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No Relief For Essar Steel In Bankruptcy Case

The Gujarat High Court on Monday rejected Essar Steel's plea against bankruptcy proceedings initiated by its lenders at the National Company Law Tribunal.

Essar Steel was one of 12 companies picked by the Reserve Bank of India (RBI) for resolution under the Insolvency and Bankruptcy Code (IBC). The RBI’s directive followed amendments to the Banking Regulation Act, which allowed the regulator to intervene directly in the resolution of nearly Rs 10 lakh crore in stressed assets on the books of Indian banks.

The Arguments

As part of their arguments, Essar Steel’s lawyers questioned the RBI’s decision to push the company into insolvency proceedings, saying the manner in which the 12 companies were picked was arbitrary. The company pointed out it was in discussions with Standard Chartered Bank till June 21 over a possible restructuring plan which was also approved by the company’s board. However, that plan had been forgotten in favour of insolvency proceeding because of the RBI’s decision last month, Essar Steel’s lawyer had argued.

Essar Steel has also claimed that its operational condition is improving and that it has repaid bankers to the tune of Rs 3,467 crore between March 2016 to March 2017.

In its response, the central bank’s counsel Darius Khambatta said the Rs 5,000 crore criterion used to select companies being referred to the National Company Law Tribunal (NCLT) was logical. To drive home its point, the RBI reiterated that together the 12 accounts against which action has been initiated make up 25 percent of the banking system’s non-performing assets. When asked by the court for documents supporting its decision to include Essar Steel in the list of 12, the RBI said that no such documents existed.

The RBI also claimed that the financial position being presented by the company is not fully accurate and that the aggregate debt of the company has in fact risen.

A Test Case

The Essar Steel case has been seen as a test case for the RBI’s attempts to speed up resolution of nearly Rs 10 lakh crore in stressed loans using the Insolvency and Bankruptcy Code (IBC). While banks have started the insolvency process in each of the 12 cases, only one company – Jyoti Structures – has been admitted.

Apart from Essar Steel, promoters in Monnet Ispat have questioned why the company has been pushed towards insolvency when a potential deal with the JSW Group had been suggested. In response, lenders have argued that the deal was not good enough. On Saturday, BloombergQuint reported that Bhushan Power & Steel may challenge the insolvency proceedings as well.

Among the other cases, in at least two, the NCLT has asked for clarity on whether insolvency petitions are maintainable if previous winding up petitions are pending.

Apart from uncertainty on individual cases, the RBI was asked by the Gujarat High Court to make a change in its June 13 press release which stated that the NCLT would ‘accord priority’ to these 12 cases. On July 8, the RBI issued a corrigendum removing that line from its release.