The resolution of Essar Steel India Limited (ESIL), the largest of the 12 accounts of the first list referred to insolvency under the Insolvency and Bankruptcy Code (IBC) by the Reserve Bank of India (RBI) in June 2017, is significant. It is the single largest resolution under IBC in terms of quantum and percentage of amounts realised by creditors, largest M&A transaction of the year and largest FDI for the year having attracted FDI from ArcelorMittal, the largest steel producer in the world. Realisation from the resolution of ESIL for various creditors including banks is more than Rs 42,000 crore.
During the course of resolution of ESIL, IBC as a resolution mechanism for stressed assets has been comprehensively tested in a large and complex account of ESIL with two rounds of litigations going right up to the Supreme Court and establishes the credibility, effectiveness and transparency of the resolution process under IBC. This shall enhance the confidence of various stakeholders and international investors of distressed debt and assets in the IBC process.
Various precedents have been established during the resolution process such as successful resolution applicant starting on a clean slate as per the Supreme Court judgment dated November 15, 2019. In addition, recent IBC (Second Amendment) Bill barring attachment/ring-fencing of assets of corporate debtors for prior offences will make stressed assets more attractive and encourage resolution applicants to bid aggressively for these assets and shall result in improved realisation for various stakeholders.
Major challenges faced during resolution
The challenges faced during CIRP included managing various stakeholders for keeping unit as going concern with maximisation of value, improving operations and litigations in different forums.
During the early period of CIRP, major challenge was stabilisation of the operations as operational creditor withdrew credit limits on initiation of insolvency and thereafter ramping up of production. Existing cash and carry limits being provided by MSTC and a few other suppliers were extremely useful in achieving above objectives as same avoided opening of LCs with 100 percent margin. Moreover, post-NCLT judgment precedent on tagging by banks, accruals from operations were also ploughed for enhancing operations to take advantage of buoyant steel market. As a result, average production per month increased from an average of 460,000 tonnes in FY 2017 to 600,000 tonnes subsequently with constructive support of the Committee of Creditors (CoC) and executive management of ESIL.
Initially, there was uncertainty whether operations could be carried on an unhindered basis as quite a few critical services to ESIL were being provided by related parties. These issues were resolved with cooperation of all stakeholders. Operations of Odisha slurry pipeline, a disputed asset, which was extremely critical for the operations of ESIL was taken control of from day one by RP as provided under Section 18(f)(vi) of IBC for unhindered operations of ESIL.
SBI and other banks’ continued proactive support to the operations of the company also enormously contributed to overcome above challenge and in that sense, CoC truly exercised its ‘Creditors-in-Control’ position with commercial considerations to maximise value of ESIL.
Overcoming above challenge was most critical to demonstrate and provide visibility to the potential Resolution Applicants (RAs) that ESIL plant was capable of being operational at higher levels and thereby enhancing its valuation and resultant bid amounts offered by the potential Resolution Applicants.
During the due diligence process by the RAs, it was ensured that all possible available information which a Resolution Applicant require was made available in the most transparent manner. All current and updated information was also shared with them as also the latest techno-feasibility viability report available with the lenders. Thousands of queries of RAs with respect to operations, technical capabilities of the plants, claims and liabilities, litigations, etc. were responded to satisfactorily with the co-operation of executive management which significantly enhanced confidence of the RAs.
Total claims of about Rs 82,000 crore were filed with the Resolution Professional by financial and operational creditors of ESIL. Based on documents perused by RP, claims of about Rs 54,500 crore were admitted, the balance being disputed amounts or not substantiated by proper legal documents. Various appeals were filed by creditors and were litigated right up to the Supreme Court which upheld the major decisions taken by RP.
Performance during CIRP
As mentioned earlier, though various constraints were faced in operations, Essar Steel achieved its highest-ever production and EBITDA during CIRP period with the co-operation of CoC and key personnel and employees of ESIL. ESIL had achieved rolled steel production of 5.47 million tonnes in FY2017 which increased to 6.78 million tonnes in FY2019 thereby benefitting all stakeholders including employees.
Promoters and management co-operation during CIRP
Though the promoters/related entities/Numetal pursued litigations on their eligibility to bid, however, operations of the company was run independent of promoters as per provisions of IBC with the support of CoC. As operations of ESIL were ramped up significantly, associate companies of the promoter group, engaged in power, port, shipping business, etc. also benefited significantly from timely and enhanced operational payments to the them from an increase in volume. The payments to all related parties providing various services to ESIL were checked by an independent team and approved in consultation with CoC as per IBC. Lenders of ESIL led by SBI already had mechanism of ‘Trust and Retention Account’ for monitoring cashflow prior to initiation of insolvency, which was being complied to by the promoters and management of ESIL.
As regards executive management and employees of ESIL, it was ensured that employees were paid on time and without any delay and they also get benefit of enhanced production of ESIL. It ensured management and employees fully co-operated with the insolvency process under IBC, rose to the occasion and delivered improved performance with checks and balances.
The decision on Section 29A eligibility test was the most difficult and complex decision which as RP had to be taken and confirmed to CoC. Section 29A, being new clause at that point of time, was being interpreted for the first time and finding both RAs ineligible was indeed a testing time. Various challenges with respect to eligibility under Sec 29A was a matter of protracted litigation and was resolved with the Supreme Court judgment dated October 4, 2018 which upheld the above decision of ineligibility of both Resolution Applicants. In the process of becoming eligible to bid for ESIL, banking system also realised about Rs 7,500 crore towards clearance of dues of two NPA entities.
Subsequently, post-approval to resolution plan by CoC in October 2018, multiple legal challenges were faced in terms of distribution to Resolution Amounts to inter se financial creditors and operational creditors etc. Such being legal issues were finally settled by the apex court in its judgment dated November 15, 2019.
My role as an RP
RP is one who leads the management team during CIRP process since board of the company is suspended on the commencement of insolvency, facilitates resolution process and acts as chairperson and guide to CoC for its decision making. The role of RP is very critical for a company with large and complex operations with decision making relating to operations, claims, resolution process etc. and thereby achieving a successful resolution. RP is one who has to face litigations in various forums, sometimes 30-40 items listed against RP.
RP’s role for the pursuit of value maximisation and Resolution Plan is very intense and requires dedicated attention. It inter alia requires multi-disciplinary financial and legal knowledge and its applications, superior inter-personal and conflict management skills. I compliment RPs who are managing multiple accounts with operations at multiple locations across different industries for their abilities.
With Graduate Insolvency Programme initiated by IBBI, it is expected that dedicated professionals with focus on insolvency with multi-disciplinary skills will be available which will also reduce the cost of insolvency proceedings.
Other interesting points
During CIRP of ESIL, claims aggregating about Rs 8,600 crore, i.e. more than 17 percent of financial creditors were traded and acquired by domestic and international investors.
Satish Gupta is the insolvency resolution professional for Essar Steel.