Essar Steel – a Landmark Case under I&B Code

Essar Steel is a fully integrated flat carbon steel manufacturer – from iron ore to ready-to-market products – with a current capacity of 10 million tons per annum (MTPA).[1] Presently, Essar Steel is owned and controlled by Arcelor Mittal. This insolvency proceeding of Essar Steel is a long journey of about two years with many twists and turns.

It all started when Essar group decided to expand its plant in Hazira, which flopped due to certain delays in environmental approvals and the non-availability of certain resources. The promoters of the company, in 2016, decided to sell it. While the hunt of potential buyers was on, RBI concluded its review on asset quality and asked banks to provide a lists of NPAs. In June of 2017, banks received lists of 12 NPAs, of which one was Essar Steel, from the RBI to commence insolvency proceedings under the then newly enforced I&B Code, 2016.

NCLT Proceedings

On June 27, 2017 insolvency proceedings began in NCLT, Ahmedabad. On July 4, 2017 Essar Steel challenged the decision of RBI in Gujarat HC and filed a petition which was ultimately dismissed.

On August 2, 2017 Essar Steel admitted to insolvency proceedings and appointed Satish Kumar Gupta as Resolution Professional. On October 2, 2017 expression of interest was invited u/s Section 25(2)(h) I&B Code for company by the RP. Arcelor Mittal and Numetal were the successful bidders.

Major twist of the Case

Meanwhile, in month of November, 2017 the government, through an ordinance, introduced a new section 29-A[2] to the I&B Code. The section barred willful defaulters, defaulting promoters and related parties from bidding. After the introduction of this section, the RP again asked to submit the resolution plans. The plans of Arcelor Mittal and Numetal were accordingly received on February 12, 2018.

The Resolution Professional rejected the plans u/s 29-A, on the grounds that Mr. Ruia, who was the ultimate beneficiary and owner of shareholders of Numetal was the promoter of Essar Steel, whose account had been declared as an NPA prior to 1 year of commencement of insolvency proceedings. Hence, Numetal was declared ineligible u/s 29-A. Arcelor Mittal had dues pending and had committed default in paying dues so was held ineligible too.

Both Numetal and Arcelor Mittal challenged their disqualifications before the adjudicating authority. On April 19, 2018 it was held that both the parties were ineligible and that the Committee of Creditors had not followed the proper procedure. NCLT asked the CoC to reconsider its decision u/s Section 29A (c) read with proviso to Section 30(4) of the I&B Code. Both the parties challenged the order in front of the NCLAT.

NCLAT Judgement

On September 7, 2018 NCLAT in its judgement held: –

  1. Those who submitted ‘Resolution Plan’ prior to the ordinance date and if covered by clause (c) of Section 29A are entitled to derive benefit of second proviso to sub-section (4) of Section 30.
  2. The date of submission of Expression of Interest be treated as date of submission of Resolution plan.
  3. Numetal was eligible, if it severs its relations with Mr. Ruia and Arcelor Mittal and pays its dues of Rs.7000crs along with submitting their revised resolution plans within three days after removing their respective ineligibilities.

On September 10, 2018 Arcelor Mittal submitted its revised plan of Rs.42000crs. of which Rs.7000crs. was of settling dues amount. Arcelor Mittal stated that amount of Rs.7000crs. was deposited into Escrow Account and would be paid only if it emerges as successful bidder.

SC Judgement

On September 27, 2018 Numetal challenged order of NCLAT before Supreme Court, of giving Arcelor Mittal opportunity to clear its dues.

On October 4, 2018 the SC in its case, Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Ors[3]  issued directions under article 142[4], giving opportunities to both the bidders, Arcelor Mittal and Numetal to clear their ineligibilities and submit their resolution plans, and CoC to approve it further within 6 weeks. It also gave power to CoC that if any plan is not worthy, they may go for liquidation.

