The judges could have considered the fact that the Insolvency and Bankruptcy Code (IBC) is in its early days—the government has amended it once already, and more changes are in the offing—and both lawyers and lenders are still learning.While the Ahmedabad bench of the National Company Law Tribunal (NCLT) may have had good reason to set aside the Resolution Professional’s (RP’s) decision to disqualify the first round of bids for Essar Steel, one wishes the tone of the order had been slightly softer. The judges could have considered the fact that the Insolvency and Bankruptcy Code (IBC) is in its early days—the government has amended it once already, and more changes are in the offing—and both lawyers and lenders are still learning.
The two-judge bench has asked the RP and the Committee of Creditors (CoC) to reconsider the bids submitted by Arcelor Mittal and Numetal since it believes rules relating to 29(A) (c) and 30(4) of the IBC code were not followed. Section 29(A) was introduced in the Act by way of an Ordinance in November last year, to allow certain persons who would normally be ineligible to participate in the bidding process. These include, inter alia, those promoters who have had their accounts classified as non-performing assets (NPAs) for one year or more and are unable to settle their overdue amounts, including the interest on this. However, there is a small window, in that defaulters can become eligible if they pay all overdue amounts with interest and other charges relating to the NPA before submitting the resolution plan.
In this instance, Arcelor Mittal had been classified as a promoter in Uttam Galva Steels that had defaulted on its loans. To be sure, the stake it owned may have been small, but it was nonetheless classified by the exchanges as a promoter and so, technically, a defaulter. It is not clear whether Uttam Galva has made good its dues to the banks; media reports suggest the discussions are on. While the stock exchanges no longer classify Arcelor Mittal as a promoter, selling its stake in Uttam Galva just before the Essar Steel bidding does look suspicious. And in the case of Numetal, Rewant Ruia, a scion of the Ruia family who are the promoters of Essar Steel, had a beneficial interest; going by the spirit of the IBC, this seems to be against the rules. Whether the disassociation of Rewant Ruia from—as has been reported in the media—has taken place is not confirmed.
Given this, the Ahmedabad bench’s directives would surely have surprised not just the RP and the CoC, but also the legal fraternity. This suggests there is room for a greater understanding of the legislation. News reports suggest the government intends to ease the eligibility conditions in the IBC to make it easier for financial investors such as private equity funds to participate, which should be fine.
The changes must on no account, however, make it easier for defaulters to bid because that would vitiate the spirit of the law. As it is, bankers are taking big hits—Vedanta has bought Electrosteel at a 60% haircut—and it would be a shame if defaulters were to get back their companies after a big chunk of the loans are written off. The environment for lending is already very strained; it is up to the courts to make sure the distressed assets don’t fall into the wrong hands.