan - Supreme Court (para 98) held that rightly rejected byNCLAT in view of the fact that said claim was filed after the completion of the CIRP period. However,the NCLAT’s judgment inasmuch as it left it open for the Appellant to pursue the matter in terms ofSection 60(6) is set aside

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Litigations against RP

• Letter issued by IBBI to RPs stating that while conducting CIRP, an IP is an officer of the Court and discharges a statutory public function. Further, any hindrance in the working of the CIRP will amount to contempt of court (Ref NCLT Order in Shivam Water, Jan 2019)

• Sec 233- Protection of action taken in good faith

• Code has restricted jurisdiction of the civil courts by Sec 63, 64 and Sec 231

• Reg 39(7) - No proceeding to be initiated against RP for any action of the CD, prior to the insolvency commencement date

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Initial challenge Litigation against RP - 1….

Financial Creditor Claim Related -One of FC, who filed claim with RP and whose claim had been accepted, continued its legal suit in London and got decree against ESIL during CIRP-FC filed claim including interest for CIRP period, which was not in line with IBC -RP filed violation of Sec. 14 moratorium application in NCLT.

-FC challenged the appointment of RP in NCLT submitting that the same was not in accordance of the provisions of the Code. Further, desired to take amount admitted as per decree

-Before NCLT, counsel of FC agreed not to proceed to with execution of the decree during the moratorium period and application was disposed of. -NCLT also did not find any illegality in the appointment of RP

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Initial challenge Litigation against RP - 2….

Payment Related-• PDCs issued by CD as security interest were being encashed by a beneficiary. Recovery or

enforcement of any security interest is prohibited during moratorium period• Sec 17(1)(d) read with Sec 23 of IBC require FI/banks maintaining account of CD to act on

the instructions of RP. • Beneficiary issued Sec. 138 notice to suspended Board and ‘RP’ • NCLT directed that no coercive action to be taken against RP as RP is an Officer of the

Court • Criminal proceedings can not be started against RP for discharging his duties (no

proceeding can be initiated against RP other than as per provisions of Code) • Creditor’s claim also rejected by various authorities

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Two series of Litigations up to Supreme Court

Supreme Court - Round 1• Based on media reports, Numetal, one of RA, filed an application before NCLT in relation to its ineligibility u/r 29A on

20.03.2018. NCLT orders any decision of CoC will be subject to order passed by NCLT • Litigations revolved around eligibility under Sec 29A of RAs, cure of ineligibility, etc. • Supreme Court order dated October 4, 2018 – Interpretation of Sec 29A and law laid down for the first time by this

judgement, SC used its extraordinary power under Article 142 and pay off dues of NPAs by Resolution Applicants. Lifting the corporate veil of RAs, meaning of management and control, reference date for eligibility etc.

Supreme Court - Round 2 • CoC approved plan of ArcelorMittal and subsequently after prolonged hearing, AA approved the plan and made a few

suggestions wrt payments made inter se FCs and OCs• SCB and OCs challenged distribution under plan in NCLAT. NCLAT ruled that all creditors to be treated equally • CoC and major FCs challenged NCLAT order in SCPost approval of Resolution plan by CoC, litigations on distribution of amounts inter se Financial Creditors, between FCs and OCs, Right of CoC in this regard etc. • NCLT approved plan on March 8, 2019, challenged in NCLAT. NCLAT order dated July 4, 2019 • IBC Amendment • Supreme Court judgement dated November 15, 2019 setting out supremacy of CoC and its wisdom as held in ‘K

Sashidhar’

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Section 29 A | Progression and Key Milestones

October 2017 November 2017 June 2018 October

2018January

2019

Disclosure of “connected

persons” under regulation 38(3) of CIRP regulations

Introduction of section 29A by

ordinance

Key changes

introduced to section

29A

Essar Steel judgment –interpreted scope of

section 29A

Swiss Ribbons

judgment –scope of

“related party” under section

29A

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Challenges to the Resolution Process

Challenges & Difficulties faced • Res. Plan being challenged at various stages – Late bids, 29A eligibility, etc• Myriad litigations thereby moving away from resolution and resultant delays in

resolution due to cross-allegations by the rival resolution applicants• SC held that a resolution applicant has no vested right that his resolution plan be

considered by the CoC, in light of which no challenge can be preferred before the NCLT by a Resolution Applicant, at a stage where (a) the Res. Plan has been turned down by the RP for non-compliance of Sec 30(2) of the Code, or (b) a Res. Plan as presented by RP is not approved by CoC. A challenge can be preferred once a Res. Plan is approved by the NCLT, before the NCLAT and thereafter the SC.

