The Supreme Court will have to lift the "corporate veil" to test the eligibility of steel and mining major ArcelorMittal and Russia's VTB Bank-promoted firm NuMetal, which are bidding for Essar Steel, to ascertain the persons behind them, the Committee of Creditors said Tuesday.
A bench of Justices R F Nariman and Indu Malhotra was told by senior advocate Gopal Subramaniam, representing the Committee of Creditors (COC), that the concept of "lifting of corporate veil" has to be given "exhaustive" interpretation to ensure that the "persons related to" or "persons acting in concert" with the debt-ridden firms do not come back to bid for the company.
The senior lawyer referred to the position of the COC with regard to ArcelorMittal and NuMetal and said, "You may have to clear the debt and work out Non Performing Assets, otherwise the purpose of the Insolvency and Bankruptcy Code would be defeated".
Responding to a query as to whether ArcelorMittal had a controlling stake in KSS Petron, the COC counsel said it held 32 per cent stake and "anything above 25 per cent is considerable" and the shareholders, under the law, can influence the decisions.
It has been alleged that ArcelorMittal had 32 and 29 per cent stakes in KSS Petron and Uttam Galva respectively and it had exited from them after selling the stakes before submitting the resolution plan to take over the Essar Steel.
On the issue of NuMetal, the senior counsel said it was incorporated in Mauritius nearly a week before bidding for Essar Steel and referred to a communication of February 21, which said if there was any objection to a person having shares in it, then the company be allowed to transfer them, so that it remained eligible for bidding.
"This looks at the face of Section 29A (which deals with disqualification criteria) of the IBC," Subramaniam submitted.
He said the law was very clear that anybody who has any kind of connection with the erstwhile company or any other NPA firm should not come and bid for the company.
The bench asked the lawyer what will happen if the COC decided that there was a resolution plan "worth consideration".
"The company would go for liquidation," Subramaniam said.
The bench said there were three scenarios. In the first, there could be straight liquidation. In the second, the CoC wants to revive the firm, but does not get a good proposal, while in the third situation, the CoC needs to deal with several bids.
It then asked "Do you (CoC) have the last word?"
"No. It has to be the adjudicating authorities (NCLT and NCLAT)," the lawyer said.
The persons willing to take part in the bid will have to clear dues of the NPAs with which they have been associated, he said, adding that it has been very tough to establish the relationship of a bidding company with other debt-ridden NPA firms.
He then said the court should accord "purposive" and "exhaustive" interpretations to terms like "people acting in concert" and "corporate veil" and said the IBC provides wider scope of interpretation of these terms.
Dealing with the delay, the counsel for the CoC said the code provided that insolvency proceedings should be decided in 270 days from the commencement and urged the court that the time consumed by NCLT and NCLAT in dealing with petitions and interim applications be excluded from the statutory time limit.
The purpose behind having National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) was not to pass interim orders and intervene at every stage, he said.
Earlier in the day, senior advocate Mukul Rohatgi, appearing for NuMetal, concluded his submisisons and said the two brothers of L N Mittal, Pramod and Vinod Mittal, have been associated with firms which were declared non-performing assets (NPAs).
He said that just the severance of family relations should be evaluated on the ground of people acting in concert and Pramod Mittal was involved in two debt-ridden NPA companies, including Ispat.
He said JSW was taken in by NuMetal for its experience in operating and maintaining large steel plants and this would help in running Esssar Steel. This was done keeping in mind that the controlling shareholder VTB Bank of Russia did not have the experience of running a steel plant, he added.
Rohatgi said the involvement of Essar in NuMetal at the initial stage was in line with the prevailing provisions under IBC Code and Rewant Ruia had exited after the introduction of 29 (A) barring promoters of a defaulting company from participation.
Senior lawyer Mihir Thakur, also representing NuMetal, said the VTB Group actively traded debt and equity securities as well as commodities and derivatives for both domestic and international clients.
The advancing of arguments would continue tomorrow.
Earlier, NuMetal had told the apex court that contrary to claims, a consortium of banks led by SBI had written to the L N Mittal group company to pay the dues of debt-ridden Uttam Galva.
ArcelorMittal had said that NuMetal was not eligible to bid for Essar Steel on several grounds, including that it was a "shell company" created by a firm in which Essar group promoters had majority shares.
NCLAT had ruled that NuMetal's second bid for Essar Steel was eligible but the same by ArcelorMittal will qualify only if it cleared the Rs 7,000 crore dues of the two firms it was previously associated with.