Banks can move NCLT against Essar Steel

Banks can now initiate insolvency proceedings against Essar Steel in the National Company Law Tribunal (NCLT).

The Gujarat High Court on Monday dismissed a petition filed by the debt-laden company, which had challenged the Reserve Bank of India’s (RBI) circular that directed the banks to take 12 specific NPA cases on priority to the NCLT. One of the 12 companies was Essar Steel.

The court has now asked the banks to approach NCLT to decide the merits of the case.

Essar Steel owed lenders around Rs 45,000 crore, of which Rs 31,671 crore had become non-performing, as of 31 March 2016.

Essar Steel said in a statement, “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 3,467 crore to 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.”

Essar Steel counsel argued in the court that the company should not be treated on par with 11 other accounts because these accounts are now closed while Essar Steel is doing well with annual turnover of Rs 20,000 crore.

The Gujarat High Court on Monday ruled that NCLT is the adjudicating authority and it needs to decide on its own based upon factual details that whether the insolvency petition is required to be entertained or not. The NCLT should give reasonable opportunity to the company to explain that why such an application should not be entertained, it said.

The court also said it should not be a mechanical admission of the application as seen and posed by RBI in its now-impugned release. The high court has asked the NCLT to deal with the application based on facts, evidence and circumstances placed before it.

The ruling is a victory for the government which altered the banking regulations earlier this year through an NPA Ordinance that empowered RBI to direct banks on the resolution process.

The courts asked RBI to be careful while framing press releases and that it must be in consonance with the constitutional mandates based on the sound principles of law but in any case should not be in the form of advice, guidelines or directions to judicial and quasi-judicial organisations.

It said RBI should see that all its schemes are offered without discrimination.

Essar Steel petitioned the high court raising objections to the RBI circular that asked NCLT to take up the certain NPA cases with priority. The State Bank of India (SBI) had submitted in the Gujarat High Court last week that Essar Steel had “suppressed facts” while challenging the RBI's directive to lender banks to initiate insolvency proceedings against it as the company was already aware of the impending resolution through the NCLT route.

SBI counsel Ravi Kadam had told the bench of S G Shah that Essar Steel had accepted a decision by the joint lenders' forum (JLF) of the banks to approach the for insolvency proceedings against the firm. SBI is one of the respondents in the Essar Steel petition.

Kadam said SBI told the company about the JLF initiating insolvency proceedings against it and had a discussion on the appointment of an Insolvent Resolution Professional and the company had “suppressed” the fact by not revealing this before the court.

...& ANALYSIS

• The high court has asked the banks to approach NCLT to decide the merits of the case
   
• Essar Steel owed lenders around Rs 45,000 crore, of which Rs 31,671 crore had become NPA