Tue 07/05/2022 10:08 AM
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Relevant Documents:
Antwerp Court of Appeal Judgment
Consolidated Briefs to Antwerp Court of Appeal
Administrator’s Brief to Antwerp Court of Appeal
Gupta’s Brief to Antwerp Court of Appeal
Ecnavla 8 UK Ltd Administrator's Report

American Industrial Partners, or AIP, the new owner of the former GFG Alliance aluminium plant in Duffel, Belgium, seeks the recovery of €55 million of missing funds placed in an escrow account by order of the European Commission in 2020. Sources say the funds were held in the now collapsed Greensill Bank in Germany rather than Deutsche Bank at the behest of Sanjeev Gupta, the embattled owner of companies in the Gupta Family Group or GFG Alliance. GFG owns aluminium and steel assets across the U.K and Europe under the brands Alvance Aluminium and Liberty Steel.

Gupta failed to use the funds for capital investment in the Duffel plant as instructed by the EU Commission. AIP is concerned by a series of suspicious transactions which indicate that the funds are now effectively missing, however Gupta disputes this characterisation.

A united front of trade unions at the Duffel plant representing 1,000 workers had also become increasingly opposed to Gupta’s mismanagement of the plant. In a letter, they raised concerns that “since the take-over by GFG…a lot of money has disappeared from the Duffel establishment.” This includes the escrow funds, loans to Liberty entities and metal prepayments to Zopco SA, a trading house, for which nothing has been received. Administrators from FRP Advisory also warned that Gupta's promises and commitments “must be viewed with the utmost caution.”

By June this year, just prior to the acquisition by AIP, the unions lost all confidence in Gupta and threatened the possibility of a strike with an unlimited duration if GFG or Gupta retained control, according to a letter seen by Reorg.

AIP recently took control of Alvance Aluminium Belgium and Alvance Aluminium Duffel BV after a sale of pledged shares by administrators to the parent company Ecnavla 8 UK Ltd – the guarantor to over €100 million of defaulted first lien debt. The first lien debt swelled from around €50 million to more than €100 million due to the advance of additional funds by AIP to meet working capital needs and accrued unpaid interest.

The €55 Million Escrow Funds

In 2020, AIP purchased a former sister plant to the Duffel Business located in Lewisport, Kentucky, U.S. This plant and Duffel had both previously been owned by the U.S Aleris Corp. and, following a takeover by Novelis (another aluminium producer), antitrust authorities ordered Novelis to divest the assets to avoid over-concentration of supply in the auto markets. As a result, GFG bought the Duffel Business for €310 million and AIP was selected by the U.S. Department of Justice to buy the Kentucky business. Both businesses provide sheet aluminium to car manufacturers. The main difference between them is that the Kentucky plant sells exclusively to customers in North America and Alvance Duffel sells primarily to European customers, including BMW and Audi.

To date, Gupta has only paid €210 million to Novelis, and has refused to pay the remaining €100 million. Novelis has initiated arbitration proceedings over the matter which are ongoing.

One of the conditions of the sale imposed by the European Commission was that Novelis had to place €55 million of the sale proceeds into an escrow account. The funds were to be used for certain capital and investment expenditure, including a new milling machine, in order to maintain the Duffel plant’s competitive position in the European market and ensure it could operate independently of Novelis. The escrow account was opened with the now collapsed Greensill Bank as the escrow agent.

An escrow agreement dated Sept. 30, 2020, contained what AIP describes as “a quite unusual clause” allowing the parties to assign or create security over their respective rights in the escrow agreement, the amount in escrow, or the escrow account to Greensill Bank or its affiliates. AIP were also alarmed by subsequent activities in relation to the escrow funds which FRP described as “abnormal and disturbing.”

On the day the escrow agreement was signed, Aleris Aluminium Duffel pledged “in a very comprehensive way” according to AIP, all its rights in relation to the escrow account to Greensill Bank for the purpose of securing all present and future claims of Greensill Bank against all GFG group members. The FRP administrators took the view that while the pledge could in principle be possible under the agreement, it resulted in the erosion of the purpose behind the funds and the intention of the EU Commission.

Secondly, a routine audit by EY later revealed that on the same day, the escrow account was entirely emptied and transferred to a different account at Greensill Bank. AIP says the escrow agreement is clear that the funds can only be released for their intended purpose of capital expenditure investments. A letter from Greensill Bank confirmed that there were now three accounts “linked to the Account Pledge Agreement”. AIP is concerned that Greensill Bank had foreclosed on the €55 million, effectively extracting value from Duffel to benefit other GFG Alliance companies. The letter also confirmed that the €55 million was no longer in a cash collateral account but in a term deposit account with a maturity date of April 30, 2022. This means it may be impossible for AIP to recover the funds from the German depository protection scheme.

According to Gupta, a fresh escrow agreement was signed in May 2021 to create a framework to recover the funds from Greensill and move them to Deutsche Bank. But nothing has come of this. Gupta asserts that the only reason the funds can not be recovered is due to the collapse of Greensill and not misappropriation.

The trade union front at Duffel wrote to management again in September last year “The promised investments that were part of the conditions of sale are not being made…[and] are essential for the independent operation of our company in Duffel in the near future.” The unions noted that this was hampering recruitment and was costing Duffel in lost revenue and contracts. In order to pay bills and continue production, the unions said CO2 certificates had been sold, slabs (of aluminium) had been sold and suppliers had not been paid on time.

