Essar Steel’s legal challenge may prolong bad loans fight
Banks are worried that other large bad loan accounts may follow Essar Steel and challenge bankruptcy proceedings against them in court
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Mumbai: Essar Steel Ltd’s move to challenge the Reserve Bank of India (RBI) directive to banks to initiate bankruptcy proceedings against the company could slow down the resolution process, legal experts say.
Creditors are concerned that other promoters could follow the company’s example. It depends on what the Gujarat high court, which Essar Steel approached on Tuesday, decides when it hears the case on Friday.
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Essar Steel challenged the insolvency proceedings initiated against it at the National Company Law Tribunal (NCLT) by its creditors after being directed to do so by RBI. The central bank has recommended such proceedings against a total of 12 loan defaulters, who account for a quarter of the non-performing assets clogging up the Indian banking system.
The court posted the next hearing in the case for 7 July, requesting the NCLT to adjourn any matter against Essar Steel listed before it until after that date.
Legal experts argue that while Essar Steel had not questioned the powers of the regulator, it had challenged the arbitrariness of the decision to identify the company for bankruptcy proceedings.
“Any promoter or party can approach the high court against a statute if it compromises on rights of the company; even in this case it is on the so-called arbitrariness of the RBI directive. So far we haven’t heard anything about others looking at this course of action. Probably they would make an assessment after Gujarat high court rules in this case,” said a lawyer representing one of the lenders at NCLT. “Any proceedings at NCLT ‘ideally’ should not be impacted till the time there is an absolute stay granted by the high court. So far there is only an interim stay in the matter.”
Other legal experts, however, say that NCLT will wait for the decision of the high court before proceeding against Essar Steel.
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“Whether other promoters could take such a route and approach writ jurisdiction would depend on the companies. If one doesn’t object to the insolvency proceedings, then they wouldn’t,” said Sitesh Mukherjee, a partner at the law firm Trilegal.
RBI, after receiving sweeping powers to resolve bad loans through an amendment to the Banking Regulation Act, directed banks to refer the 12 identified cases, including Essar Steel, directly to NCLT.
Lenders fear that if the Gujarat high court rules in favour of the company, it could set a precedent. Jyoti Structures Ltd is the only defaulter against which bankruptcy proceedings have so far been approved by the NCLT, after the company didn’t challenge its lenders’ petition.