Essar Steel’s Insolvency: Is Numetal One Up On ArcelorMittal?

Essar Steel finally has eligible suitors! It’s taken over a year, several rounds of litigation and makeover of the bidders for the National Company Law Appellate Tribunal to rule that Numetal and Arcelor Mittal’s second round of bids for Essar Steel can be considered but with a rider. The rider applies to ArcelorMittal whose second bid will be considered only after it clears the overdue payment relating to Uttam Galva and KSS Petron.

In assessing the eligibility of Numetal and ArcelorMittal, has the NCLAT applied different standards? In this week’s edition of BloombergQuint show The Fine Print, AS Chandhiok, senior counsel, said yes and rightly so, but Sanjay Asher, partner at Crawford Bayley, said that Numetal, too, should’ve been held to the same standard as ArcelorMittal in determining its eligibility under Section 29A. This section lays down the ineligibility criteria for resolution applicants- one of them being that promoters and their related parties cannot bid for the stressed asset.

Advantage, Numetal?

When Numetal had first submitted its bid in February this year, one of its shareholders was a trust called Aurora Enterprises Ltd. This entity had Rewant Ruia, son of erstwhile promoter Ravi Ruia, as its ultimate beneficiary. And so, the resolution professional had found Numetal ineligible under Section 29A. In the second round of bids, invited by the creditors' committee, Numetal had submitted a bid but had changed its shareholding to eliminate Aurora Enterprises. This bid has now been found eligible by the NCLAT.

ArcelorMittal, too, attempted to cure the defect in its bid.

It sold its 29 percent stake in Uttam Galva - an account that had been classified as a non-performing asset by banks. Section 29A disqualifies a resolution applicant if it has an account classified as non-performing asset for at least one year before the insolvency process began. ArcelorMittal then sought to declassify itself as a promoter of Uttam Galva, which it successfully did by the second round of bids in March.

But the NCLAT has held that mere selling of shares will not make ArcelorMittal eligible; it must pay the overdue amount on account of Uttam Galva. The appellate tribunal has pointed out that the insolvency code does not prescribe any other mode to become eligible, including selling the shares.

Numetal, too, should've been directed to pay the outstanding dues because it stands on the same footing, Asher said.

But Chandhiok disagreed. He said that the shareholder that was the cause of defect was eliminated by Numetal on the day of submission of the second bid. The intent of Section 29A is to not allow promoters or their related parties to participate in the bid process.

The intent of Section 29A is to prohibit those who have contributed to the defaults and have consequently run the company aground, or are otherwise undesirable, from participating in the insolvency resolution process, he added. Numetal had successfully cured this defect by eliminating the shareholder causing it but in ArcelorMittal’s case, the 'undesirable' person continued to be the resolution applicant.

Bye-Bye Promoter Play?

In ruling the first bid of Numetal as ineligible, the NCLAT has also laid down that promoters will not get a backdoor entry in the resolution process by using complex structures, both the experts pointed out.

The ruling makes it amply clear that resolution applicants cannot have any side agreements with promoters, Asher pointed out. But equally, you can't stop the promoters from acquiring their assets back, say five or 10 years, down the line, he added.

Such an acquisition later on would only become problematic if one can establish that an agreement to do this existed when the corporate debtor was undergoing insolvency, Chandhiok explained. You can unwind the whole thing but it would be difficult to unscramble it, he added.

Watch the full interview here