India – Essar Steel Insolvency Saga.

20 November, 2018

 

INTRODUCTION

 

The Hon’ble Supreme Court of India has passed a landmark judgement on 04 October 2018 in the matter of Arcelor Mittal India Private Limited vs. Satish Kumar Gupta & Others. The bench of the said court comprised of Hon’ble Justice Rohinton Fali Nariman and Hon’ble Justice Indu Malhotra.

 

ABBREVIATIONS

 

 

BACKGROUND

 

The case involved determining the eligibility of resolution applicants, ArcelorMittal India Private Limited (“AMIPL”) and Numetal Limited (“Numetal”), to submit resolution plans for the corporate debtor Essar Steel (“ESIL”) after the introduction of Section 29A into the Code. In this matter, an appeal was filed against the order of the NCLAT wherein it was held that AMIPL was ineligible under section 29A of the Code.

 

NUMETAL’S ELIGIBILITY

 

Numetal was incorporated in Mauritius on 13 October 2017. Two other companies, AHL and AEL, were also incorporated on the same day in Mauritius. Mr. Rewant Ruia, son of Mr. Ravi Ruia (who was the promoter of ESIL) held the entire share capital of AHL, which in turn held the entire shareholding of AEL, which in turn held the entire share capital of Numetal.

 

On 18 October 2017, AEL transferred its shareholding of 26.1% in Numetal to a group company, ECL. This group company is ultimately owned by ‘Virgo Trust’ and ‘Triton Trust’, the beneficiaries of which are companies owned by Mr. Ravi Ruia, and their immediate family members.

 

Subsequently, Mr. Rewant Ruia settled an irrevocable and discretionary trust, the ‘Crescent Trust’, and settled the entire share capital of AHL into the Trust. The beneficiaries of this Trust were general charities, as well as entitles owned by Mr. Shashikant Ruia (brother of Mr. Ravi Ruia, promoter of the ESIL), and entities owned by Mr. Rewant Ruia himself.

 

On 20 November 2017, Mr. Rewant Ruia settled ‘Prisma Trust’, another irrevocable and discretionary trust, whose beneficiaries are “general charities” and one ‘Solis Enterprises Limited’, a company incorporated in Bermuda, whose share capital is held by Mr. Rewant Ruia. Mr. Rewant Ruia was the ultimate natural person who held the beneficial interest in AEL through Prisma Trust and through Solis Enterprises Limited.

 

On 22 November 2017, the trustees of the Prisma Trust acquired 100% of the shareholding of AHL from the trustees of the Crescent Trust. On the same date, ECL transferred its shareholding of 26.1% of the share capital of Numetal to Crinium Bay, an indirect wholly owned subsidiary of VTB Bank, whose shares in turn are held by the Russian Government. AEL also transferred shares representing 13.9% of the share capital of Numetal to Crinium Bay, thus making Crinium Bay’s total holding in Numetal 40%. AEL also transferred shares representing 25.1% of the share capital of Numetal to Indo, and transferred shares representing 9.9% of the share capital of Numetal to TPE.

 

Mr. Rewant Ruia is thus the ultimate beneficiary in the chain of control of the trusts which in turn controlled AEL, holding through AEL 25% of the shareholding of Numetal.

 

On 29 March 2018, AEL transferred its 25% shareholding in Numetal to the other three constituent shareholders, thereby leaving its shareholding in Numetal as ‘Nil’. The second resolution plan, therefore, submitted by Numetal on 02 April 2018, did not have AEL as a constituent of Numetal.

 

The Supreme Court of India held that given the fact that Mr. Rewant Ruia is a person deemed to be acting in concert with his father Mr. Ravi Ruia (who was a promoter of the corporate debtor ESIL), there is no doubt whatsoever that Section 29A(c) would be attracted as on the date of submission of the first resolution plan.

 

The Supreme Court of India further held that on 02 April 2018 at the time of submission of second resolution plan, Section 29A(c) is applicable for two reasons.

 

a)  Firstly, the INR 5 billion earnest money continues to remain deposited by AEL even post 02 April 2018, showing thereby that Mr. Rewant Ruia continues to be present, insofar as Numetal’s second resolution plan is concerned.

 

b)  Secondly, having regard to the reasonably proximate state of affairs before submission of the resolution plan on 02 April 2018, beginning with Numetal’s initial corporate structure, and continuing with the changes made till date, it is evident that, the object of all the transactions that have taken place after Section 29A came into force is undoubtedly to avoid the application of Section 29A(c), including its proviso.

