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Essar Global accused of siphoning hundreds of millions from U.S. taconite project (update)

A new lawsuit against the India-based parent company of Essar Steel Algoma and affiliated firms is seeking more than a billion dollars in damages.
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Jan. 13 update:

An Essar Global Fund Ltd. spokesperson has provided the following response to the lawsuit filed by Essar Steel Minnesota:

"Essar Global Fund Limited (EGFL) is aware of the complaint filed by Essar Steel Minnesota LLC (ESML) in the Delaware court as part of the Chapter 11 proceedings.

EGFL denies all of the allegations set out in the Complaint, which it will vigorously contest.

EGFL regrets that these allegations have been publicly disclosed through the Complaint being filed, prior to EGFL having the opportunity to correct and rebut these unfounded allegations."

Jan. 12 original story:

Essar Steel Minnesota LLC, a sister company to Essar Steel Algoma and until recently an expected supplier of taconite to the Sault steelmaker, is now accusing parent company Essar Global of diverting half a billion dollars from its massive construction project in the heart of Minnesota's Mesabi Iron Range.

A lawsuit launched yesterday by Essar Minnesota accuses the India-based global conglomerate of using cash earmarked for its iron ore pellet plant under construction in Nashwauk, Minnesota as a corporate piggy bank for needs unrelated to the project.

"The iron ore pellet facility and procurement are both incomplete," lawyers representing the Minnesota subsidiary say in a 137-page complaint filed Wednesday with the United States Bankruptcy Court in Delaware.

"The project consists of structures that lack certain exterior walls, permanent electrical fixtures and conveyor belts to transport iron ore through various stages of processing. Large portions of equipment to be procured for the project were ordered but neither paid for nor delivered. Thousands of pieces of fabricated structural and non-structural steel are strewn about the project site, waiting to be used to complete buildings."

Essar Minnesota is "left with a half-completed iron ore pellet plant that will cost hundreds of millions of dollars more to finish," and is also "burdened with over a billion dollars in claims asserted against it that are directly attributable to the Essar affiliates' failures to fulfill their obligations with respect to the project," says the billion-dollar lawsuit, whose allegations have not yet been tested in court.

"These circumstances resulted from a  course of conduct in which [Essar Minnesota] was treated as if it existed solely for the benefit of the Essar Global enterprise, without regard for [Essar Minnesota]'s interests or its creditors."

"Essar Global and multiple Essar affiliates, often acting in concert, funneled money paid to them for project uses to wherever it was deemed to be needed by those in control of Essar Global and Essar affiliates, without regard for corporate structures, operative contracts or the law - or any repayment ability."

"Indeed, of the over $1.1 billion [Essar Minnesota] paid to Essar affiliates, almost half (approximately $500 million) was not even used on the project, even though it was needed to complete engineering, procurement and construction work."

Essar Minnesota's lawsuit against Essar Global and affiliated companies incudes:

  • breach of contract
  • fraudulent transfer
  • breach of fiduciary duties
  • aiding and abetting breach of fiduciary duties
  • tortious interference with contract
  • promissory estoppel
  • claims disallowance
  • equitable subordinatiion
  • declaratory relief regarding alter ego
  • alter ego against certain affiliates of fiduciaries of Essar Steel Minnesota

Essar Global is based in the Cayman Islands, with its principal place of business in Mumbai, India.

In 2007, it acquired the Minnesota Iron Ore Project, aimed at building a large-capacity iron ore mine and pellet plant in Nashwauk.

In July 2016, Essar Minnesota applied for U.S. Chapter 11 bankruptcy protection.

It now styles itself as Mesabi Metallics Company LLC and is restructuring with hopes to emerge as an independent company with no further involvement by Essar Global.

When work recommences in Nashwauk, completing the project is expected to take more than a year, with hundreds of workers toiling daily.

