Essar Steel Limited on Monday lost the first round of legal battle against the insolvency proceedings initiated against it by the State Bank of India and Standard Chartered Bank. The court also passed an observation against the Reserve Bank of India (RBI) for issuing advise as press release instead of following constitutional mandates.
The National Company Law Tribunal (NCLT) can now proceed with the petitions filed by the two banks against the steel company.
The single bench justice S G Shah, while rejecting the Essar Steel Limited’s petition that had challenged the RBI directive to the SBI to initiate insolvency proceedings, concluded, “It can’t be held that the banking company is not entitled to initiate insolvency proceedings without the direction of the RBI. Neither can it be said that the classification or such classification is arbitrary and discriminatory. So, the prayer of the petitioner to quash the RBI directive is rejected.”
The court also concluded, “Insolvency and Bankruptcy Code - Act (ICB), may be drastic to some, but, since it is part of statute, which has not been declared unconstitutional yet, it is to be followed in consonance with the mandates of the constitution by all concerned.”
At the same time, the court observed against the RBI, “It should be careful while issuing press releases, it has to be in consonance with the constitutional mandates, based upon sound principles of law; it can’t be in the form of advice, guidelines, directive to judicial or quasi judicial authorities in any manner.”
Dismissing the petition against the Standard Chartered Bank (SCB), the court cited that the Supreme Court order in Ionics Metaliks, according to which no order (writ) can be issued against the SCB. At the same time, the court also concluded that the RBI press release is not binding to the SCB and just because the SCB had communicated with Joint Lenders Forum regarding the restructuring proposal, it is not enough reason to say it can’t initiate insolvency proceedings against the petitioner.
Essar Steel, in the beginning of this month, had challenged insolvency proceedings initiated by two banks against it for its non-performing assets. Banks had filed petition before the NCLT-Ahmedabad. Essar’s NPA with SBI-led consortium is to the tune of Rs 35,000 crore, whereas the SCB’s NPA is $481 million.
Essar had challenged the proceedings on the ground of classification and being arbitrary decision without giving any hearing to it. That was opposed by the RBI, SBI and SCB. The RBI’s stand was that the IBC Act came into force from December 2016, and banks don’t need any directive for the insolvency proceedings as the action is in the interest of the national economy. Whereas the SCB’s stand was its act is independent and has nothing to do with the RBI directive and it had informed the petitioner way back in January 2017 about its intention to go against it in NCLT.
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
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