Approval of Arcelor Mittal’s Resolution Plan

Arcelor Mittal cleared made the payment of its dues. The revised plan was submitted and the CoC approved the Resolution Plan submitted. The Resolution Professional approached the adjudicating authority for the approval of Resolution Plan u/s 31 I&B Code. On March 8, 2019 the adjudicating authority approved the plan submitted by Arcelor Mittal. On March 27, 2019 the CoC approved claims of creditors. Financial creditors had claims of Rs. 55,440crs. and operational creditors had claims of Rs. 27,101crs of which Rs.49,473crs. and Rs. 5,073crs. claims were approved respectively.

Appeal to NCLAT

Operational creditors filed objections against the determination of their claims to NCLAT. Essar Steel Asia Holdings, after the resolution plan was approved by CoC, submitted its plan stating that if it was accepted the CIRP would not be required. It, however, was rejected. Prashant Ruia, the promoter of Essar Steel, filed objections on the eligibility of Arcelor Mittal before NCLAT.

On July 4, 2019 The NCLAT held: –

  1. Appeal of Prashant Ruia was rejected, and held Arcelor Mittal eligible.
  2. Distribution of amount was held to be discriminatory. It decided that Financial and Operational Creditors with claims less than Rs. 1cr be paid 100% of amount and other creditors with claims more than Rs. 1cr. be paid 60% of the amount.
  3. CoC had no power to decide the manner of distribution under I&B Code, i.e., the power vested with Resolution Applicant. The tribunal in its judgement defined the powers of CoC.
  4. All Financial Creditors were same, no further classification was required, Secured and Unsecured Financial Creditors.
  5. Any remaining amount after the settlement of all debts and expenses of CIRP, be distributed among creditors on pro rata basis, subjected that it does not exceed the admitted claim.

SC Verdict

Dissatisfied with judgement of NCLAT, CoC and Financial Creditors appealed to the Apex Court. On November 15, 2019 Hon’ble SC in its judgment[5] held: –

  1. Classification of Financial Creditors into secured an unsecured valid. The Court concluded that equitable treatment cannot be stretched to treating unequals equally.
  2. The decision of Appellate Tribunal regarding distribution of profit to be set aside. It was done on the ground that request for proposal issued and consented by Arcelor Mittal clearly stated that any profit during CIRP will not go for payment of any debts of creditors.
  3. Section 4 [6] in dealing with its constitutionality struck down the word ‘mandatorily’. It stated that the ordinary time required for completion of CIRP is 330 days, but must not be made mandatory. Section 6[7] was also held constitutionally valid and sub-clause (b) is a mere guideline for CoC.
  4. CIRP of Essar Steel will take place as accepted by CoC on March 27, 2019 as it provided for amounts to be paid to different classes of creditors by following Section 30(2) and Regulation 38 of the Code.  

Essar Steel lost one of its assets through CIRP. However, the long-driven case of almost 900 days will be a precedent for many further cases of insolvency under I&B Code. The critics believe that judgement will change the way operational creditors will be dealing with their defaulting debtors, but the judgement in no way is violative of rights of operational creditors. It has ensured that a reasonable amount be paid to Operational Creditors. Giving Financial Creditors back such large amounts boosted the economy. Removing the 330 days time limit has given adjudicating and appellate authorities to decide the case beyond time if needed. The SC in doing this has set the norm that “Justice Hurried is Justice Buried”. The verdict has changed the business climate of India and has strengthened the financial sector.  


[1] Essar Steel, (May 20, 2020, 3:45 PM), http://www.essarsteel.com/.

[2] Section 29-A, THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2017, NO. 8 OF 2018.

[3] Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Ors, (2018) SCC OnLine SC 1733

[4] Constitution of India, Article 142.

[5] Essar Steel India Limited through Authorised Signatory vs. Satish Kumar Gupta & Ors, Civil Appeal No. 8766-67 OF 2019.

[6] Section 4, The Insolvency and Bankruptcy Code (Amendment) Act, 2019, No. 26 of 2019.

[7] Section 6, The Insolvency and Bankruptcy Code (Amendment) Act, 2019, No. 26 of 2019.

Anukriti Jawandhia from Mody University, Rajasthan

EDITOR: SANSKRITI SOOD

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