‘No Scope For Essar Steel To Repay Its Debts For 25 Years,’ Says NCLT
Why Essar Steel failed in stalling insolvency proceedings against the company.
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In admitting the insolvency cases against Essar Steel Ltd., the National Company Law Tribunal rejected the company’s argument that the insolvency process would hurt its debt restructuring efforts.
The Ahmedabad bench of the NCLT admitted the petitions filed by Standard Chartered Bank and State Bank of India Ltd., placed the company under moratorium and appointed an interim resolution professional.
In response to Essar Steel’s argument that the insolvency process will disrupt its debt restructuring effort, the NCLT noted that even though the restructuring effort commenced in 2014 it had not yet been finalised.
...the fact remains that except showing a little progress in the last financial year, there appears to be no scope for Essar to repay its debt for 25 years or in a span of 25 years. Therefore the Debt Restructuring Process, which is going on for the last two years, may not be a factor not to enter into Insolvency Resolution Process.NCLT Order
The tribunal also pointed out that the debt restructuring plan can be submitted and chosen as a resolution plan under the insolvency process. Thus rejecting Essar Steel’s argument that insolvency would put to waste efforts undertaken to arrive at a debt restructuring scheme.
The company’s argument that its operations would suffer if control passed to an interim resolution professional were also not accepted by the tribunal.
If insolvency resolution process is commenced by appointing interim resolution professional, no doubt the board of directors would be suspended. That does not mean the entire machinery of the company is suspended. Even after appointment of the IRP all the employees of the company, top to bottom, would continue to function under the control of the IRP, instead of the board of directors.NCLT Order
The NCLT also rejected the company’s argument that an interim resolution professional ought not to be appointed at the same time as admitting the petitions but instead at a later stage. In doing so the order records Essar Steel’s lawyer as suggesting that the company may appeal the admission of the petitions and hence defering the appointment of the resolution professional would protect the interests of the company.
...there is no need to defer the appointment of interim resolution professional only to give an opportunity to the corporate debtor to agitate the decision of this adjudicating authority twice in two appealsNCLT Order
The order also details why the tribunal selected as interim resolution professional Satish Kumar Gupta the candidate proposed by SBI and over the one proposed by Standard Shartered Bank. Despite the latter being the first to file the insolvency petition.
...a lot of exercise has been undertaken by SBI before recommending the name of Mr. Satish Kumar Gupta. Further the Joint Lenders Forum authorised SBI to initiate the insolvency resolution process. The debts due to JLF are more in value than the debt due to Standard Chartered Bank.NCLT Order
With this, the NCLT has kickstarted the process in which the next step will be for the IRP to invite claims, the setting up of the committee of creditors and formulation or selection of a resolution plan.
The Insolvency and Bankruptcy Code permits 270 days for these steps, with the provision of a 90 day extension. If within that period no resolution plan is approved by the committee of creditors the company heads to liquidation.
As per the NCLT order Essar Steel owes Standard Charterd $538 million and SBI Rs 14,830 crore.
The company had earlier also challenged and lost its inclusion on RBI’s list of 12 companies to be referred to insolvency.
The Reserve Bank of India, through an internal advisory committee, has shortlisted 12 large stressed accounts, including Ruia family-led Essar Steel, for the insolvency process. These cases have been selected on the basis of a common criterion where the outstanding bank exposure was higher than Rs 5,000 crore and at least 60 percent of the exposure had turned non-performing as on March 31, 2016.
