More steel to lenders

| Updated on January 11, 2018 Published on July 19, 2017

The Gujarat High Court verdict in the Essar Steel case sanctifies the IBC process and strengthens the hands of lenders

Counter-intuitive as it might seem, Essar Steel may actually have done a favour to the fledgling Insolvency and Bankruptcy Code by challenging the Reserve Bank of India and State Bank of India in the Gujarat High Court, which the latter has now dismissed. The embattled steelmaker had challenged RBI’s direction to the lenders to start insolvency proceedings against the company. Essar Steel argued that it was not given an opportunity by the central bank to present its case before its name was included in the list of 12 borrowers that was referred to the National Company Law Tribunal (NCLT) for commencement of insolvency proceedings. The company had argued before the court that it was in the process of revival now having repaid ₹3,467 crore between April 2016 and June 2017 out of its massive outstanding debt of ₹45,000 crore. Its operating parameters had improved and the company was in talks with banks and therefore ought to have been given time to complete restructuring the debt.

The Gujarat High Court needs to be lauded for not just clearly spelling out the rights of lenders under the IBC but also calling out Essar’s attempt to delay the insolvency process. The company had argued that initiation of insolvency proceedings would disrupt operations and threaten the livelihoods of workers. By holding that a bank is entitled to launch insolvency proceedings even without the directions of the RBI under section 35 AA of the Banking Regulation Act, the court has cleared the path for lenders to proceed aggressively against truant borrowers to recover their dues. The court has left no room whatsoever for borrowers to exploit by expressly clarifying that banks do not require either permission or direction from the RBI to initiate insolvency proceedings because it is their absolute right to do so. In the process, the powers of the NCLT as the insolvency court have also been upheld with the High Court stating that the former would give Essar Steel the chance to explain its position before deciding on the insolvency petition of the lenders.

The judgment effectively closes an option for other troubled borrowers who may have been considering appealing against the IBC proceedings as Essar did. While the action now shifts back to the NCLT, the challenge for the lenders is to keep to a minimum the sacrifice that they have to make for a settlement. Borrowers such as Essar Steel have commissioned state-of-the-art assets on the ground and it will be interesting to watch if suitors emerge to rescue the company during the IBC process. Meanwhile, the rap on the knuckles that the RBI got from the court is well-deserved. Its press release which referred the 12 borrowers to the NCLT for consideration on a “priority” basis was clearly wrong in using language that was not appropriate while dealing with a quasi-legal authority such as the NCLT.

Published on July 19, 2017

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill.

In these difficult times, we, at BusinessLine, are trying our best to ensure the newspaper reaches your hands every day. You can also access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all our readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. You can help us by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section.

Our subscriptions start as low as Rs 199/- per month. A yearly package costs just Rs. 999 – a mere Rs 2.75 per day, less than a third the price of a cup of roadside chai..

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor