Operational creditors face Shakespearean dilemma in Essar Steel insolvency

The operational creditors of steel companies face a Shakespearean dilemma. Though they wish to speak out against the problems at hand due to delayed payments of dues from companies undergoing the Corporate Insolvency Resolution Process (CIRP), they fear retribution from the committee of creditors (CoC) and the new management which would take over.


“These companies are largely small-time operators and do not wish to sour their relationship with the new management. They are fearful whether a big company would want to continue their contract with them or not,” said Anand Verma, an advocate-on-record of the Supreme Court, who has represented some of these small operational creditors. In many instances, the dues owed to them almost equal their net worth.


A few days ago, a half-page advertisement appeared in leading business newspapers with an appeal to Prime Minister, the Ministry of Fin­ance, the Ministry of Corporate Affa­irs, and others. The Forum of Ad­mitted Operational Creditors of Steel Companies, which had come out with the appeal, said that there should be no haircut against the admitted appeals of operational creditors. When contacted, the group members, however, refused to come on record.


The situation among other operational creditors is no different. An operational creditor, who supplied Compressed Natural Gas (CNG) at one of the plants of Essar Steel, has been forced to shut down the business and ask his small team of nearly 15 people to leave. “Right now, our inventory has been seized by the transporter since we have not been able to clear his dues. Statutory dues such as income tax, service tax and others are also mounting,” said the operational creditor.


Another operational creditor, which provided coil coating services to a couple of steel companies, agrees that OCs have no voice when it comes to meetings of the CoC with the resolution professional or otherwise.


“Nobody knows what the internal situation is. All our old dues are stuck. Even the small guys like plumbers, contractors and tea-sellers have been denied their claims,” the operational creditor said.


The condition is so grim that some of the foreign joint-venture partners of these small operational creditors have threatened to pull out if the current situation of the dues being denied continues, said another operational creditor. “We have a 51% partnership with a foreign company. Since our dues have been pending for so long, they have denied us any permission for capital expansion.”


The problem for even bigger operational creditors like the Gas Autho­rity of India Limited (GAIL) is no different. The company has pending dues in nearly seven-eight cases, in­cluding in Essar Steel where its entire claim of Rs 125 crore is still being verified. “There are seven-eight companies where our dues are pending. Some have been acknowledged by the resolution professional (RP), while others have rejected our claims. We are moving appropriate fora against the rejections,” a source in the company said.


The Essar Steel insolvency saw about 1,757 operational creditors making claims worth about Rs 23,087 crore. Of these, claims worth Rs 312 crore were rejected by the RP, the verification for Rs 628 crore was still on. Claims worth nearly Rs 254 crore had been admitted.


A common allegation made by many operational creditors is that CoCs often walk away with lion’s share of funds provided by the successful resolution applicant, while the resolution professional does little to help. However, that may not always be the case, said Bikash Jhawar, partner at law firm L&L Partners. Jhawar was the counsel for the resolution professional in the Binani Cement corporate insolvency resolution process.  “One of the major problems we faced was the lack of proper documentation,” Jhawar said.


The challenge for an RP is to determine how to keep a company a ‘going concern’ without giving in to all the demands from the operational creditors. Statutory government dues such as goods and services tax and income tax can also not wait.


Also, the period of 30 days, given to the RP to determine everyone’s claims, is too small, said Jhawar, add­ing that it is highly unlikely that a professional appointed from outside will understand accounts and claims of years within such a short period.


In some cases, it is also difficult for the RP to determine whether the working capital extended to operational creditors by the banks has actually been utilised for the purpose it was given, said the former chairman and MD of Cotton Corporation of India, B K Misra, who now also works as an RP.

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