A plan by lenders to sell personal and corporate guarantees on loans given to erstwhile Essar Steel, nearly seven years after the steelmaker’s insolvency resolution, is expected to face a long and difficult recovery process.
Led by India’s largest lender State Bank of India (SBI), 12 lenders have decided to seek bidders for these guarantees, according to a document on the website of BoB Capital Markets Ltd.
The admitted claims during the Essar Steel insolvency was ₹49,000 crore, of which ₹41,970 crore or 92% was recovered under the resolution plan. The BoB Capital Markets document said ₹13,751.21 crore is the outstanding liabilities due and payable under the Essar Steel guarantees as on 31 January 2022 and includes accrued interest. Bankers said this is the difference between how much was admitted under the resolution and how much was eventually recovered, plus interest.
Experts said that while it is the best thing for lenders to do, buyers of these guarantees will not pay enough to cover banks’ dues. Buyers typically include asset reconstruction companies and sophisticated litigation financiers who have the bandwidth and time to go after such assets, they added.
After a few years of litigation under the Insolvency and Bankruptcy Code (IBC), banks recovered over 92% of their dues to Essar Steel when ArcelorMittal India Pvt Ltd took over the steelmaker for ₹42,000 crore in December 2019.
Recovery hurdles
“It is going to be very difficult to recover so much out of personal and corporate guarantees as the assets backing these guarantees will need to be traced,” said a former banker who was part of the Essar Steel lenders’ consortium.
Lawyers outline the causes of delay. “That process may not always result in full recovery, and it is important to recognize that enforcement can be time-consuming, particularly where assets are located overseas rather than in India. Attaching assets situated outside India will also be an expensive affair for the lenders,” said Pratish Kumar, partner, JSA Advocates & Solicitors.
Kumar, who specialises in securitisation and direct sale of stressed assets, pointed out that recovery under these kinds of transactions depends on the “nature and quality” of the assets being acquired.
“In some situations, the objective may simply be to negotiate and settle the loan. At times, the process may also serve as a pressure mechanism to encourage repayment of the outstanding dues”. The bidders could include regulated entities such as asset reconstruction companies (ARCs), banks, or NBFCs.
The SBI-led consortium has set the reserve price for this at ₹200 crore, per the document cited earlier.
With ₹4,155.71 crore, SBI is at the top of the league table, followed by Union Bank of India at ₹2,200.25 crore, Punjab National Bank at ₹1,730.61 crore, and IDBI Bank at ₹1,701.18 crore, besides others.
Guarantees under scrutiny
A renewed push to recover more of their dues from the steelmaker comes about three years after a Supreme Court order allowed personal guarantees to be part of IBC.
According to the document, these guarantees were given as backing for loans extended to erstwhile Essar Steel India Ltd and comprise personal guarantees, issued by former promoters Prashant S. Ruia and Ravi N. Ruia. It also includes corporate guarantees of Essar Investments Ltd — now Aradhana Realties — Essar Steel Mauritius, Essar Steel Asia Holdings, and Essar Steel Mauritius. These were for working capital and term loans.
An email sent to SBI remained unanswered till press time. A spokesperson for Essar said it has “no comments to offer”.
Legal experts said the assignment of rights under the corporate or personal guarantee for the balance amount post-recovery under the resolution plan is not barred by law.
Broadly, relevant regulations under IBC provide for assignment of debt, said Siddharth Srivastava, partner, Khaitan & Co. “Having said that, assignment of PG/CG (personal guarantee/corporate guarantee) post CIRP (corporate insolvency resolution process) is not very common,” said Srivastava.
Slim recovery prospects
Srivastava said one of the main reasons for the lack of such an assignment of personal guarantee is the bleak chances of recovery. That is because most personal guarantees are unsecured in nature, and it may be difficult to recover the amount since the guarantor may not have sufficient assets to cover it.
“Also, in some cases, the assets owned by the guarantor may already be sold to their parties by the time the lender enforces the guarantee. Actual recovery of the debt, therefore, remains the biggest challenge for buyers/assignees of such debt,” he said.
Another person involved in the original insolvency proceedings said that the challenge in selling personal guarantees is tracing the assets of promoters. He said that a formal asset mapping exercise is done when banks want to liquidate such guarantees and this encompasses assets in India and abroad.
“It is easier to sell these guarantees than for banks to do it themselves. It is time-consuming and takes up a lot of bandwidth, which only certain dedicated litigation funds have,” said the second person cited above.