In a move that could impede the Reserve Bank of India’s efforts to clean up the bad assets in the banking system, the Gujarat High Court has stayed further proceedings by the National Company Law Tribunal on the insolvency petition filed by the lenders against Essar Steel.

Though the stay is only relevant for Essar Steel, and that too till the court’s next hearing on July 7, the other 11 companies named by the central bank under the Insolvency and Bankruptcy Code may take similar recourse if proceedings at the Tribunal are not allowed to continue by the High Court.

‘Arbitrary distinction’

Essar Steel had moved the Gujarat High Court claiming that the RBI’s decision to refer it for insolvency proceedings was arbitrary. The RBI had on June 13 issued a directive asking banks to initiate insolvency proceedings at the NCLT benches against 12 specific cases of non-performing assets (NPA).

This included players such as Essar Steel, Jyoti Structures and Bhushan Steel. The main issue being raised is that the RBI’s directive to banks made an arbitrary distinction between the 12 identified companies and the other large NPAs. While the RBI directed banks to refer the 12 identified cases directly to the NCLT, other stressed borrowers were given a six-month period to arrive at a resolution with their lenders. Hearing the plea by Essar, the High Court also directed the RBI to explain what it meant by according priority to the 12 cases of insolvency by the NCLT.

The court also stayed further hearing on the insolvency petition filed separately by Standard Chartered Bank, which was not part of the Joint Lenders Forum, against Essar Steel in the Gujarat Bench of the NCLT.

Referring to the RBI notification in the form of press release, Justice SG Shah said the effective date taken by the RBI for initiating action against the defaulting companies was March 31, 2016 though the press release is dated June 13, 2017. If at all the RBI has powers to classify such companies, it has been made on details available as on March 31, 2016 and not as on June 13, 2017, said the order.

Essar Steel said the company has been doing well and has managed to pay back ₹3,476 crore of debt over the past year. With the forcible invocation of the Insolvency and Bankruptcy Code, the administration of the company will go into the hands of Interim Resolution Professional and result in closure of the company, argued Essar Steel. Essar Steel owes ₹31,200 crore to its lenders.

RBI to counter

A senior public sector bank official said on condition of anonymity: “The choice of the companies for referral to the NCLT is not arbitrary. There is no attempt to single out any company for action. It is just one among a dozen odd companies that banks have moved against under the IBC. In fact, action is being contemplated against other corporates too.”

“If Essar Steel’s contention is upheld, the very purpose of enacting the IBC will be defeated. Other large stressed borrowers may approach high courts to stall the NCLT proceedings,” he added.

The RBI is expected to strongly challenge the company’s position by stating that it has been transparent in zeroing in on the large stressed borrowers that banks need to proceed against. The RBI’s internal advisory committee comprising independent directors met in Mumbai and will take a call in this regard.

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