Deutsche, SBI oppose more cash to operational creditors of Essar Steel

The dispute among Essar Steel creditors on how to distribute cash from ArcelorMittal’s resolution plan has taken a new turn with Deutsche Bank opposing any move to deviate from what the lenders have approved and giving more cash to operational lenders.


Last week in a meeting of the committee of creditors, lenders agreed to set aside Rs 1,000 crore more for operational creditors. This additional cash was to gain approval from operational creditors, who are opposing the distribution of Rs 42,000 crore (ArcelorMittal’s resolution plan) only among secured creditors while setting aside only Rs 200 crore for them. The operational creditors are claiming Rs 4,700 crore.


The additional cash to the operational creditors excluded Standard Chartered Bank, the biggest operational creditor to Essar Steel.


In a letter to the lenders, the German bank has warned this (additional cash) will discourage foreign investors from investing in India.


Deutsche Bank and State Bank of India have filed a petition with the National Company Law Appellate Tribunal (NCLAT), opposing a suggestion of the National Company Law Tribunal (NCLT) to reconsider the distribution of proceeds in the ratio of 85 per cent for financial lenders and 15 per cent for operational creditors.


Bankers said a higher payout to the operational creditors was likely to set a precedent for other resolutions under the Insolvency and Bankruptcy Code (IBC). Lenders said they might take it to the Supreme Court if there was any objection to this redistribution. “This was a suggestion. If there is any objection to this, we will go to a higher court,” said one of the top lenders to Essar Steel.


Mrutyunjay Mahapatra, managing director and chief executive officer, Syndicate Bank, said the Supreme Court had ruled the IBC was a statute enacted for financial creditors. The NCLT is taking a sympathetic view, appealing to the conscience of financial creditors. The law is very clear, he said.


The redistribution has pushed the resolution in the Essar case, which has been running for more than 600 days, to the next financial year.


Other banks that do not have an exposure to Essar have the same view on operational creditors. “When the IBC was formulated, it was made in keeping with the interests of financial creditors. Operational creditors give unsecured loans, and get a higher rate of interest. So they cannot be treated on a par with financial creditors,” said A K Pradhan, managing director and chief executive officer, United Bank of India.


Saurav Kumar, Partner, IndusLaw, pointed out in almost every case, operational creditors were putting forward their claims. “The adjudicating authority cannot go into the commercial reasoning of a resolution plan and can only verify if the resolution plan is in compliance with the law,” he said.


Bankers too say it’s a decision best left to them. On the treatment of financial and operational creditors, they point to a recent Supreme Court order that gave a direction on the matter. Nearly 40 operational creditors have challenged various provisions of the IBC. The Supreme Court said operational creditors were involved only in recovering amounts paid for their services and would be unable to assess the viability and feasibility of business. The apex court also dismissed the claim that the IBC was discriminatory.


Resolution professional Sumit Binani said: “The primary objective behind a resolution plan is the revival of the ailing corporate debtor and it must address the dues of all stakeholders without discrimination. An ideal plan would be one that would also balance the interests of public equity shareholders. A resolution plan is not a recovery mechanism.”

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