Contentious Insolvency Processes for Uttam Group Companies?

Gurugram: The assets of two bankrupt companies in the Mumbai-headquartered, Nagpur-based Uttam group of companies, promoted by members of the Miglani family, are being sought to be purchased by firms owned by non-resident Indians under the statutory Insolvency and Bankruptcy Code (IBC). The processes are, however, being questioned, past complaints to tribunals as well as a recent affidavit filed on September 26 in the Supreme Court, reveal. The two companies are Uttam Value Steels Limited (UVSL) and Uttam Galva Metallics Limited (UGML).

In addition, it has been reported that an insolvency plea was accepted on October 1, by the National Company Law Tribunal (NCLT), against the group’s flagship firm, Uttam Galva Steels Limited, based on a complaint by its financial creditor and the country’s largest bank, the State Bank of India (SBI).

In January, Deutsche Bank had moved the NCLT for recovery of its dues against a $20 million (Rs 142 crore) credit facility given by it to the flagship. 

Making the situation messy, the Uttam group, which is steeped in debt, obtained loans from two scam-tainted banks, namely, Yes Bank and the Punjab & Maharashtra Cooperative (PMC) Bank, documents with NewsClick show. 

The official website of the Uttam group claims that it is one of Western India’s largest manufacturers of cold-rolled and galvanised steel. Besides the flagship Uttam Galva Steels, two major group companies are UGML and UVSL (which was earlier known as Lloyds Steel Industries) with plants located at Wardha in Maharashtra. The group had announced plans to set up an integrated steel plant at Satarda village in Sawantwadi taluka of Sindhudurg district in the state for which land had been acquired, but the project is yet to come up.

By 2017, the loan assets of UGML and UVSL had become “stressed.” Late that year and in early-2018, the group’s lead banker, SBI, declared the loans disbursed to these two firms as non-performing assets (NPAs). On June 26, 2018, the NCLT in Mumbai admitted the corporate insolvency resolution process (CIRP) against UVSL. On July 11, the same year, the tribunal admitted the CIRP against UGML as well. 

Nine months later, on March 25, 2019, the resolution professional (RP) appointed by the Committee of Creditors (CoC)­­ led by SBI––Rajiv Chakraborty of Pricewaterhouse Coopers Professional Services LLP (limited liability partnership)––sought an extension of time to complete the insolvency process and also for interlinking the resolution plans of UGML and UVSL.

On April 21 last year, the RP said an upfront payment of Rs 250 crore each for the two companies or a total of Rs 500 crore would have to be provided for by the potential buyer of the assets of the two companies that had been put on the block. Till the upfront payments were made, performance bank guarantees of a similar amount would have to be provided, the RP stated.

Enter NRI Firms and Makalu Group

On May 7, 2019, two important developments took place. The RP sought the NCLT’s approval of a resolution plan–– approved by the CoC the previous month––that was put up by a consortium led by the New York-based CarVal Investors LLC (limited liability company) and the London- based Nithia Capital Resources Advisors LLP (limited liability partnership). The partners of the consortium, henceforth referred to as CarVal group, are NRIs Jai Saraf and Nirmala Saraf.

The same day, the Makalu group led by Vinod Jatia put forward its claims of being operational creditors to the extent of 80.88% of the total admitted operational debt of UGML and UVSL of Rs 423.88 crore.

Nothing much moved for the next 11 months. On April 13, 2020, Chakraborty, the RP, filed an appeal before the principal bench of the NCLT, then operating out of Chennai, urging an expeditious decision as the bank guarantees of Rs 500 crore given by the CarVal group would expire at the end of that month. On the last day of April, the principal bench of the NCLT, headed by its acting president B S V Prasad Kumar, announced its approval “in principle” of the resolution plan. The formal approval came a week later, on May 6.

The resolution plan was a combination of an upfront settlement amount of Rs 1,567 crore for both companies as well as deferred and contingency payments to financial creditors of Rs 1,078 crore. Chakraborty admitted claims of Rs 4,176 crore in the case of UGML and Rs 3,014 crore for UVML totalling Rs 7,190 crore.

According to an article in Bloomberg Quint by Rohit Jain, published on May 7, the NCLT bench dismissed the objections raised by unsuccessful resolution applicants contrary to an official circular that disallowed hearing of resolution plans during the lockdown.

The Makalu group objected to the 99% “hair-cut” being given to the creditors against its claims––in bankruptcy proceedings, the term “hair-cut” means the proportional reduction in debt that will be paid to each creditor based on an evaluation of the total debt owed and the total assets of the debtor. The resolution plan was contingent on NCLT’s approval and it was argued that this “conditionality” breached Section 31 of the IBC that required a resolution applicant to seek prior approval of the Competition Commission of India (CCI), the government’s anti-trust regulatory authority.

