Arcelormittal’s Resolution Plan For Essar Steel, A Creditor Files Recall Application ; NCLT Ahmedabad Issues Notice

The National Company Law Tribunal (“NCLT”), Ahmedabad Bench, comprising of Shri Shammi Khan (Judicial Member) and Dr. Velamur G Venkata Chalapathy (Technical Member), has issued notice in an application seeking recall of the order dated 08.03.2019 whereby the resolution plan of ArcelorMittal India Pvt. Ltd. was approved for Essar Steels India Ltd. by the NCLT.

The Applicants are creditors of Essar Steels India Ltd., who have alleged that the plan approval order was obtained by casting fraud upon the NCLT by the Resolution Professional, ArcelorMittal India Pvt. Ltd. and their concerned legal team.

Background Facts

On 02.08.2017, Essar Steels India Ltd. (“Corporate Debtor/ESIL”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT. Mr. Satish Kumar Gupta was appointed as the Interim Resolution Professional and later confirmed as the Resolution Professional.

ArcelorMittal India Pvt. Ltd. (“Successful Resolution Applicant/SRA”) submitted a Resolution Plan for ESIL which was approved by the Committee of Creditors with majority votes. On 08.03.2019, the NCLT approved the resolution plan and the same stood implemented thereafter.

M/s Palco Recycle Industries Ltd. is an Operational Creditor of ESIL and M/s Sayam Shares and Securities Pvt. Ltd. is the assignee of part of actionable claim from certain Operational Creditor of ESIL (hereinafter collectively, “Applicants”). On 27.10.2023, the Applicants filed an interlocutory application before NCLT seeking recall of the order dated 08.03.2019 whereby the resolution plan submitted by SRA for ESIL was approved by NCLT.

Contentions Of Applicants

The Applicants contended that the Order dated 08.03.2019 was obtained by the Resolution Professional, SRA and the related legal team by casting fraud upon the NCLT. Also, the order was passed without jurisdiction as the Resolution Plan was incompliant of the provisions of IBC and hence the order is a nullity.

ESIL owned a Slurry Pipeline (“Pipeline”), admeasuring 253 kms, of Rs. 4,000 Crores. In 2015, ESIL sold the Pipeline to Odisha Slurry Pipeline Infrastructure Ltd (“OSPIL”). A Cancellation Deed dated 24.06.2016 was executed between ESIL and OSPIL to revert the ownership of pipeline to ESIL with effect from 30.06.2016, alongwith the OSPIL debt of around Rs. 2,450 Crores.

Further, a Title Suit was pending before the Civil Court, Sealdah since 21.11.2016 in respect to the dispute relating to the ownership of the Pipeline.

During the CIRP, the Resolution Professional of ESIL contended that the pipeline ownership had reverted to it.

However, in November 2023, the NCLT found that the claim is bogus since the OSPIL debt to match the asset had not gone to ESIL. This was in light of its earlier order dated 07.02.2018 passed by it while dismissing IA 419 of 2017 filed by the Resolution Professional, in which, NCLT had held that "Therefore, the pipeline is the property of Respondent No. 1", meaning, OSPIL, which was in view of its observation in the same para to the effect that "the applicant (Essar Steel) cannot claim ownership of the pipeline on the basis of Cancellation Deed which appears to be ineffective and it is without approval of all Lenders as required by the loan agreements and the finance documents". Further, the NCLT held that till the time the Title Suit pending before Civil Court, Sealdah is decided, the Parties would proceed on the premise that the Pipeline was an asset of OSPIL and not ESIL. However, ESIL may continue to use the Pipeline against payment of RTU charges to OSPIL of around Rs. 600-720 Crores per year.

The Applicants have alleged that the Resolution Professional in connivance with CoC, deliberately disobeyed the NCLT order dated 07.02.2018 by not paying RTU charges to OSPIL. The non-payment of RTU charges pushed OSPIL into insolvency in May 2019, since it did not have any other source of income.

Apart from the Pipeline of Rs. 4,000 Crores, OSPIL possessed insignificant assets such as tables, chairs, computers etc. worth Rs. 19.4 Lakhs. ArcelorMittal India Pvt. Ltd. (SRA) also submitted a resolution plan for OSPIL. Upon approval of the SRA’s resolution plan by NCLT, the SRA paid Rs. 2,453 Crores on 08.07.2020 to acquire OSPIL, which indicates that the SRA was aware that the Pipeline is an asset of OSPIL.

Consequently, the non-payment of RTU charges of Rs. 3,000 crores (approx.) to OSPIL by ESIL resulted in overstated profits or EBTIDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of ESIL during its CIRP, which was entirely appropriated by its lenders.

The Applicants have further alleged that the CoC in connivance with the Resolution Professional had ensured that OSPIL is admitted into insolvency in order to be acquired by the SRA. The Lenders of Corporate Debtor also benefitted from windfall by the overstated EBITDA of ESIL, resulting from under-statement of the CIRP costs to the extent of the RTU Charges payable by Corporate Debtor to OSPIL.

NCLT Verdict

In a hearing held on 01.11.2023, the NCLT has issued notice to the Respondents to enter appearance and file their objection/reply, if any.

The issue of maintainability of the application is yet to be adjudicated. The next date of hearing is 08.12.2023.

Case Title: State Bank of India v Essar Steels Ltd

Case No.: CP(IB) 40 of 2017

Counsel for Applicant: Mr. Deepak Khosla, Advocate.

Counsel for Respondent: Mr. Mihir Thakore, Senior Advocate a/w Ms. Ruhi Singh, Advocate for Respondent no. 6.

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