Rights of suspended Board of Directors • Board members (comprising promoters also) invited to all CoC meetings• SC in the case of Ruchi Soya held that the scheme of the Code makes it clear that the

directors have a right to participate in every meeting of the COC• Further, as vitally interest parties, they have right to receive copies of the Res Plan

presented to the CoC

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Assuming the CoC were to still reject the first round bids for any reason and another round of bids are to be invited (to maximize value), the CoC is still expected to follow the process set out under Sec 30(4) even in the second round bids, in case any bidder is subject to a disqualification under S.29A(c). If second rounds bids were to be called for, the NCLT’s view is that it should be open for all interested parties

Key findings of NCLT Order dated April 19, 2018

Eligibility Determination Process

In rejecting the first round bids, the CoC has acted on the views of the RP and the CoC has not itself determined the eligibility of the resolution applicants. First round bids and eligibility process remanded back to RP and CoC for independent evaluationAccordingly: (a) RP to present both the resolution plans along with his comments on eligibility for consideration of CoC; and (b) CoCto consider the above for independent evaluation

Second Round Bids

Reiterating that time is of the essence for proceedings under the IBC, the NCLT excluded the period from 20 March 2018 (date of filing of I.A. 98 of 2018) till date of pronouncement of the order (19 April 2018) from the CIRP timeline in respect of ESIL (which would otherwise have expired on 29 April 2018)

CIRP Timelines

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Key findings of NCLT Order April 19, 2018

• Difference in legal opinions among the counsels and more than one views are possible, it can’t be said that there is patently illegality in the conclusion of RP or acted arbitrarily or mala fide in rejecting the resolution plans. Court being AA under IBC is not expected to substitute its views upon the discretion and wisdom of RP.

• RP’ legal firm was of view that negative control over an entity also constituted control for the purpose of testing under Sec 29A of IBC. RP had different view and therefore took an independent opinion of a reputed Sr. Counsel, Mr. Darius Khambata.

• Finally, RP's legal firm also recommended to rely on Sr. Counsel's view.

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Key findings of NCLAT Order dated 7 Sep 2018 (1/3) RP Role

• RP’s decision on ineligibility of Numetal and AM India for first round bid upheld by the NCLAT• CoC’s decision to invite 2nd round bids upheld by the NCLAT• NCLT’s decisions (in its order of 19 April 2018) upheld by the NCLAT except in respect of (a) invitation

of 2nd round bids; and (b) eligibility of Numetal in relation to its 2nd round bid

Bidding Process and TimelinesCoC will, if the overdue amounts in relation to NPA of Uttam Galva and KSS Petron are paid by 11 September 2018, consider the plan submitted by AM India along with other plans (including that of Numetal); and if necessary, may negotiate with the Resolution Applicant(s) (and in the case of AM India, only if AM India pays the overdue amounts in full by 11 September 2018)Time from date of filing of the appeal before the NCLAT (i.e. 26 April 2018) till date of the order (i.e. 7 September 2018) be excluded from computation of the 270-days timeline for the CIRP of ESIL – new 270th day for CIRP process is 10 October 2018

ArcelorMittal challenges NCLAT Order

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• Second bid submitted on 29 March 2018, on which date Numetal’s shareholders were VTB (40%), Indo (34.1%) and TPE (25.9%)

• As on 29 March 2018, since AEL was no longer a shareholder in Numetal and all the remaining shareholders were eligible, NCLAT has held Numetalto be eligible under S. 29A in respect of second round bid

• Numetal’s second round bid to be considered by CoCto ascertain viability, feasibility and financial matrix

Key findings of NCLAT Order dated 7 Sep 2018 (2/3)

Numetal – First Bid

• Section 29A must be interpreted in light of mischief sought to be curtailed and statements and objects to be considered

• Eligibility to be tested against RA, its connected persons and persons it is acting in concert (PAC)

• EU regulations regarding restrictions on VTB (on account of Russia related measures) not considered as ineligibility under S. 29A

• Definition of PAC not in IBC or in SEBI Act – however, defined under SEBI Takeover Regulations, which are deemed to be part of SEBI Act and therefore applicable for determining PAC in the context of S. 29A

• Aurora Enterprises Limited (“AEL”) (controlled by Rewant Ruia) is PAC with Ravi Ruia, promoter of ESIL

• On account of AEL, Numetal not eligible to submit (first) plan in terms of S. 29A

Numetal – Second Bid

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• Ineligibility under Section 29A(c) can only be cured by making payment of overdue amounts along with interest and all other charges – no other manner of cure is possible (including sale of shares of NPA company)

• Deposit of INR 7,000 crores in escrow account is a conditional deposit and not payment as contemplated under proviso to S.29A(c)

• AM India entitled to benefit under S. 30(4) – on the ground that submission of EOI is the first part of Resolution Plan and that AM India submitted its EOI on 11 October 2018 (before S. 29A was introduced)