It was further alleged that the resolution plan discriminated against operational creditors (like the Makalu group) by offering a low payment that was only 0.19% of the amount sought.

The Makalu group also claimed that the performance bank guarantees given by the CarVal group had lapsed and that instead of furnishing bank guarantees of Rs 250 crore each (totalling Rs 500 crore) which the resolution professional had asked for, two bank guarantees each worth only a fifth of this amount or Rs 50 crore each (totalling Rs 100 crore) had been provided. The group contended that this fact had been “suppressed” from the adjudicating authority. Moreover, the financial creditors accepted the bank guarantees drawn on a UK branch of ICICI Bank for the lower amount of Rs 50 crore each without the approval of the adjudicating authority, that is, the NCLT.    

The NCLT bench “read into the intent of the IBC,” took into the account the conditions prevailing due to the COVID-19 pandemic and the financial conditions of the two companies, UGML and UVML. The objections of the operational creditor (Makalu group) were dismissed by the tribunal. The NCLT said the resolution plans of CarVal had been approved by the CoCs of both companies, that the interlinking of resolution plans had been approved and that there was no “contingency” in the plans. 

The tribunal stated that any objection regarding pendency of approvals from the CCI cannot be raised by a stakeholder as it would not change the payment obligations under the resolution plan. It quoted the Supreme Court’s clarification in a case relating to Essar Steel that stated that an adjudicating authority cannot transgress the “commercial wisdom” of the CoC in a resolution plan. 

Meanwhile, there were two other developments of significance. Based on a complaint by the resolution professional (Chakraborty) alleging mismanagement and illegal diversion of funds, the Ministry of Corporate Affairs initiated an inquiry into the affairs of UGML and UVSL. Then, as already mentioned, Deutsche Bank initiated insolvency proceedings in NCLT Mumbai for recovery of Rs 142 crore ($20 million) from the Uttam group flagship, Uttam Galva Steels, that is currently going through insolvency proceedings.

Appellate Body Moved

On June 2, the Makalu group moved the appellate body, the National Company Law Appellate Tribunal (NCLAT), against the May 6 decision of NCLT. Its appeal was heard on June 5 and 12 and the NCLAT dismissed the appeal on September 9. Thereafter, on September 26, the Makalu group moved the Supreme Court challenging the NCLAT’s decision.

In its petition before the apex court, the Makalu group has argued that by dismissing its appeal, NCLAT has completely ignored the provisions of Section 31(4) of the IBC that necessitated the CarVal group obtaining approval from the statutory anti-trust body, the CCI, before the combined resolution plan for UGML and UVSL could be approved by the CoC, which, admittedly, was never obtained by the CarVal group within the relevant deadline. Section 31 (4) of the IBC states that the resolution applicant shall, pursuant to the resolution plan being approved, obtain the necessary approval required under any law for the time being in force within a period of one year from the date of approval of the resolution plan.

The Makalu group has alleged that the absence of this prior mandatory approval from CCI, makes the COC’s approval of the CarVal group’s resolution plan illegal. It claims the CarVal group, controlled by NRIs, was not eligible to be considered as a potential buyer because it “knowingly” submitted a resolution plan with “false” information about one Johannes Sittard, who was said to be a director of CarVal when it submitted its resolution plan in 2019, although he apparently resigned from the position in April the previous year.

The Makalu group claims that the CarVal’s resolution plan could not have even been placed before the CoC by the RP, leave alone be approved, as it violated the terms of Regulation 39(l)(c) of the CIRP Regulations, which reads: “An undertaking by the prospective resolution applicant that every information and records provided in connection with or in the resolution plan is true and correct and discovery of false information and record at any time will render the applicant ineligible to continue in the corporate insolvency resolution process, forfeit any refundable deposit, and attract penal action under the Code.”

The appeal filed in the Supreme Court further alleged that NCLAT “failed to appreciate” that CarVal had not adhered to the terms of the resolution plan either by making upfront payments of Rs 250 crore for each of the two companies by June 5 or furnishing performance bank guarantee of similar amounts. Nevertheless, CarVal had taken charge of the corporate debtor. It had allegedly “colluded” with “certain creditors” to reduce the bank guarantee amount to one-fifth the amount, that is, Rs 50 crore each for UGML and UVML.

The operational creditor (Makalu group) claimed before the NCLAT that after the RP handed over charge to the monitoring committee on May 6, no upfront payment was made till the transfer date of July 5. It stated that its electronic mail messages on July 24 and August 3 to the RP and the CoC on whether the bank guarantees had been encashed or not, went unanswered. 