Named as defendants in the lawsuit are:

  • Essar Global Fund Ltd.
  • Essar Projects Ltd.
  • Essar Projects USA, LLC
  • Essar Projects (India) Ltd.
  • Essar Project Management Co. Ltd.
  • Essar Constructions Ltd.
  • Essar Projects Middle East FZE
  • Essar Engineering Services Ltd.
  • Global Supplies FZE
  • Essar Logistics Ltd.
  • Madhu Vuppuluri, former president and CEO of Essar Minnesota
  • John Does 1-1000

"From 2008 to 2016, [Essar Minnesota] paid Essar Global and its various affiliates over $1.1 billion to complete the project," the lawsuit states.

"[Essar Minnesota] was treated as if it existed solely for the benefit of the Essar Global enterprise, without regard for [Essar Minnesota]'s interests or its creditors."

"Essar Global and multiple Essar affiliates, often acting in concert, funneled money paid to them for project uses to wherever it was deemed to be needed by those in control of Essar Global and Essar affiliates, without regard for corporate structures, operative contracts or the law - or any repayment ability."

"Indeed, of the over $1.1 billion [Essar Minnesota] paid to Essar affiliates, almost half (approximately $500 million) was not even used on the project even though it was needed to complete engineering, procurement and construction work."

"The siphoning of hundreds of millions of dollars from [Essar Minnesota] was part of a larger effort to shore up the finances of Essar Global that treated [Essar Minnesota] as part of a single enterprise for the benefit of Essar Global without regard to  [Essar Minnesota]'s financial condition."

"Although the full extent of the Essar affiliates' transmutations of the funds paid by [Essar Minnesota] await discovery, such misues were rampant and often occurred at a time when the project was starved for cash and without regard for the receiving Essar affilates' ability to repay the funds."

"A primary reason for the project's state of incompletion, despite [Essar Minnesota] 's payment of over $1.1 billion to the Essar affiliates in substantial performance of its obligations under the project contracts, is that almost half of the money was not put to use on the project by the Essar affiliates. [Essar Minnesota]  transferred hundreds of millions of dollars to Essar affliates without receiving reasonably equivalent value in return."

"Essar Global and certain controlling persons controlled and dominated its subsidiaries and affiliates... to such an extent  that they have no separate existences and act as mere instrumentalities of Essar Global."

"At all relevant times, Essar Global was the alter ego of each of its subsidiaries that are defendants herein."

Essar Global's original plan was to ship taconite pellets from the Minnesota facility to Essar Steel Algoma in Sault Ste. Marie.

However, Essar Algoma filed for protection from its creditors in November, 2015.

In October 2016, the court-appointed monitor overseeing Essar Algoma's restructuring launched oppression proceedings against Essar Global.

Claims made in the ongoing Canadian oppression proceedings include the following:

  • Essar Steel Algoma was billed more than US$9 million for a corporate jet and residential and office space in New York City that were never used by the Sault steelmaker.
  • from 2011 to 2016, Essar Steel Algoma paid a total of $US7.5 million for residential and office premises in New York City that were similarly "not incurred for the benefit of Algoma's business but for other members of the Essar Group."
  • transfer of Essar Algoma's port allowed the Essar Group to obtain an effective veto over transactions involving the Sault steel mill. 
  • divestiture by Essar Steel Algoma of its cogeneration plant left the steelmaker without contractual certainty for its electrical supply.
  • Essar Steel Algoma paid premiums to Essar Group subsidiary New Trinity Coal Inc. in excess of prices charged by Essar Algoma's other coal suppliers.
  • multi-million-dollar payments made by Essar Steel Algoma to Essar Mauritius for lump iron ore, metallurgical coal and coke essentially amounted to interest-free loans that benefited Essar Group to the detriment of Essar Algoma.

Essar Global has responded with a statement of defence, denying those accusations.



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David Helwig

About the Author: David Helwig

David Helwig's journalism career spans six decades beginning in the 1960s. His work has been recognized with national and international awards.
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