The Gujarat High Court on Monday dismissed the plea of Essar Steel against the Reserve Bank of India for including it in the list of 12 accounts for resolution under the Insolvency and Bankruptcy Code (IBC). The development is significant as the government’s move to tackle the bad debt issue can now carry on unabated. With the dismissal of the case, Essar Steel’s lenders — a joint lenders’ forum (JLF) led by State Bank of India (SBI), and Standard Chartered Bank — can now proceed against the company in the National Company Law Tribunal (NCLT).
In fact, the matter will come up for hearing in the NCLT Ahmedabad bench on Tuesday.
Essar Steel had sought relief from the HC by challenging the RBI’s June 13 circular that asked banks to initiate action against the company and 11 other accounts with over Rs 5,000 crore of outstanding loans each under the IBC. Essar’s contention was that this directive was improper in its case, as the company was at an advanced stage of loan restructuring and any such step would not only hamper its operations but also delay its discussion with banks for a resolution.
However, the single-judge bench of justice SG Shah dismissed the plea on the ground that Essar Steel had not challenged the IBC but instead said that it being dragged to the NCLT would result in a drastic impact on its day-to-day functioning. Shah in his 83-page order said that a banking company is entitled to initiate insolvency proceedings without the directions of the RBI.
“Provisions of IBC may be drastic to some extent, but since it is part of statute which is yet not declared unconstitutional and therefore they are to be followed,” the order noted. It said that whatever issue Essar Steel has can be raised in the NCLT, which is the appropriate legal forum in the matter.
“Refusal of interim relief is obvious because the petitioner company (Essar Steel) is in debt of more than Rs 45,000 crore for a couple of years, its NPA (non-performing asset) was more than Rs 32,000 crore in last year and more than `31,000 crore in previous year. It is also clear that when total debt is more than Rs 45,000 crore, 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 order noted.
Signalling that it would not challenge the single bench’s order, Essar Steel in a statement said, “We respect the decision of the High Court and will accordingly be raising these issues for consideration by the NCLT.”
The RBI’s step against Essar Steel had come after the government had suitably empowered it through an amendment in the Banking Regulation Act. Its circular was based on the criterion that the total banking exposure of the company should be at least Rs 5,000 crore and 60% of this exposure should have turned non-performing as of March 2016.
Essar Steel owes lenders around Rs 45,000 crore, of which Rs 31,671 crore became non-performing as of March 31, 2016.
According to the norms, once the case is with the NCLT, the lenders 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.