The appellate bankruptcy court on Thursday approved ArcelorMittal’s Rs 42,000-crore offer for Essar Steel, rejecting its former promoters’ claim that the Luxembourg-based steelmaker was ineligible to acquire the Indian company. The National Company Law Appellate Tribunal (NCLAT), however, reduced the share of the sale proceeds that financial creditors were hoping to get.
The NCLAT granted almost equal treatment to financial and operational creditors in the proceeds, modifying a resolution plan cleared by the lenders to the company. Creditors have no role in deciding the distribution of funds in a resolution plan, it said.
‘Ruling may Cause Uncertainty’
This means financial creditors would have to take a bigger loss on their loans outstanding than what they had expected.
Legal experts said the ruling, which equates lenders like banks with operational creditors such as raw material suppliers, could cause uncertainty in the distressed assets market. They expect the lenders to challenge the order in the Supreme Court.
After the National Company Law Tribunal approved ArcelorMittal’s resolution plan for Essar Steel, its former promoters, the Ruias, had made a counter offer of Rs 54,389 crore, with a promise to clear all of the admitted claims of creditors at the time. The Ahmedabad bench of the NCLT had rejected Ruias’ plea to consider their offer.
Prashant Ruia, one of the former promoters, approached the NCLAT, claiming that ArcelorMittal was ineligible to bid under the Insolvency and Bankruptcy Code, because its promoter, Lakshmi Mittal, held shares in defaulting companies. The law prohibits defaulting companies and their related parties from bidding for stressed assets unless they have paid their dues.
While rejecting the argument, a two-member NCLAT bench, led by Justice SJ Mukhopadhaya, also said that the personal guarantees given by Prashant Ruia stood paid after the approval of the plan. Experts believe the ruling would negatively impact future resolution plans. “It creates difficulties in all insolvency processes going forward as in most cases, the level of recovery is quite low and the lender look to recover the remaining from promoter guarantors who may have large asset base,” said Shardul Shroff, the executive chairman of law firm Shardul Amarchand Mangaldas. Yogesh Singh, a partner at law firm Tri Legal, said the judgement will hurt the valuation of distressed assets for banks when they try to sell those to asset reconstruction companies. “This judgement will hit right at the heart of the distressed assets market,” he said, adding: “An asset reconstruction company will have to analyse the possible operational creditors when purchasing debt.”
