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How the Ruias delayed an insolvency process from 270 to 720 days

The key reason for the enactment of the Insolvency & Bankruptcy Code in 2016 was so that resolutions could be brought about in a time bound manner. The time limit set was 180 days, and if thought fit by the NCLT, an additional 90 days could be awarded. However, under no circumstances was the maximum time limit of 270 days to be surpassed.

The first lot of defaulters referred under the new act in June of 2017 were popularly called as the dirty dozen – 12 large steel and other infrastructure companies. This enactment was an attempt to change the culture of a country that had become synonymous with a tardy and lethargic pace of debt resolution. However, most large cases are still languishing in the courts or yet to be decided.

A case among these 12 that specifically sticks out like a sore thumb is that of Essar Steel. For a law that was to resolve big ticket, debt infested companies within a time span of 180 days, the Ravi and Shashi Ruia controlled Essar Steel has taken 720 days, with no concrete resolution implemented as yet.

So, what exactly is the reason for this delay?

How can one company circumvent the law this way and play hard ball?

Are the promoters, who, let’s face it, are not exactly role models for being on the right side of law, responsible for delaying the judicial process?

With a total unpaid debt, of an astronomical ₹ 49,000 crores, the insolvency process against Essar Steel began on 27th June 2017. In a rather surprising move, the company challenged the RBI’s decision in the Gujarat High Court. After hearing both sides, the Gujarat High Court dismissed the beleaguered steel maker’s petition on 17th July, and finally on August 2nd 2017, the NCLT admitted Essar Steel for insolvency proceedings under the IBC Code.

After the first round of bidding, two contenders emerged. Billionaire Laxmi Mittal led steel giant Arcelor Mittal, and a Russian backed steel maker from Mauritius named Numetal.

However, both the bidders were disqualified due to technicalities. Section 29A of the Insolvency and Bankruptcy Code specifies a list of persons who are not eligible to bid for other companies. Among them are promoters or their related entities that cannot bid for their own stressed assets and try and acquire it back. Therefore, in Numetal’s case, one of its shareholders holding 25% of the company, had Rewant Ruia, son of one of the promoters, Ravi Ruia, as its ultimate beneficiary, and hence was disqualified.

Arcelor Mittal was declared ineligible to bid as well, under the same section, which disqualifies an applicant to bid if it has an account classified as an NPA for at least one year before the insolvency process begins. Accordingly, by virtue of Arcelor Mittal holding shares in Uttam Galva, another Steel producer, which was classified as an NPA account, the company was declared ineligible.

Several rounds of intense litigation and a makeover of bids later, round two began. This round saw Arcelor Mittal shell out close to ₹ 7,500 crores to clear its outstanding NPA account to become eligible, and witnessed NuMetal change its shareholding to eliminate the company in which Rewant Ruia was a beneficial owner.

A third company came into the mix, another billionaire, Anil Agarwal led Vedanta, which gave a bid of ₹ 35,000 crore. Meanwhile, Arcelor Mittal and NuMetal threw up bids of ₹ 42,000 crores and ₹ 37,000 crores respectively.

After the NCLT approved Arcelor Mittal’s bid in October of 2018, came the biggest surprise of them all. In a final, desperate attempt to hold on to their flagship company, the Ruia’s put out an aggressive ₹ 54,389 crores offer to repay the company’s debt and get back control of their company.

If the promoters had the money, why did they not pay off their debts in the first place?

Why go through all the trouble of insolvency proceedings and then finally reveal your cards?

The game they played was a wait and watch one. They thought by dragging the company to bankruptcy court, they might get away with bidding for their own company at a throwaway price, as evidenced by the backdoor channel they attempted, with the initial bid via NuMetals. It seems to be an obvious attempt at making an unjust profit at the expense of the banks. Further, on seeing that their insolvent company is worth much more than previously thought, as evidenced by the handsome bids received, the Ruias then didn’t want to lose control of their prized asset and made an offer of ₹ 54,389 crore.

Thankfully, the lenders to Essar Steel accepted the bid by Arcelor Mittal and it was finally approved by the NCLT in March of this year.

However, this saga was far from over. Another unit of Essar Steel, Essar Steel Asia, filed a petition on behalf of promoter Prashant Ruia alleging that Laxmi Mittal was disqualified from bidding as he was related to companies that had defaulted on their loans.

Finally, the issue of distribution of the ₹ 42,000 crore to be paid by Arcelor Mittal became an issue. A July 4th order by the appellate tribunal, NCLAT, widely deemed to be quite erroneous in nature, directed that the payment be made on equal terms to financial and operational creditors, thereby treating both at par. When, in fact under Insolvency law, secured financial creditors have the first priority to any proceeds.

The Supreme Court on Monday rightly agreed to expeditiously hear the plea filed by banks against the order of the NCLAT, however, till then the apex court has put a hold on the sale of Essar Steel to Arcelor Mittal.

So, in conclusion, this is where the matter stands, and that is how the country’s longest insolvency case under the new law has played out so far.

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