Moneycontrol
Last Updated : Mar 14, 2019 01:17 PM IST | Source: Moneycontrol.com

Comment | NCLT’s ArcelorMittal-Essar Steel order: critical loose ends remain

NCLT order on ArcelorMittal’s resolution plan for Essar Steel highlights dependence on Essar Group’s infrastructure and seeks continued access. Also cites Wednesbury Principle to ask for a more equitable distribution to all creditors.

Ravi Ananthanarayanan @ravi_ananth

The long awaited written order approving ArcelorMittal’s resolution plan for Essar Steel is available now.

Key highlights:

The NCLT has approved the ArcelorMittal resolution plan but it's subject to observations and conditions.

Essar Steel’s dependence on ancillary infrastructure that belongs to the Essar group has been raised as part of the resolution plan. The resolution professional had sought directives from the NCLT to ensure continuance of these arrangements and also directions to statutory authorities to ensure it gets all necessary approvals and exemption from levies to run the plant. The NCLT has not stepped into areas that it considers in the domain of other laws or statutory authorities. This leaves a few crucial loose ends for ArcelorMittal to tie up.​

Earlier, it was assumed that financial creditors were getting back 86% of their outstanding loans. But they are actually getting back 92%, based on the committee of creditors’ (CoC) distribution schedule.

The order makes a case for a more equitable distribution of proceeds to financial creditors and operational financial creditors, in the ratio of 85:15. Note that this is in the form of an advisory from the NCLT and is not an order.

Here’s a brief (well, not so brief!) look into the key aspects of the 153-page NCLT order.

Why banks get 92% and not 86%: Standard Chartered Bank’s contention is that it is not getting its rightful dues. While total financial creditors’ claims amounted to Rs49046crore, its portion was Rs3487crore. But Standard Chartered Bank’s share under the resolution plan is only Rs61crore, with Rs3426crore denied. It asked for an equitable distribution among the financial creditors.

Therefore, Rs42000crore less Rs61crore or Rs41939crore is being distributed to the remaining financial creditors whose claims amount to Rs45559crore. That is a 92.1% claim acceptance.

The Wednesbury principle: The NCLT order raises the Wednesbury principle while dealing with Standard Chartered’s case, where it was getting back only 1.7% of its claim, despite being a financial creditor, while others were getting 92%. It has prayed for this ratio to change to 86% for all secured financial creditors.

The NCLT order cites two Supreme Courts which cited the Wednesbury Principle of unreasonableness and doctrine of proportionality. Here’s a partial quote from the SC order.’Normally, a Court should not interfere with an Administrative decision unless it is illogical or suffer from procedural impropriety or was shocking to the conscience of the Court in the sense that it was in defiance of logic or moral standards (Wednesbury Principle).’

The NCLT then says it will not review the commercial decision of the Committee of Creditors but make some observations and suggestions, following the Wednesbury Principle.

Statutory requirements and exemptions: The resolution professional has sought reliefs on issues under the law on stamp duty and income tax. It has also sought exemptions on taxes, levies, transfer premiums and so in, in connection with the resolution plan. It has also sought directions that Essar Steel should get all necessary government approvals such as environmental approvals, and for the crucial gas procurement/contracts, the relevant entities should engage with ArcelorMittal for a viable solution for long–term gas procurement contracts. It has sought that Essar Steel should be given uninterrupted supply of essential services and goods during the period between the plan approval date and the effective date.

Dependency on the Essar Group: The resolution plan states that the Essar Steel operation is dependent on three power companies of the Essar Group for uninterrupted supply of power and on another group company for access to power transmission infrastructure. It seeks continuation of these supplies on the same terms as at present. Similarly, it has asked for current terms to continue for port access at Hazira and for cargo services at Paradip and Vizag. These are critical requirements for the steel plant.

The resolution plan itself: ArcelorMittal will pay Rs42000crore as upfront payment. It will invest Rs8000crore as fresh equity.  The Committee of Creditors has decided the distribution plan. This is what it looks like. Rs17.4crore will be paid to the unsecured financial creditors. It will also pay Rs196crore to trade and government creditors and Rs18crore to workmen. The rest will go to the financial creditors. ArcelorMittal will acquire 100% of the equity capital of the existing shareholders of Essar Steel and extinguish all shareholding (equity and preference).

Operational creditors: The NCLT has observed that while the operational creditors were owed Rs4700crore, only those with debt below Rs1crore are being paid in aggregate Rs196crore. Here, it observes that if the CoC had ‘adopted some other reasonable and fair formula’ then the maximum debt of all stakeholders, including financial and operational creditors, would be paid off. It again cites the Wednesbury Principle in support. It then reiterates that Standard Chartered should be given equal footing with other financial creditors, with all of them getting 85% of their claims.

The remaining 15% or Rs6300crore, it has advised, may be distributed among other operational creditors and other stakeholders. Thus, it has said that those with Rs1crore and above should be paid such that they get back at least 50% of their principal dues. The NCLT order then says, ‘If such suggestion is accepted and followed, then we find no infirmity in the Resolution Plan as it will achieve the true spirit of law compliant under Section 30(2) of the I&B Code.’

In conclusion: The NCLT has approved the resolution plan submitted by ArcelorMittal subject to the observations and conditions. It has not agreed to the reliefs and concessions sought from the NCLT by ArcelorMittal, such as directions to authorities and external stakeholders. It has said that the law gives the resolution applicant one year’s time to obtain any approvals required under any law.

Thus, clarity on issues such as statutory approvals or levies in relation to the transfer will come only later. The dependence on the Essar Group’s infrastructure to run the steel plant is also an issue, and the NCLT order does not contain any specific directions on this aspect. Whether ArcelorMittal is able to ensure continuity in these commercial arrangements with the Essar Group will be a key issue in determining the success of the steel plant operations once ArcelorMittal takes over.

With the order now available, the parties looking to appeal will proceed with their cases in the NCLAT.
First Published on Mar 14, 2019 01:04 pm
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