India: Analysis Of Gujarat High Court Decision On Essar Steel India Limited Application

Brief Facts

Essar Steel India Limited ("Essar/Company") had filed a petition before Hon'ble Gujarat High Court ("Hon'ble High Court") challenging the directions issued by Reserve Bank of India ("RBI") in a press release came out in June 2017. In the said petition filed before the Hon'ble High Court, Essar had challenged the criteria chosen by RBI in selecting 12 companies and referring them to NCLT for insolvency proceeding under newly enacted Insolvency and Bankruptcy Code, 2016 ("I&B Code").

Contention by Essar

  1. The primary contention of Essar was with respect to the power of RBI to direct NCLT to try certain cases on priority basis. Essar had contended that the press release issued in June 2017 was arbitrary and unjust. Further, the directions from RBI has no rationale and justification, whatsoever, to determine the companies to be tried before NCLT. Furthermore, it was also apprehended by Essar that the Application filed against it before the Adjudicatory Authority (NCLT, Ahmedabad) was due to such directions of RBI and not the own decision of the Financial Creditor;
  2. Another concern raised by Essar was with respect to Insolvency Resolution Professional ("IRP") appointment after the admission of the application, as mandated under I & B Code. Essar argued that as the Company has large magnitude of operation and such huge business can be at risk particularly when managed by a new person having no expertise of the field. Moreover, Essar argued that it has achieved considerable amount of progress including repayment of 3,500 crores to the Banks which clearly shows that resolution process is eminently possible without any intervention or reference to the Adjudicating Authority (NCLT) as directed by RBI;
  3. The third contention of Essar was that RBI has ignored the fact that the Company has reached the final stage of negotiation of Debt Restructuring Scheme with its lender and the restructuring plan would be ready soon. The direction of RBI to take action of filing insolvency petition even in respect of companies where restructuring proposal is under consideration is clearly discriminatory and required to be struck down;
  4. The other contention which was placed by Essar was that the Section 35AA of the Banking Regulation Act, 19491 ("BRA") authorize the RBI to give direction to banking companies to initiate Insolvency Resolution Process in respect of a default. Essar contended that RBI has to come to subjective satisfaction on the basis of objective facts to give such directions. In the given facts, RBI has given a generic direction which is bad in law.

Contention by RBI

  1. RBI had contended relying on the current situation of increase in the Non-Performing Assets ("NPA"). RBI argued that as on March 31, 2017 the gross NPAs in India had aggregated more than 5% of the Total GDP of the country. About 12% of the total advances by public sector banks are NPAs. Such increase in NPAs is grossly against the economy of the country. Therefore, such direction has been released to banks;
  2. RBI informed the Hon'ble Court that the NPA of Essar rose from Rs. 31,671 crores till 31 March, 2016 to Rs. 32,864 crores till 31 March, 2017. Therefore, the directives are not on any "imaginary grounds" or arbitrary as alleged by Essar;
  3. RBI has further argued that section 35AA of BRA empower bank to initiate insolvency proceedings before the NCLT and there is no restriction on initiation of proceedings even if negotiations between the borrowers and the financial creditors are going on.

Hon'ble High Court Reasoning:

  1. While analysing the provisions of I&B Code, the Hon'ble High Court observed that the bank has right to initiate the Insolvency Proceeding but filing of the application would not amount to admitting. The Adjudicatory Authority needs to decide w.r.t admission of the said application filed on the basis of the factual details in hand. Moreover, the Adjudicatory Authority certainly requires extending reasonable opportunity and hearing to the company to explain as to why such application should not be admitted;
  2. The Hon'ble Gujarat High Court further observed that the amended provisions of BRA certainly gives power to RBI to issue certain directions to banks so as to see that there is proper recovery of public money, therefore, the issuance of press release cannot be quashed. However, the Hon'ble High Court gave an observation that while making any directions RBI must consider the necessity of doing so. There must be some substance and there must be a speaking order. The process cannot be initiated mechanically;
  3. The Hon'ble Gujarat High Court also observed the careless and haphazard construction of the RBI's press release, by noting that the usage of the phrase, "such cases will be accorded priority basis by the NCLT..." was a serious concern as "nobody is entitled or empowered to advice, guide or direct a judicial or quasi judicial authority in any manner whatsoever".
  4. The Hon'ble Gujarat High Court also mentioned that the issue of appointment of IRP and taking over of business and management of such large enterprise by non-expertise person might cause hindrance in the smooth functioning of the Company. But such issue can be raised before NCLT. Under article 226 of the Constitution, this Hon'ble High Court does not wish to entertain such issues.

The Hon'ble High Court based on above observations disposed the petition filed by Essar. It would though be worth mentioning that I&B Code 2016, itself bars the jurisdiction of Civil Courts and the present judgment of Hon'ble High Court of not entertaining the plea of Essar even though having supervisory jurisdiction further strengthens the sanctity of the I&B Code 2016.

Footnotes

1 Section 35AA of BRA enables Union Government to authorize RBI to direct the banking companies to resolve specific stressed assets by initiating insolvency resolution process, where required. The RBI has also been empowered to issue other directions for resolution and appointment or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution

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