Mismanagement, broken promises, poor communication and a request for detailed information relating to the company’s swelling debt position went unanswered by Gupta leading to the threat of a general strike last month.

The Duffel aluminium rolling plant generated revenue of €542 million in 2019, according to the administrators, and a profit of €26 million. However, neither of the Duffel entities have compiled any annual accounts since Gupta acquired them in 2020.

Duffel Issues Indicative of Wider Problems in GFG Alliance

The concerns of AIP, the administrators and unions are not unique to Duffel. AIP notes that an investigation by French prosecutors into the disappearance of a €18 million French government-backed loan given to a French GFG group company “shows remarkable resemblance to the Novelis escrow issue.” GFG entities are also currently under investigation by the U.K.’s Serious Fraud Office.

GFG also owns a Belgian steel mill, Liberty Liège-Dudelange SA, which narrowly avoided being placed into liquidation in May. GFG acquired Liège-Dudelange in 2018 with promised investments of up to €100 million which have not materialised. In November 2021, the Enterprise Court of Liège confirmed a judicial reorganisation plan which included refinancing and debt clearance commitments. By December, Gupta had reneged on the restructuring commitments. Liquidation was only avoided when Gupta’s Romanian steel subsidiary, Liberty Galati provided financial support in the form of a €52.5 million debt-to-equity swap and a €3 million cash injection, according to the Financial Times.

In the U.K, a Parliamentary inquiry noted fundamental issues and concerns associated with the corporate governance, leadership, transparency, funding and operations of Gupta’s businesses. It concluded that: “we remain unconvinced by Sanjeev Gupta’s attempts to restructure and re-finance his businesses…and remain concerned that this poses a threat to the long-term prospects of Liberty Steel UK.”

HMRC is currently pursuing winding up petitions against three UK Liberty Steel entities, as reported.

Legal Struggle Over Appointment of Directors

For the past year, Gupta has fought a rearguard action in the Belgian Courts to maintain control over the Duffel assets. Following the acceleration of €96.1 million of first lien debt by the loan security agent GLAS in July 2021, GLAS moved to appoint administrators over the parent company to the Belgian assets, Ecnavla 8 UK. The administrators from FRP promptly removed Gupta as the sole director of the two subsidiary companies and replaced him with independent directors to ensure the interests of creditors were protected and to increase the flow of information.

In September, Gupta successfully applied to the Antwerp Enterprise Court to have the appointments suspended and his appointment reinstated. The administrators, advised by Simmons & Simmons, successfully appealed the decision.

The Antwerp Court of Appeal overturned the decision in a judgment on May 5 removing Gupta as director and paving the way for AIP to take the keys to the Duffel plant last month. GFG now claims it is owed €21 million that it invested in Duffel before AIP took control, sources told Reorg.

First Lien Defaults, Collapsed Sale Talks

AIP approached GFG with an offer to purchase the Duffel business in February 2021 which was rejected. Following the collapse of Greensill Capital in March 2021, which GFG was heavily dependent on for its supply chain financing, GFG changed tack and made an offer to sell both the Duffel business and the Dunkirk business to AIP. The collapse of Greensill put GFG in acute financial distress, it needed urgent working capital to refinance its outstanding loans and had caused suppliers to revise their delivery payment terms which now required a larger upfront cash requirement. FRP noted that Greensill Capital’s insolvency is partly attributed to GFG Alliance’s own default on loan repayments and, at one point, GFG Alliance even feared that it would become insolvent itself if Greensill Capital went under. The receiver of Greensill Capital also established that certain loans to Gupta could not be supported by invoices and that the companies mentioned on those invoices denied ever having done business with him.

Last month, Liberty Steel reached a standstill agreement with Greensill Bank pausing all enforcement action until October.

On April 6, 2021, Tor Investment as 100% holder of what was originally a €50 million first lien facility declared Alvance Aluminium Duffel BV in default following an unauthorised loan in breach of covenants to an entity called ‘Liberty Financial Management’ or LFM, and of failing to submit audited and approved financial statements for the 2020 financial year. LFM is a U.K. company owned by Gupta which acts as “treasury company” for the GFG Alliance. It was from LFM that funds were forwarded by GFG to repay debt related to the Dunkirk aluminium plant that AIP said they could not accept since it was “tainted” by fraud, as reported.

Shortly after, and at Gupta’s request, AIP acquired the first lien facility from Tor along with the related share pledges. AIP agreed to waive any existing events of default, advance an additional €18 million in working capital, and reduce the interest rate. Tor received a €3 million break fee, according to the trade unions.

In July 2021, after 75 days of negotiations, GFG withdrew from sale discussions with AIP over the proposed purchase after heads of terms had been agreed personally with Gupta. The terms included an agreed valuation of the Duffel assets and personal guarantee of the first lien debt by Gupta. Gupta said the proposed price of €255 million was “obviously artificially low.” However, to date Gupta has only been willing to pay Novelis €210 million for the 2020 acquisition of Duffel.

Since AIP acquired the debt, fresh events of default occurred when Alvance Duffel failed to make a €7.5 million payment on June 30. AIP then instructed GLAS to accelerate the debt. Though it remained open to forbearance.

Over the next 11 months, Gupta failed to refinance the debt. Once administrators had secured the removal of Gupta as a director of the Duffel entities in the Belgian courts, AIP bought the shares from the administrators.

Gupta’s successive negotiations with Tor, ICP and others show that he “keeps shuffling the funding for the GFG Alliance companies” FRP concluded, “each time giving himself an important position but never actually repaying loans.”

– Connor Lovell
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