Gujarat High Court on banks’ statutory right to initiate Proceedings against Loan Defaulters

essar-steel-limited-vs-reserve-bank-of-india

Status as on- 30/06/2021

Case- Essar Steel India Limited & vs Reserve Bank of India

(Gujarat High Court Judgment dated July17, 2017 in SPECIAL CIVIL APPLICATION NO. 12434 of 2017)

Brief Facts of the Case

  1. Essar Group is an Indian conglomerate with interests in manufacturing, services, and retail. The group has a presence in 29 countries and employs 45,000 people worldwide. The Group’s primary interests are in the steel and energy sectors, with Essar Steel serving as its flagship company.
  2. The Reserve Bank of India (‘RBI’) issued a press release on June 13, 2017, stating that the Internal Advisory Committee (‘IAC’) had identified 12 accounts that would qualify for immediate reference under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), and that the RBI had issued directions to the relevant lead banks directing them to initiate IBC proceedings against these 12 companies.
  3. On June 22, 2017, the State Bank of India (‘SBI’) initiated IBC proceedings against Essar Steel India Limited (‘Essar Steel’), shortly after Standard Chartered Bank (‘SCB’) initiated IBC proceedings against Essar Steel.
  4. Essar filed a writ petition before the Gujarat High Court Bench in Ahmedabad, citing the failure of the consortium of banks to accept the debt restructuring package proposed and approved by Essar’s Board of Directors. Essar also questioned the RBI’s authority to issue directives to the NCLT, claiming that an interpretation of the last line of Paragraph 5 implied that the NCLT was a subordinate authority to the RBI, which is unconstitutional.
  5. Essar claimed that the RBI blindly followed a process to shortlist companies based on classification, which violated Articles 14 and 19 of the Indian Constitution. It was charged that the classification based on total outstanding amount exceeding Rs 5000 crores and percentage of classified NPAs exceeding 60% is arbitrary and irrational.
  6. In response, the RBI stated that the Essar account was a non-performing account (NPA) even prior to 31-3-2016, with a total outstanding amount of Rs 31,671 crores, and the RBI directives are reasonable, making classification valid under Article 14, because the press release and the RBI directives to banks were issued to give effect to the economic policy contained in the IBC, i.e., insolvency.
  7. In response, SBI, i.e., Respondent 2, stated in court that they have a statutory right to proceed against any corporate debtor with or without directions from the RBI if they meet the requirements of Section 7 of the IBC. SBI denied that the appointment of IRPs would impede the petitioner’s ability to work because the company is managed by executives rather than their Board of Directors. SBI-led Consortium Bank denied accepting any proposal from Essar and claimed that Essar had approached the court with dirty hands.
  8. In response, Standard Chartered Bank (SCB), i.e., Respondent 3, stated that they are a company incorporated in the United Kingdom and are governed by the United Kingdom’s prudential regulatory authority; thus, they are not a banking company under Sections 5(c) and (d) of the Banking Regulation Act, 1949. SCB also claimed that it is not a member of the JLF (Joint Lenders’ Forum), that they have statutory rights to proceed against petitioners, and that they do not require RBI’s approval.

Held

  1. The Court denied Essar’s request for a stay of proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016. (IBC)
  2. The Court also stated that NCLT, Respondent 4, cannot be directed to stay proceedings against Essar because such a writ of prohibition may only be issued in the rarest of rare cases, or when an inferior court exceeds its jurisdiction, or proceeds under a law that is itself ultra vires or unconstitutional.
  3. The court further said: Since IBC is not unconstitutional, this prayer is also rejected by the court.
  4. The Gujarat High Court dismissed Essar Steel’s petition and refused to grant any of Essar Steel’s requested reliefs. The Gujarat High Court moved quickly and efficiently, and the order was issued within 10 working days of Essar Steel’s filing of the case.

Impact of the Case

First, we should see the “Para 5” of the said RBI’s press release, it reads as follows:

“The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT).”

The RBI apologised to the Court for such poor drafting and issued a corrigendum dated 3-7-2017 correcting this error by deleting the last line of Para 5.

As per Pratik Datta, a researcher at the National Institute of Public Finance and Policy, New Delhi:

“RBI suffers from low capacity in legal drafting. In this case, however, it is unlikely to lead to a serious legal problem. RBI’s lawyer should ideally request the court to permit it to expunge that one line from the RBI’s Press Release. That should allay the court’s concern about separation of powers”

In reference to this the court said:

“The Respondent No. 1 RBI has to be careful while issuing press releases; it must be in consonance with the Constitutional Mandates, based upon sound principles of Law, but in any case, should not be in the form of advice, guidelines or directions to judicial or quasi- judicial authorities in any manner what so ever;”

Returning to the impact of the decision, it should be noted that the Gujarat High Court dismissed Essar Steel’s petition and refused to grant any of the reliefs sought by Essar Steel. The Gujarat High Court moved quickly and efficiently, and the order was issued within 10 working days of Essar Steel’s filing of the case. This decision is critical because it ensures that Essar Steel and the other identified debt-laden companies are referred to the NCLT as soon as possible.

Conclusion

This High Court decision is a major relief for financial institutions that had become concerned about the prospects of recovery from India’s twelve largest loan defaulters. This decision also establishes banks’ statutory right to initiate proceedings against loan defaulters in appropriate forums, with or without RBI guidelines. The Court also observed that NCLT, cannot be directed to restrain from proceedings against Essar, as such writ of prohibition may be issued only in the rarest of rare cases or when inferior court exceeds its jurisdiction.

 

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

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