No Relief For Essar Steel In Bankruptcy Case
Essar Steel’s petition against insolvency proceedings was seen as a test case for the RBI’s resolution plan.
The Gujarat High Court on Monday rejected Essar Steel's plea against bankruptcy proceedings initiated by its lenders at the National Company Law Tribunal (NCLT).
Essar Steel was one of 12 companies picked by the Reserve Bank of India (RBI) for resolution under the Insolvency and Bankruptcy Code (IBC). The RBI’s directive followed amendments to the Banking Regulation Act, which allowed the regulator to intervene directly in the resolution of nearly Rs 10 lakh crore in stressed assets on the books of Indian banks.
Essar Steel had challenged the RBI’s decision to include it in the list and the subsequent decision by State Bank of India (SBI) to initiate insolvency.
In its order, the high court noted that Essar Steel’s claim that the RBI’s directive was in violation of the fundamental rights of the company, does not hold. Justice SG Shah of the Gujarat High Court who heard the arguments, also concluded that a bank is free to invoke the insolvency and bankruptcy code in the event of a default.
The court clarified that a case being filed at the NCLT would not directly result in admission under the IBC.
In its order, the court noted that refusal of interim relief to Essar Steel is obvious because “petitioner company is in debt of more than Rs.45,000 crore for couple of years, its NPA was more than Rs.32,000 crore in last year and more than Rs.31,000 crore in previous year.”
“It is also clear that when total debt is more than Rs.45,000 crores, there is no option, but to leave the issue at the discretion of the lenders to take appropriate steps in accordance with law, thereby, without interference of this court under the constitutional mandate,” the court said.
However, at the cost of repetition, it is made clear that factual details and on-going process of restructuring plan and other details would be taken care of by NCLT before taking any decision on merits.Gujarat High Court
However, the court also cautioned that the RBI should be careful when drafting press releases, as the regulator cannot guide or direct any judicial or quasi-judicial authority in any way.
Previously, the RBI was asked by the Gujarat High Court to make a change in its June 13 press release which stated that the NCLT would ‘accord priority’ to these 12 cases. On July 8, the RBI issued a corrigendum removing that line from its release.
This has been a very positive judgement and is very positive for the insolvency and bankruptcy code. If the judgement had been otherwise, it would have been a setback for insolvency. Enormous amount of work is has gone into this case already. The IBC is a good platform to work out the problems and the company should work with us.Siby Antony, Managing Director & Chief Executive Officer, Edelweiss Asset Reconstruction Company Ltd.
In a statement, an Essar Steel spokesperson said that while the Gujarat High Court had disposed of the company’s petition, it did point out the need for the NCLT to view cases closely and admit only after considering the facts and evidence presented to them.
“We respect the decision of the Hon’ble High Court and will accordingly be raising these issues for consideration by the Hon’ble NCLT,” the Essar Steel spokesperson said.
The Arguments
As part of their arguments, Essar Steel’s lawyers questioned the RBI’s decision to push the company into insolvency proceedings, saying the manner in which the 12 companies were picked was arbitrary. The company pointed out it was in discussions with Standard Chartered Bank till June 21 over a possible restructuring plan which was also approved by the company’s board. However, that plan had been forgotten in favour of insolvency proceeding because of the RBI’s decision last month, Essar Steel’s lawyer had argued.
Essar Steel has also claimed that its operational condition is improving and that it has repaid bankers to the tune of Rs 3,467 crore between March 2016 to March 2017.
In its response, the central bank’s counsel Darius Khambatta said the Rs 5,000 crore criterion used to select companies being referred to the National Company Law Tribunal (NCLT) was logical. To drive home its point, the RBI reiterated that together the 12 accounts against which action has been initiated make up 25 percent of the banking system’s non-performing assets. When asked by the court for documents supporting its decision to include Essar Steel in the list of 12, the RBI said that no such documents existed.
The RBI also claimed that the financial position being presented by the company is not fully accurate and that the aggregate debt of the company has in fact risen.
A Test Case
The Essar Steel case has been seen as a test case for the RBI’s attempts to speed up resolution of nearly Rs 10 lakh crore in stressed loans using the Insolvency and Bankruptcy Code (IBC). While banks have started the insolvency process in each of the 12 cases, only one company – Jyoti Structures – has been admitted.
Apart from Essar Steel, promoters in Monnet Ispat have questioned why the company has been pushed towards insolvency when a potential deal with the JSW Group had been suggested. In response, lenders have argued that the deal was not good enough. On Saturday, BloombergQuint reported that Bhushan Power & Steel may challenge the insolvency proceedings as well.
Among the other cases, in at least two, the NCLT has asked for clarity on whether insolvency petitions are maintainable if previous winding up petitions are pending.
Freelance journalist Devshi Varotariya contributed to this report