• AM India given one opportunity to make payment of all overdue amounts, interest and charges relating to non-performing accounts of both UG and KSS Petron by credit the respective accounts by 11 September 2018. If done and the CoC of ESIL is informed, AM India’s second bid eligible to be considered by the CoC

Key findings of NCLAT Order dated 7 Sep 2018 (3/3)

AM India – First Bid

Uttam Galva• AM Netherlands, a connected person of AM India was

promoter of Uttam Galva (UG) since 2009• UG’s account classified as NPA (by certain banks) on

31 March 2016• Since ESIL’s insolvency commenced on 2 August 2018,

AM Netherlands was promoter of UG (an NPA) for a more than 12 months prior to commencement of ESIL’s insolvency - therefore ineligible under Section 29A(c)

KSS Petron• Fraseli (controlled by Mittal Investments) acquired 1/3rd

of KSS Global – on account of which it acquired certain rights in KSS Global and its subsidiaries, including KSS Petron Private Limited (KSS Petron)

• Mittal Investments held to be in control of KSS Petron, whose account is an NPA and which was admitted into insolvency on 1 August 2018

• Accordingly, AM India (part of the AM Group) considered ineligible under S. 29A by RP and CoC

AM India – Second Bid

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Extract from SC order dated October 4, 2018

Purposive interpretation of S. 29ANecessitates the lifting of corporate veil, so as to determine the eligibility of ‘person’ submitting a resolution plan (Para 29) – principle can be applied even to group companies so that one is able to look at the economic entity of the group as a whole (para 34)

Antecedent facts reasonably proximate to the time of submission of resolution plan can always be seen, to determine whether the persons referred to in Section 29A are, in substance, seeking to avoid the consequences of the proviso to sub-clause (c) before submitting a resolution plan (Para 57)

Relevant time for disqualification - at the time of submission of the resolution plan (para 43)

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SC Order Oct 4, 2018 – Key Findings

• Interpretation of ‘persons acting jointly or in concert’ - to be seen whether certain persons have got together and are acting “jointly” in the sense of acting together -no super added element of “joint venture” required (Para 35)

• Interpretation of “management” and “control”“management” refers to the de jure management of a corporate debtor“control”, in Section 29A(c), denotes only positive control, which means that the mere power to block Special Resolutions of a company cannot amount to control -de facto control of actual management or policy decisions (Para 48)

• Cure of ineligibility under Section 29A(c) – this ineligibility can only be removed if the resolution applicant makes payment of all overdue amounts with interest thereon and charges relating to the non-performing asset in question before submission of a resolution plan.” (Para 54)

Dealt with contentious issue of management and control

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SC Order Oct 4, 2018 – Key Findings

• Held ineligible as per Sec. 29 A(c) on account of Uttam Galva

• Both AM India and AM Netherlands (promoter of UG) managed and controlled by LN Mittal and are deemed to be a PAC

• Shares of AM Netherlands in UG were sold at a time reasonably proximate to the date of submission of the Res Plan in order to get out of the ineligibility under Section 29A(c) and its proviso

• Held ineligible as per Sec. 29 A(c) on account of KSS Petron

• Fraseli, a group company of L N Mittal, exercised positive control over KSS Global and in turn KSS Petron

• Sale of shareholding in KSS Global a transaction reasonably proximate as in UG

Eligibility of Numetal

• Numetal held ineligible as per Sec. 29 A (c) for both resolution plans on account of presence of RewantRuia, a person deemed to be PAC with Ravi Ruia, promoter of ESIL

Eligibility of AM India

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Extract from SC order dated October 4, 2018

Para 88

The Resolution Professional, after looking at this affidavit, correctly noted that statements of such a nature would not have been made by a truly independent trustee of a discretionary trust, which demonstrates that the trustee was under the complete control of promoters, This in turn indicates that Prisma Trust is one more smokescreen in the chain of control, which would conceal the fact …….

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Compliance and NCLT Order dated March 8, 2019- Major Highlights

• ArcelorMittal in line with SC Order paid about Rs 7500 crore to become eligible

• CoC considered plan of ArcelorMittal as HI and further negotiated and approved plan with more than 90 percent majority

• LOI issued to ArcelorMittal and it submits PBG of Rs 3950 crore • RP submits plan of ArcelorMittal to NCLT for its approval• NCLT approved the Resolution Plan of ArcelorMittal with certain

suggestions• Distribution to Standard Chartered Bank and Operational Creditors to

be reconsidered

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NCLAT Order dated July 4, 2019 – Major Highlights

• All financial Creditors form one class. Can't be any distinction between secured or unsecured financial Creditors for the purposes of distribution of monies under a resolution plan.

• Amount proposed under a resolution plan should be shared in the same percentage between the FC and OC.

• On extinguishing of all claims, NCLAT held where claims have not been decided on merits, it is open for the parties to raise the issue before the appropriate forum in terms of Sec 60(6) of IBC.

