Insolvency process: Debt-laden Essar Steel's case may drag, say lawyers

With promoters wanting to get back Essar Steel, lawyers expect the insolvency case to drag on. Lenders could outright reject the promoters’ offer even if they want to pay the entire debt, since lawyers say such an offer is invalid.

“Withdrawal of this application is not permissible as the company has come forth for payment after the due process. Expression of interest to the selection of bidder and voting has been completed. Section 12(A) does not allow withdrawal once all processes are over under the Insolvency and Bankruptcy Code (IBC),” Shardul Shroff, executive chairman of law firm Shardul Amarchand Mangaldas, said in his personal capacity and not in consultation with the committee of creditors (CoC). Shroff is a lawyer for the CoC.

Subodh Sadana, Senior Partner at Advaita Legal, agrees: “Since the invitation seeking expression of interest from the bidders by the RP has already been issued under Regulation 36A, it is unlikely that withdrawal of insolvency proceedings would be permitted,” Sadana said.

On amendment of Section 12(A) of the IBC in June 2018, the corporate affairs ministry had said: “Such withdrawal will only be permissible before publication of notice inviting expressions of interest (EoIs). In other words, there can be no withdrawal once the commercial process of EoIs and bids commences.”

Given the fact that the highest bidder has been chosen, the process cannot be reversed, Shroff said. In the last meeting of the CoC, ArcelorMittal was voted the highest bidder.

This is not the first time the promoters of Essar Steel are trying to get the company back. After the company was dragged to the National Company Law Tribunal (NCLT) last year, the promoters had tried to place a bid. However, they were restricted after the government brought in an ordinance inserting Section 29(A) to the IBC that barred all related party, including defaulting promoters, from taking part.

While the Supreme Court noted that Section 12(A) — inserted through an amendment to the IBC earlier this year — allowed an adjudicating authority to withdraw an application with the approval of 90 per cent votes of the CoC, the adjudicating authority is NCLT.

Lenders too are sceptical of Essar Steel’s offer said that since the current IBC process is almost complete (with 92 per cent of the votes in favour of ArcelorMittal’s offer), the appropriate legal forum for Ruias would be the National Company Law Tribunal (NCLT). Also, they will need to show evidence of money (bank guarantee, and a special arrangement where money is set aside for the offer), three senior bank executives said.

Nilesh Sharma, senior partner at Dhir & Dhir Associates, however, said that the legal remedy for the firm was to move Supreme Court. “The apex court can use Article 142 of the Constitution to provide relief, as it did in the case Lokhandwala Kataria vs Nisus Finance and Investment Manager,” Sharma said. The Article 142 states that the Supreme Court may pass such order or decree as is necessary in doing “complete justice”.

However, in another instance, the Supreme Court did not favour out-of-court settlement. Binani Industries had filed a petition in the apex court to end insolvency proceedings against its subsidiary Binani Cements.

The court had ordered that insolvency law will take precedence.

“While the Ruias can take a view that their company was admitted under the CIRP before the June amendment to the IBC, it is still not automatic, as you will still have to get the court’s approval. Further, given that the matter has gone up to the Supreme Court (SC) it is unlikely that other bidders like ArcelorMittal will not contest Ruias’ offer,” said the second person cited above.