What is the Essar Steel Insolvency case?

A recent landmark judgement by the Supreme Court facilitated the take-over of Essar Steel by Arcelor Mittal. This article explains all about the Essar Steel Insolvency case.

The story so far: In the year 2016, India passed the Insolvency and Bankruptcy Code to deal with insolvency and bankruptcy in India.

The National Company Law Tribunal or NCLT was appointed as the adjudicating authority.

[Read: Insolvency and Bankruptcy Code- Explained]

In the year 2017, the RBI directed the banks to refer 12 large corporate borrowers that had defaulted on their loans to NCLT

Essar Steel was one of the large borrowers that owed Rs.54557 crores to its creditors- financial creditors and operational creditors combined. It could not pay the amount and so the banks (SBI and Standard Chartered Bank) filed insolvency petitions against the company to recover the amount.

Essar Steel was owned by Ruia brothers then.

[The financial creditors of Essar Steel were public sector banks who provided loans. The operational creditors were companies like Dakshin Gujarat, Gujarat Energy, Bharat Petroleum, Indian Oil, GAIL, ONGC, NTPC etc who provided raw materials and were not paid.]

Open bids were invited from interested parties to buy the firm.

In October 2018, after a prolonged legal battle, Arcelor Mittal won the bid with an offer of Rs.42000 crores. The Committee of creditors (which consists of the banks) approved the bid.

In March 2019, NCLT also approved the bid. In July 2019, NCLT held that financial creditors will be treated on par with operational creditors and the proceeds of Rs 42000 would be divided proportionately.

The financial creditors (banks) were hoping to recover 89.8% of their dues. NCLT’s order brought this down to 60.7% on par with the operational creditors. 

The banks challenged the decision of NCLT in the Supreme Court.

The Supreme Court held that the financial creditors will be given precedence over the operational creditors. Also, the resolution of Essar Steel will proceed as per the resolution plan approved by the Committee of creditors in 2018. The Committee will decide how to distribute the proceeds. The NCLT cannot make changes in the plan.

The Supreme Court’s verdict will see banks recover almost 90 % of their dues.

To conclude, this is a significant judgement that will bolster the effectiveness of Insolvency and Bankruptcy Code. It will expedite the resolution of stressed assets (of the bankrupt companies), by reducing conflict between the financial creditors and the operational creditors.

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You may also read– Insolvency and Bankruptcy Code- Explained