 

Thus, the first or second resolution plan are clearly be hit by Section 29A(c).

 

AMIPL’S ELIGIBILITY

 

The Supreme Court held that it is absolutely clear that Mr. L.N. Mittal, who is the ultimate shareholder of the resolution applicant, AMIPL, is directly the ultimate shareholder of AMNLBV as well, which is an L.N. Mittal Group Company. When the corporate veil of the various companies aforementioned is pierced, both AMIPL and AMNLBV are found to be managed and controlled by Mr. L.N. Mittal, and are therefore persons deemed to be acting in concert.

 

It is clear therefore that the Uttam Galva transaction clearly renders AMIPL ineligible under Section 29A(c) of the Code.

 

As in the case of Uttam Galva, Fraseli divested its shareholding in KSS Petron three days before AMIPL submitted its first resolution plan. On the same day, the directors nominated by Mr. L.N. Mittal, through Fraseli, resigned from the board of KSS Global.

 

As in the case of Uttam Galva, there can be no doubt whatsoever that the sale of Fraseli’s shareholding in KSS Global, together with the resignation of the Mittal directors from the board of directors of KSS Global, is a transaction reasonably proximate to the date of submission of the resolution plan by AMIPL, undertaken with the sole object of avoiding the consequence mentioned in the proviso to Section 29A(c).

 

Thus, the first or second resolution plan are clearly be hit by Section 29A(c). 

 

THE JUDGEMENT

 

The Supreme Court held that as both sets of resolution plans are hit by Section 29A(c), and since the proviso to Section 29A(c) will not apply as the corporate debtors related to AMIPL and Numetal have not paid off their respective NPAs, ordinarily, these appeals would have been disposed of by merely declaring both resolution applicants to be ineligible under Section 29A(c). The NPAs for AMIPL would mean the outstanding dues with respect to KSS Petron and Uttam Galva. The NPAs for Numetal would mean all outstanding debts of ESIL, as well as those of such other corporate debtors of the Ruia group of companies, which were declared as NPAs prior to the aforesaid period of one year, before submitting its resolution plan.

 

However, based on request of the CoC, the Supreme Court, under Article 142 of the Constitution of India, gave one more opportunity to the parties to pay off their corporate debtors’ respective debts in accordance with Section 29A within a period of two weeks from the date of receipt of this judgment.

 

If such payments are made within the aforesaid period, both resolution applicants can resubmit their resolution plans to the CoC, who are then given a period of 8 weeks from this date, to accept, by the requisite majority, the best amongst the plans submitted, including the resolution plan submitted by Vedanta.

 

In the event that no plan is found worthy of acceptance by the requisite majority of the CoC, the corporate debtor, i.e. ESIL, shall go into liquidation.

 

OTHER ASPECTS COVERED IN THE JUDGEMENT

 

Stages at which decisions can be challenged by resolution applicants.

 

a)  If the resolution plan is rejected by the RP or if it does not receive the requisite approval of the CoC the applicant cannot knock at NCLT’s doors.

 

b)  CoC’s rejection of a resolution plan, on the ground that it violates the provisions of any law, including the ground that it is ineligible under Section 29A, can be challenged before the NCLT and NCLAT.

 

c)  A plan approved by the CoC and the NCLT can be challenged before the NCLAT and the Supreme Court

Clarification on Control:

 

Section 29A(c) speaks of a corporate debtor “under the management or control of such person”. The expression “under” would seem to suggest positive or proactive control, as opposed to mere negative or reactive control.

 

CURRENT STATUS

 

Post the Supreme Court judgment, ArcelorMittal vides its official press release dated 17 October 2018, stated that it has approved the payment of INR 74.69 billion to the financial creditors of Uttam Galva and KSS Petron, in order to ensure its eligibility. Further, ArcelorMittal vides its official press release dated 26 October 2018, has stated that

 

a) the CoC of ESIL approved the resolution plan submitted by AMIPL; and

 

(b) under its resolution plan, AMIPL has agreed to offer an upfront of INR 420 billion for clearing the dues of ESIL along with an addition of INR 80 billion for injecting capital into ESIL to support operational movement, increase production levels and deliver enhanced levels of profitability, thereby fixing its total commitment at more than INR 500 billion. 

 

 

For further information, please contact:  

Souvik Ganguly, Partner, Acuity Law

al@acuitylaw.co.in