That’s not all. The Makalu group also questioned the ability of CarVal and Nithia Capital to raise Rs 1,600 crore to bid for UGML and UVSL (and another associated company Crest Steel for Rs 250 crore) given its inadequate credit rating and low paid-up capital of only UK pounds (GBP) 1,000. 

Makalu alleged that the successful resolution applicant (the CarVal and Nithia Capital consortium) had been given access to the plants of UGML and UVSL without making any payment for acquiring the steel-making assets of the two companies. It raised questions as to whether proceeds from the sale of goods in the premises of the two companies during this period would be “surreptitiously” used to purchase the assets of the two bankrupt companies, UGML and UVSL. 

Loans From Scam-Tainted Banks

In separate letters to the Reserve Bank of India (RBI), the Makalu group has sought to rake up a lot of muck about other entities of the Uttam group for their allegedly questionable dealings with two scandal-racked banks, Yes Bank and Punjab & Maharashtra Bank (PMC). 

A letter dated July 23 sent to Neeta Rohit Jain, RBI Ombudsperson, Prateek Vinod Jatia, son of Vinod Jatia, has alleged that Archista Steels in the Uttam group was sanctioned loans of Rs 55 crore by PMC Bank and Rs 250 crore by Yes Bank. In Archista Steels, 98% of its shares are held by members of the Miglani family, promoters of the Uttam group, and it had related party transactions with eight entities in the group, including Uttam Galva Steels and UGML.

Indrajit Power Private Limited, which supplies power to UGML and UVSL, and which is wholly owned by the Miglani family, has an outstanding loan of Rs 115 crore from PMC Bank. In 2017, the bank had given a no-objection certificate for pari passu (meaning side by side or on an equal footing) charge on its collateral to Yes Bank which then lent the company Rs 275 crore against receivables of UGML and UVSL––although by then the companies’ assets were categorized as “stressed.” Both loans are still outstanding. 

The loans had been sanctioned against sureties of two flats in Mumbai, including one in the controversial “Pratibha” building that was built in an allegedly illegal manner––the top eight floors of the 36-storeyed building located on Sophia College Lane in the posh Breach Candy area, had been demolished in March 1989––besides land at Madh, Borivli, held in the name of Palak Agency Private Limited, whose director is Ankit Miglani (one of the promoters of the Uttam group) and against which there is a title litigation. The Central Bureau of Investigation (CBI) had lodged a first information report (FIR) against this firm on April 30, 2019, alleging illegal diversion of funds. 

It was further alleged by Prateek Jatia that Yes Bank had increased the quantum of the loan sanctioned by it to Archista Steels by Rs 50 crore despite the fact that the parlous financial state of the Uttam group had by then been widely publicised in the media and that insolvency proceedings against two group companies were going on at that time. 

On August 19, the Makalu group’s representative wrote to Jai Bhagwan Bhoria, authorised representative of RBI, alleging that land acquired by another group firm, Shree Uttam Steel and Power Limited, that was supposed to set up the earlier-mentioned integrated steel plant at Satarda, Sawantwadi in Sindhudurg district, had been over-valued at Rs 900 crore, sub-divided and shown as collateral by multiple firms in the Uttam group to obtain loans.

One such firm was First India Infrastructure Private Limited that had been disbursed loans of Rs 70 crore by PMC Bank in 2016-17 that remained unpaid. This Haryana-based company had been given loans against collateral of a building that did not possess an occupancy certificate. 

The scam-tainted cooperative bank, that had a total exposure of Rs 2,000 crore with the Uttam group, had disbursed loans to eight group companies to avoid “single party exposure,” it was alleged. These companies include Black Stone Multi Trading Limited, Barclays Export Private Limited, Jwalla Energy Resources Private Limited (in which a Singapore-based national holds majority shares), Kredence Multi Trading, Shah Steel Impex and Shah Enterprises. 

Before PMC Bank got embroiled in a major scandal that left its depositors high and dry and led to intervention by RBI, a spokesperson of the bank had told Bloomberg Quint on September 27, 2019, that the Uttam group had not defaulted on its loans, that group exposure was less than Rs 300 crore and that the loans would be repaid on due dates.

This writer sent two sets of email messages to three promoters of the Uttam group, Rajinder Kumar Miglani, Anuj Miglani and Ankit Miglani on September 9 and September 30. Another email was sent to Jai Saraf of Nithia Capital on September 30. No response was received till the time of publication. This article will be updated as and when responses are received.

Time will tell how the Supreme Court decides on the appeal made by the Makalu group against the Uttam group. 

Research and writing assistance: Sourodipto Sanyal

The writer is an independent journalist.