Gujarat High Court disposes of Essar Steel plea without giving any relief in insolvency proceedings

Ahmedabad: In a significant judgement for banking sector with regard to recovery of NPA, the Gujarat High Court today rejected the Essar Steel’s plea against the Reserve Bank of India (RBI) circular of June 13 asking lender banks to act under Insolvency and Bankruptcy Code against the steel major and 11 other firms each having over Rs 5,000 crore of outstanding loans.

Though the Steel major, which now faces the danger of liquidation for recovery of the loan of SBI, in all likelihood would file an appeal against today’s order, the judgment is being seen as a significant one with regard to the initiative of the banking sector to hit the big defaulters. Notably the loan to the 12 companies including Essar Steel, accounted for 1/4th or 25% of the total banking sector NPAs.

The single bench court of Justice S G Shah which had reserved its order after completing the hearing on July 14 announced the verdict today. The court had earlier also stayed the insolvency proceedings against Essar Steel for recovery of the loan taken from the State Bank of India before the National Company Law Tribunal (NCLT) as an interim measure on its plea.

Challenging the said ‘arbitrariness’ of RBI, the company had on July 5 moved the high court contending that the order was improper as the firm was in an advanced stage of loan restructuring.
During the course of hearing counsel of the company Mihir Thakore had argued that the RBI circular violates the fundamental right of equality before law. The company was still a Rs 20,000 crore turnover company and was not like the other 11 mentioned in the circular which have closed down.

RBI counsel Darius Khambata on the other had had alleged that the company had suppressed facts and misled the court to get a favorable decision. He had claimed that had the company not hid the facts like it once agreeing to got to NCLT, from the court, its plea for relief would have been immediately rejected.

On June 13, RBI through its Internal Advisory Committee (IAC) recognized 12 accounts (companies) for resolution under Insolvency & Bankruptcy code (IBC).

For accounts with more than Rs 5000 crore – where 60% or more exposure was already classified as NPA by banks as on FY16 – immediate reference to resolution through IBC was made. Thus, a total of 12 accounts constituting of 25% of gross NPAs qualified for insolvency.

According to the norms, once the case is with the NCLT, the lenders or the banks need to set up a committee of creditors that will come up with a plan on how the asset will be tackled. If the committee is unable to find a solution within 180 days, this can be extended to 270 days. After 270 days, the company will go into liquidation.

Technically, as today’s order is a singe judge bench verdict it can be challenged in a larger bench in the Gujarat High court itself.

Background:

– Essar Steel had moved the court against Reserve Bank of India (RBI) for initiating insolvency procedure against it.

-RBI has issued a release on June 13 directing the banks to start insolvency procedure against a dozen stressed companies including Essar.

-Following the RBI direction, a joint lenders’ forum led by State Bank of India (SBI) initiated proceeding in the National Company Law Tribunal (NCLT) under the newly-formed Insolvency and Bankruptcy Code.

-Essar Steel moved High Court against this move and got a stay on all proceedings against the company at tribunal.

Statement from Essar Steel

Our request to the Hon’ble High 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 Rs 3467 croresto 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.
In its judgement, the Hon’ble High Court while disposing of the petition has indicated that all of these issues should be considered by the NCLT before taking any decision on merits. In this regard, we would like to highlight the following observations made by the Hon’ble High Court:

39 (2): “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.”

39(3): “Adjudicating authority, certainly requires to extend hearing and reasonable opportunity to the company to explain that why such an application should not be entertained. In other words, filing of an application may not result into mechanical admission of application as seen and posed by RBI in impugned press release. It would be a decision based on judicial discretion by the adjudicating authority to deal with such application in accordance with law and based upon facts, evidence and circumstance placed before it.”

39 (12)“…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 merit.”

We respect the decision of the Hon’ble High Court and will accordingly be raising these issues for consideration by the Hon’ble NCLT.

DeshGujarat