Gujarat HC turns down Essar Steel’s bad loan plea in big win for banks

The Gujarat High Court dismissed Essar Steel’s plea against the Reserve Bank of India directive asking lenders to initiate bankruptcy proceedings against the debt-laden company, observing that the regulator and banks are empowered to do so, giving a boost to the government’s efforts to clean up the country’s bad-loan mess.

But the court cautioned RBI against encroaching upon the judiciary’s territory as a press release it issued previously appeared to be in form of a directive to National Company Law Tribunal (NCLT). RBI has since removed the reference in the reissued press release.

The court dismissed arguments that restructuring under the Insolvency and Bankruptcy Code (IBC) would lead to disruptions in the company’s operations that could threaten the employment of thousands of workers.

The law “certainly makes it clear that, now, RBI has such powers to issue certain directions to certain banks and banking companies so as to see that there is proper recovery of public money or for any other such purpose,” Justice SG Shah said in his order.

“When it is undisputed fact that the petitioner company has not paid its debt to the tune of more than Rs 32,000 crore at the end of 31.3.2017 and when total debt is more than Rs 45,000 crore, it is clear and obvious that RBI is authorised to direct any banking company to initiate insolvency resolution process.”

An Essar spokesperson said the group respects the verdict but pointed out that the high court verdict has given the company another opportunity to present its case before the NCLT.

According to Essar, the court, while highlighting the fact that the RBI has powers to issue certain instructions to banks to ensure proper recovery of public money, also observed that the NCLT should not allow the petition for insolvency to pass without offering an opportunity to the company to explain its position. It further stressed on the need for the company law tribunal to decide on its own based on facts on the validity of the insolvency petition.

“It is undisputed fact that filing of such application cannot be questioned or that action cannot be quashed, but it goes without saying that such filing would not amount to admitting or allowing the petition for insolvency without offering reasonable opportunity to the Company, which is requested to be taken into insolvency by any such person. Therefore, the adjudicating authority being NCLT herein, which is constituted in place of the Company Court, needs to decide on its own based upon factual details that whether the insolvency petition is required to be entertained as such or not,” an Essar statement, quoting the court verdict, said.

The court further instructed the tribunal to consider the ongoing process of the restructuring plan of the company before deciding on insolvency.

“Filing of an application may not result into mechanical admission of application as seen and posed by RBI,” noted the court. “It would be a decision based on judicial discretion.”

Essar petitioned the Gujarat High Court against its inclusion in the list of 12 defaulters by the RBI saying that its restructuring proposal was at an advanced stage and that its financial and operational improvements since March 2016 have not been taken into account by RBI.

The ball is now in NCLT’s court which will hear the main petition for insolvency against Essar in the coming days.

Some bankers said that the ruling underscores the legitimacy of the bankruptcy process.

“It has set a precedent establishing the jurisdiction of NCLT for corporate insolvency and bankruptcy references going forward,” said State Bank of India managing director Sunil Srivastava.

The regulator said the selection of the 12 cases was based on due process.

“To ensure that the identification process does not include companies who have only recently faced stress, the IAC (internal advisory committee) identified the seasoned NPAs (non-performing assets) from List B, i.e., those companies which were classified as NPA to the extent of more than 60 per cent as on March 31, 2016,” RBI told the court.

The court declined to consider the point about jobs after the regulator said operations would not be hampered.

“Though it may seem to be an attractive argument, in my humble opinion, at this stage, in a petition under Article 226 of the Constitution of India, I do not wish to explore all such issues and to determine anything precisely because, ultimately, all such issues would be raised before NCLT, which has to ascertain that whether there is reason to admit the insolvency resolution process immediately or not,” said the order.

The order comes as a relief to the banking industry, which has been struggling under a bad-loan burden of more than Rs 7 lakh crore, or 9.6 per cent of the total.

“This sets a very clear precedent as far as insolvency cases are concerned that the high courts will not ordinarily interfere as the jurisdiction of the civil courts is expressly barred under the code,” said Amit Vyas, founder partner, Vertices Partners.

“Having examined the case, the Hon’ble Court has come to the conclusion that there is no case for interference by HC in its writ jurisdiction. For the borrowers, they can fight these cases under parameters that are contained in the code but not outside the framework of the code.”

The court reiterated that the central bank can’t stipulate the kind of action NCLT can take, referring to the line in a press release that said insolvency cases “will be accorded priority by the National Company Law Tribunal (NCLT)”.

“This also goes to show the manner in which RBI is functioning, inasmuch as there is a press release even without a decision at certain level,” said the order. “Nobody is entitled or empowered to advise, guide or direct the judicial or quasi-judicial authority in any manner whatsoever.”

Source-ET