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The bankruptcy proceedings will now move ahead at NCLT under the Insolvency and Bankruptcy Code, provided Essar Steel does not challenge Gujarat HC’s decision in the Supreme Court. Graphic: Paras Jain/Mint
The bankruptcy proceedings will now move ahead at NCLT under the Insolvency and Bankruptcy Code, provided Essar Steel does not challenge Gujarat HC’s decision in the Supreme Court. Graphic: Paras Jain/Mint

Gujarat HC dismisses Essar Steel plea against RBI’s bankruptcy order

This sets the stage for SBI and Standard Chartered to push for resolution of Essar Steel bad loans at NCLT under the Insolvency and Bankruptcy Code

Ahmedbad: The Gujarat high court on Monday cleared the way for the Reserve Bank of India (RBI) to press ahead with the bad-loan resolution process, dismissing Essar Steel Ltd’s petition challenging the initiation of bankruptcy proceedings against the company.

The ruling throws judicial weight behind RBI’s 13 June directive asking lenders to initiate action against the steelmaker and 11 other companies that account for a quarter of the Rs7.8 trillion of bad loans clogging up the banking system.

The ruling by justice S.G. Shah is likely to deter companies that may have been contemplating similar legal challenges.

The ruling means Essar Steel creditors such as State Bank of India (SBI) and Standard Chartered Bank can proceed against the company in the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).

Essar Steel said in a media statement that it would raise the concerns it highlighted before the high court at the NCLT

The statement said the high court judgment had indicated that the concerns raised by the company should be considered by the NCLT before taking any decision on their merits. .

Hearings on the matter, scheduled for Tuesday, are expected to begin at the Ahmedabad bench of the NCLT where the case is listed.

“Essar is going to argue before NCLT that it should be given the opportunity to restructure within 6 months. RBI has given 488 companies (time) to resolve their bad loans in six months. Essar is going to ask for the same opportunity," said a person with direct knowledge of the company’s plans.

Essar Steel, in its petition in the Gujarat high court, challenged the June statement by RBI in which the central bank directed banks to refer a dozen cases directly to NCLT. Essar contested a line in the RBI statement which said NCLT will accord priority to these cases.

It also objected to being clubbed with the 11 other defaulters and said it had been in inconclusive discussion with banks to restructure debt when the directive was issued. Essar Steel claimed it had paid Rs3,467 crore to creditors between April 2016 and June 2017 and that there had been a substantial improvement in all operating parameters. The company said it should have been given time to complete its debt restructuring

Essar Steel said it should have been included in a second category of 488 defaulters that had been given six months to restructure debt, failing which they would be taken to the NCLT for the start of bankruptcy proceedings.

This was turned down by the court on Monday.

Essar Steel owed lenders around Rs45,000 crore, of which Rs31,671 crore had become non-performing as of 31 March 2016, the cut-off date specified by the central bank.

In an 83-page order, justice Shah said a bank can initiate proceedings under the IBC even without direction from the RBI.

It cannot be held that such a direction is irrational, unjust, arbitrary or discriminatory, as Essar had claimed, but it would be appropriate for RBI to ensure that the benefits of all its debt restructuring schemes are extended to all without any discrimination, the court said, noting that one such scheme had become effective the same day that RBI released its directive.

“RBI has to be careful while issuing press releases; it must be in consonance with the constitutional mandates, based upon sound principles of Law, but in any case should not be in the form of advise, guidelines or directions to judicial or quasi judicial authorities in any manner what so ever," the court said in its order.

“I think the Gujarat high court has passed an entirely reasonable judgement refusing interim relief to Essar Steel for the right reasons," said Alok Prasanna Kumar, a visiting fellow at the Vidhi Centre for Legal Policy, an independent advisory group. “It has also rightly criticised the RBI for its manner of functioning. I hope RBI takes this into account and takes proper legal advice on board before issuing such orders."

The high court had rightly left all substantive issues to be decided by the NCLT in this case since there was nothing to show SBI and the other lenders had done anything wrong in approaching the NCLT, he added.

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