Corporate resolution: Larsen & Toubro moves NCLT against Bhushan Steel

The move follows Tata Steel's announcement that it emerged as the highest bidder for the Delhi-based steel company, beating Sajjan Jindal-promoted JSW

A corporate tug-of-war has broken loose, with infrastructure major Larsen & Toubro (L&T) moving the National Company Law Tribunal’s (NCLT’s) Delhi Bench against the Bhushan Steel resolution process. Tata Steel on Wednesday had announced it had emerged the highest bidder for the Delhi-based steel company, beating Sajjan Jindal-promoted JSW.
 
L&T alleged that Bhushan Steel, undergoing corporate resolution, had defaulted on payment of Rs 9.62 billion for construction of its Angul factory in Odisha. Under the procedure set by the Insolvency and Bankruptcy Code (IBC), L&T had claimed the amount by filing a prescribed form with the resolution professional (RP) Vijay Kumar Iyer of Deloitte Touche Tohmatsu in August 2017.
 
This is the second insolvency case where Tata Steel had emerged the highest bidder, but the process has been questioned in the NCLT. Tata Steel and the UK-based Liberty House are locked in another legal dispute over Bhushan Power & Steel, which also came up for hearing on Thursday.
 
The L&T case, however, is just the tip of the iceberg. Lawyers suspect operational creditors will be moving the tribunal to recover their dues in other companies as well. Unsecured creditors of Binani Cement, Bhushan Power & Steel and Essar Steel are planning to move the tribunal as they have been left out of the entire process and no communication has been made to them about their dues.  The present resolution plan is one-sided and favours only the lenders. The non-financial creditors therefore, plan to take legal action, said one lawyer.
 
In the case of Binani Cement, for instance, UltraTech had, in fact, made an offer to give 100 per cent dues of non-financial creditors. But the Dalmia Bharat offer, ultimately declared the highest bidder, took care of only one non-financial creditor, IDBI Bank, while leaving the rest out in the cold. Binani Cement has 3,000 small- and medium-sized creditors/suppliers taking legal advice to move the tribunal against the resolution plan. 
 
During a hearing on Thursday, L&T argued it should not be treated as an operational creditor of Bhushan Steel. The company’s counsel said they should get the status of a secured creditor. The NCLT ordered Bhushan Steel to submit a reply via its RP. The next date of hearing has been fixed on March 23.
 
Neeraj Singhal-promoted Bhushan Steel had received resolution plans from JSW Steel and employees of Bhushan Steel. The Odisha-based company operates a 5.6 million tonne capacity plant and is a high-margin flat product business that caters to the domestic as well as the auto export market. As on March 31, 2017, Bhushan Steel had a debt of Rs 481 billion.
 

In its petition, L&T said the plant and machinery supplied by it to Bhushan Steel were “a property attached to the earth” under Section 3 of the Transfer of Property Act, and, hence, these would come under the ambit of immoveable property. Since “works evaluated at Rs 9.62 billion remained outstanding from the respondent (Bhushan Steel) due to its non-performance of the contract and the machines stand embedded into the earth, the applicant (L&T) has a charge to the extent of the unpaid amount”. L&T argued that it was a secured creditor under the IBC.
 
“Though the Code protects the rights of secured creditors, gives them priority over others, and also gives them primacy in decision-making through voting, it is giving unfair treatment to non-financial creditors. It is expected they would move the tribunal like L&T,” said a Mumbai-based lawyer.
 
“The intention of saving stressed assets through the resolution plan is to provide relief to these companies after their debt is reduced. But if non-financial creditors are not treated fairly, they are bound to challenge the resolution plan. We see that happening in the weeks to come,” said a bidder. It is important to get the non-financial creditors on board for carrying on the production of stressed assets, he added.
 
As the IBC mandates that the process should balance the interest of all the stakeholders and the resolution plan is also required to make a statement on how it has dealt with the interest of all stakeholders, it is necessary for the RP and the committee of creditors to satisfy this requirement, said bidders. “In the absence of any scoring for the requirement, the resolution plans give non-financial a raw deal to please other creditors who get a better score and are part of the decision-making. In all cases, it is the small- and medium-sized suppliers who are squeezed out by the RPs, whilst taking care of only the lenders,” said a bidder asking not to be named.