IBC: Amendment debarring defaulting promoters may be challenged in court

The insolvency and bankruptcy process is entering the decisive phase where some big-ticket stressed assets are up for grabs. However, the recent amendment to the Insolvency and Bankruptcy Code with the introduction of Section 29A that debars defaulting promoters from participating in the bidding process has put many stakeholders on shaky ground. 

For instance, the bids of Numetal, a company having VTB Group as a majority shareholder and the Ruias as a minority partner, and ArcelorMittal for Essar Steel are hanging fire more than two weeks after submission. The resolution professional has assured stakeholders the proposals are being evaluated; the financial bids are yet to be opened. But, legal experts expect affected parties to test various provisions of Section 29A in the court.

The trouble with Section 29A

With the introduction of Section 29A, the government sought to exclude defaulting promoters and those connected to them. So who can't submit a resolution proposal?

a) an undischarged insolvent

b) a wilful defaulter  

c) one who has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset and at least one year has elapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process

If a person is acting jointly or acting in concert with someone meeting any of the above criteria, then that person would stand disqualified. However, the person will be eligible to submit a resolution plan if he/she makes payment of all overdue amounts with interest and charges relating to the non-performing asset (NPA) accounts before submission of the plan

How it affects ArcelorMittal

ArcelorMittal Netherlands BV held a 29.05 per cent stake as a co-promoter in Uttam Galva Steels, now an NPA. On February 7, the firm transferred its entire shareholding to Sainath Trading Company Private Limited by inter-se transfer at Rs 1 a share. Consequently, the co-promotion agreement with the Miglani family dated September 4, 2009, stood terminated.  

ArcelorMittal’s arguments are that it did not have any board representation or management control of Uttam Galva Steels. Lawyers to Numetal, however, point out ArcelorMittal has been promoter of a corporate debtor (Uttam Galva) for over one year prior to commencement of the resolution process of Essar Steel and the only way the person who is a promoter of a corporate debtor becomes eligible is if he/she makes payment of all overdue amounts with interest. 

The other point is, as a co-promoter, did it enjoy any special rights? The original agreement said it had the right to appoint one half of the non-independent directors, among others. But sources close to ArcelorMittal said these were not carried through to the articles of association. They also said since ArcelorMittal was not responsible for policy decisions and did not have management control, it wasn’t responsible for Uttam Galva’s financial woes.

Apart from Uttam Galva, L N Mittal, chairman and CEO of ArcelorMittal, had a personal holding in KazStroy Services of Kazakhstan, an oil infrastructure provider company, which in turn had a 100 per cent stake in KSS Petron that turned an NPA in 2015. However, Mittal sold his shares in KSS before submission of Essar Steel bid.

Some of the lenders had raised questions on the promoter status at the time of the company turning into an NPA and not the sale of shares. But legal sources point to Section 29A, saying the wording of the clause is in the present tense, so the status at the time of submission of the bid should be counted.

Issues with Numetal

In the case of the Ruias, Essar Steel has defaulted on bank loans, which led to the bankruptcy proceedings against the company. Essar Steel owes banks around Rs 440 billion. 

Numetal, the bidder, is 40 per cent owned by VTB Group and 25 per cent by an offshore trust where Rewant Ruia, son of Ravi Ruia, is a trustee. Ravi Ruia had co-founded the Essar group with brother Shashi Ruia. 

Numetal’s argument is that Rewant Ruia’s holding is an indirect minority interest and he is neither its promoter nor in the management or control of the company. He will also not have any role in the management of Essar Steel.

Rewant Ruia was a director of the boards of Essar Steel Minnesota and Essar Steel Algoma before March 2012. Sources pointed out Essar Steel had not turned an NPA then.

Resolution professionals’ dilemma

As the companies present their cases, it’s the resolution professional (RP), who according to law, is expected to certify the plan meets the eligibility test and the other legal contents. 

“While doing so, he relies on the 29A undertaking from the resolution applicant concerned and is also expected to carry his/her own diligence and due care,” an RP said.

The RP has an option to approach the National Company Law Tribunal for referring the matter under the point of law if any. Intricate matters are likely to be taken to the NCLT. “It is extremely difficult for any RP to do an eligibility check as stipulated for connected parties as they could be hundreds in number for large houses acting as bidders,” the RP added.

‘Spirit’ of Section 29A

A resolution professional said the spirit of the introduction of Section 29A of the IBC is to bar wilful defaulters, defaulters whose dues had been classified as NPAs for more than a year and connected persons. The spirit in no way bars the entire promoter class.  “It would be unfair to debar promoters and its connected persons to be a resolution applicant where the corporate debtor is unable to discharge its debt due to adverse market,” N G Khaitan, senior partner, Khaitan & Co, said.

In their defence

ARCELORMITTAL

• Didn't have board representation or wasn't involved in the management of Uttam Galva Steels
• Had no connection with KSS Petron; L N Mittal had personal shareholding in KSS
• Sold shares in Uttam Galva and Mittal in KSS before submission of Essar Steel bid

NUMETAL

• Rewant Ruia has indirect minority interest in Numetal
• Rewant Ruia has no involvement in management of Numetal or Essar Steel
• Is led by the VTB group