In a major setback to Essar Steel that is set to go under bankruptcy proceedings initiated by the Reserve Bank of India (RBI), the Gujarat High Court on Monday dismissed a plea by the company challenging the proceedings under the Insolvency and Bankruptcy Code (IBC) at the National Company Law Tribunal (NCLT).
“It goes without saying that any action is to be started with someone and may not lie against all at the time,” the order said. “It also goes without saying, as already recorded herein above, that for filing any such proceeding, none of the financial company or Bank requires either the permission or direction from RBI for other agency or authority because it is their independent and absolute right to initiate any such proceeding/s,” it added.
The court had earlier stayed the insolvency proceedings against Essar Steel before the National Company Law Tribunal (NCLT) as an interim measure on its plea. The company owed lenders about ₹45,000 crore, of which ₹31,671 crore had become NPA as on March 31, 2016.
First to approach court
Essar Steel was the first to approach the High Court, challenging the Reserve Bank of India’s June 13 circular asking the banks to initiate action against the company and eleven other firms with more than ₹5,000 crore of outstanding loans each under the IBC.
While rejecting the company’s plea, Justice S.G. Shah noted that the action initiated by the RBI was not arbitrary as argued by the company.
In its petition, the company had made multiple prayers claiming that RBI’s directive was in the nature of classification and such classification was irrational, unjust and arbitrary and an impediment to its recovery process, which it claimed was under way with its lenders.
However, the Court observed that it cannot be held that RBI’s directions are in the nature of classification or such classification is irrational, unjust, arbitrary or discriminatory... “but 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 83-page order stated.
Other pleas rejected
Moreover, the court has also set aside the company’s another plea seeking to quash the State Bank of India (SBI)’s move to initiate proceedings under IBC.
“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, denying any relief on the plea.
The High Court also denied ESIL any relief on its plea to restrain international lender Standard Chartered Bank (SCB) from proceeding further with proceedings under bankruptcy code. “It cannot be held that directives of RBI under reference by impugned press release are binding upon SCB and therefore SCB is bound to consider the restructuring proposal by the petitioner, wherein petitioner has offered to start payment of dues only after 25 years and that too only with 1% interest...
“Only because SCB has corresponded to SBI for its proposal with reference to JLF activities, it cannot be held that SCB could not have initiated insolvency proceedings but it has done it only because of RBI guidelines by way of press release,” the order stated.
Earlier, in the course of the hearing, the RBI had told the court that as on March 31, 2017, the gross NPAs in India aggregated more than ₹7,28,768 crore, which is about 5% of the GDP. About 12% of the total advances by public sector banks are NPAs, the RBI counsel had stated.
In a statement, Essar Steel said its request to the court was that, “in view of the specific facts of Essar Steel, i.e., advanced stage of discussions with lenders on its debt resolution proposal, 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 as we apprehended that referring the company to the IBC at this stage may result in deterioration of the company’s operations and in fact, may delay the resolution discussion with the banks.”
‘NCLT to decide’
The statement added that as per Monday’s order, the NCLT needed to decide, “based upon factual details that whether the insolvency petition is required to be entertained as such or not.”
“We respect the decision of the Hon’ble High Court and will accordingly be raising these issues for consideration by the Hon’ble NCLT,” said an Essar Steel spokesperson.
“The High Court said that RBI circular is not arbitrary and whatever action State Bank of India was doing with respect to restructuring of Essar Steel will now be done at NCLT,” Sandeep Sanghi, advocate representing Essar Steel told The Hindu.
“Standard Chartered Bank, also a party to the case, stands on a different footing. The court observed that SCB can initiate its own bankruptcy proceedings,” Mr. Sanghi added.