In a big boost to banks and the Reserve Bank of India’s newfound resolve against bad loans, the Gujarat High Court on Monday dismissed a petition by Ruias-led Essar Steel against the insolvency proceedings initiated against it by banks under the National Company Law Tribunal (NCLT). Pronouncing the verdict on Monday, Justice S G Shah declined any relief to Essar Steel, vacating the stay ordered by it for banks to initiate insolvency proceedings against it. Today’s verdict means that lenders, led by State Bank of India (SBI), can begin bankruptcy proceedings under the NCLT against the company.
Essar Steel had moved the High Court on July 4 challenging the RBI's press release dated June 13, which directed banks to refer top 12 NPA accounts to the NCLT under the newly introduced Insolvency and Bankruptcy Code (IBC). Essar’s petition stirred a controversy over the RBI’s press release which mentioned that such cases would be accorded priority for resolution. The RBI later issued a corrigendum to the press release and deleted the statement. However, Essar continued to object to being clubbed with other 11 NPA accounts, whereas it was in discussion with banks for a financial restructuring.
The company argued before the HC that it should not be treated on par with other eleven accounts (firms) which have been closed now, while Essar Steel is still doing well with an annual turnover of Rs 20,000 crore. At the hearing on Monday, Essar Steel's counsel Mihir Thakore argued that the SBI and other lender banks under the Joint Lenders Forum may not have approached the NCLT for insolvency proceedings, had the RBI not issued the circular.
The company was challenging the RBI's directive, not the SBI's decision. The State Bank was asked by the RBI to file a case before the NCLT against Essar Steel through the circular, advocate Thakore said. The action, he argued, was a violation of his client's fundamental right to equality before the law and equal protection of the law under Article 14 of Constitution.
Though the Insolvency and Bankruptcy Code is in force since December 2016, the lender banks did not opt for insolvency proceedings because they knew it would "jeopardise company's operations" as suppliers may stop supplying material on learning about such action, Thakore said.
RBI counsel Darius Khambata, however, said the steel firm had suppressed facts and misled the court to get a favourable decision. "The company was aware about SBI's action. They were also aware that lenders will file for insolvency proceedings... You cannot play games with the court. This court is beingmisled," the RBI lawyer had said.
Banks are standing on the huge pile of corporate non-performing assets, which according to the RBI stood at Rs. 7,50,000 crore as on March 31, 2017.
On Friday, Justice S G Shah had reserved the judgement till Monday after hearing the arguments by the petitioner and the respondents, which included the RBI and SBI, which is leading the consortium of 22 banks. Essar Steel has a total debt at Rs. 42,000 crore to these banks.
Earlier this year, the RBI had identified top 12 NPA accounts, including of Essar Steel, for bankruptcy proceedings. While arguing before the court, the RBI counsel had informed the court that these 12 NPA accounts represent 25 per cent of the total NPA of Rs. 7,50,000 crore, which forms 5 per cent of the country's GDP.