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Current Affairs

Essar steel insolvency case

Date: 16 November 2019 Tags: Public Finance

Issue

The supreme court has paved way for ArcelorMittal to enter Indian market with its approval for sale of Essar steel to ArcelorMittal.

 

Background

Essar Steel owes Rs 54,547 crore to its creditors , financial creditors and operational creditors combined. The company had been put on the block under IBC to recover the unpaid dues.
 

Details

  • The Ahmedabad-bench of National Company Law Tribunal (NCLT) had okayed the bid submitted by ArcelorMittal, led by steel tycoon Lakshmi Mittal, for the takeover of Essar Steel.
    A consortium of banks led by the SBI had moved the Supreme Court against a National Company Law Appellate Tribunal (NCLAT) order in the case.
    The NCLAT had held that Essar Steel's operational creditors be treated on par with financial creditors when settling the claims.

  • Essar Steel's Committee of Creditors (CoC) had sought the quashing of NCLAT's order that approved the Rs 42,000-crore bid for the debt-laden firm by ArcelorMittal.

  • This was to be divided between the financial creditors who are owed Rs 30,030 crore and the operational creditors who are owed Rs 11,969 crore.
    The operational creditors had opposed the bid on the basis that they were getting notional payment, while 92.5 per cent of the financial creditors' dues were being paid.

  • The financial creditors, who have a secured , are against the NCLAT's equal status order because the IBC framework does not envisage such a parity between the two categories.

  • The operational creditors are expected to be paid only after all secured creditors have been paid off.

    Insolvency and Bankruptcy Code

  • The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.

  • The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.

  • The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

Procedure for insolvency

  • Initiation:

  • When a default occurs, the resolution process may be initiated by the debtor or creditor.

  • The insolvency professional administers the process.  The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. 

  • This process lasts for 180 days and any legal action against the debtor is prohibited during this period.

  • Decision to resolve insolvency:

  • A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. 

  • They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them. 

  • If a decision is not taken in 180 days, the debtor’s assets go into liquidation.

  • Liquidation:

  • If the debtor goes into liquidation, an insolvency professional administers the liquidation process.

  • Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.

Financial creditors

The financial creditors are basically entities (lenders like banks) that have provided funds to the corporate. Their relationship with the entity is a pure financial contract, such as a loan or debt security.

 

Operational creditors
The entities that have provided inputs and other materials and services and to whom the defaulted corporate owes a debt are called as operational creditors.