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Essar Steel Supreme Court Verdict – A Big Relief for Banks

Yesterday’s decision from the Supreme Court is a big relief for creditors who were wandering from the last 2 years, first, in NCLT and then in, Supreme court, to get their dues from Essar Steel.

Essar Steel is an integrated steel producer with an annual capacity of 10 million tonnes with a strong presence in intensive steel consuming markets of Asia and North America. However, It has been for long, not been able to pay interest on loans taken from banks. Therefore, in 2017, the banks such as SBI, Canara, ICICI, Punjab National Bank and Standard Chartered had knocked on the door of NCLT to get their money back.

Dues of Banks:

(i) State Bank of India = 13220 cr

(ii) Canara Bank = 3798 cr

(iii) Punjab National Bank = 2936 Cr

(iv) Edelweiss ARC = 8266 Cr

(v) ICICI Bank = 2294 cr

During the last two years, the Essar Steel case has seen lots of hiccups. Even after giving a 54000 cr resolution plan by Arcelor Mittal, Ruias the original promoters tried to delay the case by diverting the attention of NCLT court when they claimed to provide a better resolution plan and wants to get back the control of the company. However, NCLT rejects plea challenging Essar Steel sale to ArcelorMittal by Ruis in March 2019

The NCLAT, while approving ArcelorMittal’s bid, was unhappy with the payout given to operational creditors as per the decision given by the Committee of Creditors. Operational creditors to the stressed steel have admitted claims of ₹4,976 crores against which they will receive only ₹1,200 crores under the current resolution plan, while Standard Chartered Bank, one of the formal lenders, said it has claims of ₹3,487 crores against which it will receive ₹60.71 crores. The rest of the RS 42,000 crore would go to the secured lenders.”

Operational Creditors Vs Finacial Creditors?

“Operational Creditors”-  who provide goods or services including employment to the company. A raw material supplier is an example of the operational creditor.

Financial Creditors“- means who have given loans to the company to run its operations or for expansion. The bank is an example of the financial creditor.

So accordingly, the NCLAT finally on July 5 gave judgment, that operational creditors should be treated on a par with financial creditors for distribution of funds from ArcelorMittal’s bid in the Essar Steel insolvency case. The appellate tribunal had ordered an equal distribution of funds among all classes of creditors, with financial and operational lenders having claims above ₹1 crore to recover 60.7% of their total dues. For financial creditors, it was a sharp haircut compared to 89.8% as per the CoC’s revised funds distribution plan.

This above judgment was against the rule which says the first right on funds are of Secured creditors, then Unsecured creditors and finally to Operational creditors.

The financial creditors then went to Supreme Court, and finally, the case has been settled wherein, it has said that “

“The Supreme Court has set aside the NCLAT judgment in Essar Steel case paving the way for distribution of claims as decided by the Committee of Creditors. The SC bench said the adjudicating authority cannot interfere with the commercial decision taken by the CoC and they can at most ask the committee to re-examine the resolution plan”.

So, all have been said with regard to Financial and Operational creditors, but what about shareholders’ fate?

As per the resolution plan, the Arcelor Mittal will infuse Rs.8000 cr in the company for running its operation and make it profitable again. The company is already delisted from the stock exchange and we feel that there is no chance of listing it again. The reason being, the listing requires a lot of compliances and moreover, the company doesn’t need funds as of now, the primary reason for knocking the door of exchanges.

So existing shareholders can buy/sell their shares in the unlisted market, as we feel the demand will come once the company becomes profitable. However, the picture will be clearer in the coming time and we will keep updating the same here.

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