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Problems for U.S. Steel Košice going into sale. A shell company is making a grab for its premises

The Košice Regional Court retained two thirds of the U.S. Steel premises in Košice-Šaca in favour of a shell company. The steelworks do not comment on lawsuits.

U.S. Steel Košice(Source: Courtesy of U.S. Steel Košice)

USSK, the Košice-based steelworks with 10,000 employees has a significant problem. The courts have placed restrictions on the sale of its property shortly before the factory is expected to change hands in a forthcoming deal with the Chinese owned Hesteel Group.

The Košice Regional Court issued a right of lien in relation to two thirds of the land owned by U.S. Steel Košice (USSK) in favour of an American shell company, Adams & Co. The court’s spokesperson, Marcela Gálová, confirmed the information for the Sme daily. The right of lien has also been published as part of the on-line cadastre.

Adams & Co., whose ownership is unclear, is demanding €16 million from U.S. Steel but the value of the lands in question significantly exceeds the total amount claimed.

The two companies have been in dispute since the 1990s when the steelworks, then known by the name Východoslovenské Železiarne (VSŽ) was controlled by a privatisation group under Alexander Rezeš, which brought it to the brink of bankruptcy.

Adams & Co. do not currently own any part of the property but do have the right to restrict its sale until the debt they claim is owed to them is discharged. The right of lien on the lands is non binding and U.S. Steel can still appeal the measure.

“We do not comment on ongoing lawsuits,” U.S.Steel Košice spokesperson, Ján Bača, told Sme.

The measure issued by the court does not prevent the American company, United States Steel Corporation, from concluding the planned sale of the business to the Chinese.

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Two thirds of the land

The factory has 2,020 plots of land registered on the ownership certificate, of which two thirds have been included within the court ruling. Sme calculations point to 1,872 of them under the lien right, or 5.8 million square metres or 575 hectares of the area, which is almost 64 percent of the whole premises.

Satellite images show that key parts of the steelworks are located on the lands in question, including blast furnaces for the production of iron and rolling mills for the production of sheets.

Back in the 1990s

The measure is the result of a conflict that emerged 20 years ago. Adams & Co. sued the factory for the first time in 1999, alleging that in the 1990s the steelworks used its intellectual property without proper authorisation.

The trade relations between the shell company and the steelworks came about in the 1990s. At that point they were facing bankruptcy and the banks placed an experienced manager, Gabriel Eichler, at the helm who managed to revitalise the company.

“There were contracts at all levels that were clearly disadvantageous for the company - the purchase of raw materials, transport, sale, and exports,” Eichler said in 2012 about the state the factory was in when he took over. “There were long-term contracts everywhere with companies who were making big money on it.”

When Adams & Co. sued the factory in 1999, they demanded USD 9.6 millions. The Bratislava Regional Court blocked the bank accounts of the steelworks for several weeks but later cancelled the order when the shell company failed to produce evidence to support its claims. Furthermore, the Bratislava court's authority to deal with the case has been questioned as it should fall under the jurisdiction of the Košice court.

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In 2013, Adams & Co. filed another lawsuit in Košice and this case has resulted in the lien on the lands of the steelworks. The case has not been closed, the court has yet to rule on the obligation of U.S.Steel to pay.

Shell company with debts on taxes

It is not clear exactly what intellectual property is the subject of the suit. It is also not clear who the real owners of the American company are.

The available data suggest that it is a shell company that was founded in 1990 based in an inconspicuous business centre in Wilmington, Delaware which is 200 km from New York. The same address is shared by thousands of other companies.

Since 1993 the register has labelled the company a “Tax Deliquent” because it has failed to pay the annual tax licence, USD525. The company has also failed to submit the compulsory annual financial reports.

Why did the court do it?

It is not clear, for now, why the Košice Regional Court put most of the U.S. Steel Košice lands under the right of lien. The court has not yet published the full reasoning behind its decision. Sme daily requested this, based on the law on free access to information but a few days remain until the deadline elapses

Doubts surround the decision of the court because the law states that property can only be impounded if there are concerns that the distrainment could be threatened but there are no reasons to believe there are such concerns in this case. Even if the company lost, it would not be a big problem for them to pay the amount the shell company demands.

“Sixteen millions is not a life-threatening amount for U.S. Steel,” Finlord analyst, Boris Tomčiak, told Sme and he pointed to its annual revenues exceeding two billions euros.

The overall value of the property of USSK is about €1.4 billion based on the latest data from 2015. The account records show that just the lands and buildings alone have a value of €446 million, which is significantly in excess of €16 million.

But if Adams & Co. finally wins the lawsuit, it will be able to call out its right of lien and take ownership of part of the lands under the steelworks.

The law says Adams & Co. can apply the right of lien immediately after the court issues an effective ruling in its favour.

It is not clear if the company would also get the lands if U.S. Steel paid in cash, in the case that the steelworks loses the lawsuit. The measure that the court applied in this case has only been part of the law since July 2016 and it has not been well-established in practice so far.

No reserves

Despite the fact that U.S. Steel does not comment on lawsuits, its accounting suggests that they did not count on ever losing one. In 2013 the company did not put aside any reserves for the purposes of a lost lawsuit.

In 2015, its reserves for lawsuits amounted to €441,000, down by €3 million year-on-year.

Many doubts

The lawsuit has provoked doubts since its very start. At the beginning, U.S. Steel requested the court to order Adams & Co. to put down a deposit for the court fees. The law allows for such measures when the lawsuit in question exceeds €80,000.

The court obliged U.S. Steel and in 2015 ordered that both parties put down a deposit of €590,000 each. While U.S. Steel sent the money to the court, Adams & Co. did not. Thus, the whole proceeding should have been halted in September of that year but it continued. In November 2015 the court issued a decision to free the American company of court fees without providing an explanation. U.S. Steel appealed against this decision at the Constitutional Court but the appeal was dismissed in March 2016.

Just before the sale

The court retained part of the lands under the steelworks only a few days before it is expected to change hands. The information garnered by the Sme daily suggests that the purchase agreement with the Chinese Hesteel Group should be closed after Easter. The sale may not necessarily be affected by the lawsuit.

“The measure does not impose limits on the owner to handle the property,” the court spokesperson Marcela Gálová said.

The buyer must accept the right of lien for Adams & Co., however.

Companies usually solve this kind of situation with a special clause in the sale contract, says Michal Mišun from the Redbaenk advisory company.

©Sme

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