Gujarat HC dismisses Essar Steel petition in insolvency case

Rajalakshmi S Updated - January 11, 2018 at 02:59 PM.

Observes that RBI directions not ‘arbitrary’, banks can initiate insolvency proceedings

steel

The Gujarat High Court on Monday dismissed Essar Steel’s petition seeking to quash the Reserve Bank of India’s directive to a consortium of lenders, clearing the way for them to initiate proceedings under the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT).

The order strengthens banks’ case to recover money from corporate defaulters.

Passing judgement on the ESIL’s petition, filed on July 4, Justice SG Shah ruled out any relief to ESIL.

The company had claimed that the RBI’s directive was in the nature of a classification, which was “irrational, unjust and arbitrary” and an impediment to its recovery process, which it claimed was under way with its lenders.

The Court, however, noted that “it would be appropriate for RBI to see that benefit of all its schemes is equally offered and extended to all without any discrimination.”

The Court also turned down ESIL’s plea to quash the decision of the SBI, which heads the consortium of lenders, to file proceedings under IBC against it.

“It cannot be held that Banking Company is not entitled to initiate insolvency proceedings without the directions of the RBI u/s 35AA of Banking Regulation Act,” the court ruled.

The Court also denied ESIL any relief on its plea to restrain Standard Chartered Bank (SCB) from proceeding further under the bankruptcy code.

Essar’s response Responding to the order, an Essar Steel spokesperson said, “Our request to the... Court was that in view of the... advanced stage of discussions with lenders on (Essar Steel’s) debt resolution, payment of ₹3,467 crore to banks between April 2016 and June 2017, and the substantial improvement in all operating parameters, the company should have been given time to complete its debt restructuring.”

Referring the company to the IBC at this stage, it argued, may result in deterioration of the company’s operations and delay the resolution discussion with the banks.

The spokesperson noted that the court had indicated that all of these issues should be considered by the NCLT. “We will be raising these issues for consideration by the... NCLT.”

NPAs at ₹7.2 lakh cr RBI had earlier told the court that as on March 31, 2017, the gross NPAs of banks had aggregated more than ₹7,28,768 crore, about 5 per cent of GDP. About 12 per cent of the total advances by public sector banks are NPAs, RBI counsel had stated.

The High Court further observed that there is no direction that insolvency proceedings are to be initiated only against some companies and not others.

Lenders free to proceed “It goes without saying... that for filing any such proceeding, none of the financial company or Bank requires either the permission or direction from RBI... because it is their independent and absolute right to initiate any such proceeding/s,” the order said.

On the ESIL’s concerns about the impact of the admission of the petition before the NCLT under the Act, the High Court merely noted that in a petition under Article 226 of the Constitution, ultimately, all such issues would be raised before the NCLT, which has to ascertain whether there was reason to admit the insolvency resolution process immediately or not.

The court additionally held that, “The adjudicating authority certainly requires to extend hearing and reasonable opportunity to the company to explain why such an application should not be entertained.”

In other words, it noted, “filing of an application may not result in mechanical admission of application as seen and posed by RBI in (the) impugned press release. It would be a decision based on judicial discretion by the adjudicating authority to deal with such application in accordance with (the) law and based upon facts, evidence and circumstance placed before it.”

Plea in NCLT today Meanwhile, the NCLT-Ahmedabad bench is likely to hear the lenders’ petition on insolvency proceedings against Essar Steel on Tuesday.

According to data collected by the Central Repository of Information on Large Credits, as on March 31, 2017, the total fund outstanding against Essar Steel with banks was ₹33,842 crore.

As on March 31, 2016, ₹31,671 crore or 94 per cent of the outstanding amount was classified as NPA, which increased to ₹32,864 crore or 97 per cent of the outstanding by March 31, 2017.

Published on July 17, 2017 10:41