• Distribution of amounts under a resolution plan is not a commercial decision

Major uproar post NCLAT order – led to IBC Amendment which was also challenged in SC and was tagged along with ESIL Resolution Plan proceedings

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Supreme Court Judgment dated November 15, 2019

Landmark ruling by the Supreme Court paves the way for ArcelorMittal to finally acquire debt-laden Essar Steel after almost 2 years of an intense legal tussle.

Disregard of security would have made secured lending unattractive

The ruling brought finality on the insolvency resolution process and strengthens the IBC by defining roles and responsibilities of key stakeholders i.e. Resolution Professional, Resolution Applicant, Committee of Creditors (CoC), Adjudicating Authority (AA).

SBI Chairman stated that Essar Case has settled every issue in IBC process.

Respite to bidders in respect of claims

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Key Principles laid down by SC dated November 15, 2019

-Commercial decision of CoC paramount (P 38), who has to determine 'feasibility & viability' of a plan factoring all aspects (P 40), including manner of distribution (P 89)

-AA has only 'limited judicial review' over CoC decision (P43), to ensure inter alia that stakeholders' interest has been taken care of(P 46)

-Allocating Nil value to OCs basis liquidation value would amount to not balancing interest of all stakeholders (P 46)

-AA can send back plan to CoC only if CoC has not acted within defined parameters, but not basis merits of commercial decision (P 46)

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1 - ArcelorMittal : Interpretation of Sec 29 A

2

- K Sashidhar v. IOB – AA have limited scope to suggest or recommend but can’t make judicial review of CoC’s commercial decision

- AA were to only review fairness and equitability of a plan

3 - Swiss Ribbon v. Union of India – ruled FCs have higher pecking order

4 - Binani Cement – Plan by CoC providing for payment of dues of OCs, CoCreceived much needed credibility

5 - Pioneer Urban Land and Infrastructure Limited vs. Union of India

Landmark Supreme Court Judgments

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-Secured & unsecured creditors need not be treated equally or paid pro rata ((P 54-57) -CoC cannot delegate power of approving a plan, but can create sub-committees for ministerial /administrative work, including negotiation with RA (P 62)

-Plan may provide for extinguishment of subrogation right of guarantor (P 66)

-No new claims can be filed which have not been considered by RP (P 67)

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-In given cases, AA to have authority to extend CIRP process beyond 330 days (P 79)

-Sec 53 priority irrelevant for plan (P 80), but CoC may consider the same (P 92)

-CoC has no fiduciary duty (P 93)

-RP decision to admit disputed claims at a notional value (P 102) upheld

-Sub-committees of CoC • While the CoC can delegate its administrative powers or power of

negotiation with the resolution applicants to a smaller committee, such acts, in the ultimate analysis would be required to be approved and ratified by the CoC

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1 - Multi-disciplinary skills – Banking docs, litigations, contracts, etc.

2- Experience in running sale process, due diligence, etc.

- Documents – Simple, no ambiguity (RFP etc.)

3

- Pro-active, prompt advice/opinion rather than reactive one with focus on reduced litigation

- Regular reviews with team and document written advice

4 - Up to date with various precedents resulting in quicker decision making

5 - Independent /No conflict

Legal Advisors to RP – Very Critical Role

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1 - Objective – Non adversarial, non arbitrariness, transparent

2 - RP as Facilitator

3

- When in doubt, please disclose (Mr N R Narayana Murthy)

- Take professional advice and record/document the same

- Consult and inform CoC, use provisions under IBC to approach AA for direction

4 - Provide opportunity to aggrieved party, follow ‘Principle of Natural Justice’

5 - Reasoned decisions

Resolution Professional – Framework

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Final Distribution to different classes as per Supreme Court Order (As % of claim filed)

Secured FCs 90.95%Secured FC- Standard Chartered Bank 1.72%

Operational Creditors with claim <Rs 1 crore 100%Operational Creditors with claim >Rs 1 crore 20.49%

Workmen 100%

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Outcome for stakeholders

Sr. No. Particulars

1 Production increased from 5.47 MT in 2016-17, 6.18 MT in 2017-18 to 6.78 MT in 2018-19. Highest ever production – 618 KT in Dec 2019

Demonstrated complex operations can be managed successfully by RP and CoC during CIRP

Total income in FY 2019 – Rs 31,974 crore (Rs 26,028 in FY 2018) 2 Amount of Rs 7,500 crore paid by ArcelorMittal to lenders in October 2018 to

cure its ineligibility

3 Realisation of more than Rs 42,500 crore by creditors

4 Most FCs realised 90% of claim and about 100% of principal 5 Realisation more than 35% of total realization under IBC as on Dec 2019

(excl plans which have not been implemented)

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Disclaimer

Presentation is intended for learning process during CIRP and mostly taken from publicly available information including legal proceedings.

Information should not be considered as advice.