Gujarat HC stays bankruptcy proceedings against Essar Steel

The Gujarat High Court has stayed the bankruptcy proceeding initiated by creditors to Essar Steel at the National Company Law Tribunal on Essar's plea and also directed the RBI to explain the priority accorded to the 12 insolvency cases by the NCLT.

The Reserve Bank could move the HC against Essar's plea as the stay granted on Essar Steel's petition could impede the central bank's efforts to clean up bad assets in the banking system.

Although the stay is granted to Essar Steel only, and that too till the court's next hearing tomorrow, this could prompt the other 11 companies named by the central bank under the Insolvency and Bankruptcy Code to take similar recourse.

Essar Steel Ltd approached the Gujarat high court challenging bankruptcy proceedings initiated by its creditors at the National Company Law Tribunal (NCLT) under the Reserve Bank of India (RBI) directive.

Essar Steel has submitted that it has been repaying its debt and has cleared debt to the tune of Rs3,467 crore in the year 2016-17.

Further, the company said it employs as many as 4,500 people and the insolvency process at the NCLT would transfer the administration to an interim resolution professional that would further complicate recovery.

Essar Steel said the company was in the midst of a restructuring and that the company was trying to restructure the package approved by its board of directors when the RBI came out with a notification classifying loans to certain companies with debt over a certain level as non-performing assets.

RBI, empowered by the amended Banking Regulation Act, directed banks to refer the 12 identified cases, including Essar Steel, directly to NCLT.

Essar Steel also pointed out that RBI's press release dated 13 June 2017 had set the effective date to initiate bankruptcy proceedings against the defaulting companies as 31 March 2016.

A Joint Lenders Forum meeting led by State Bank of India (SBI) initiated proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) against three steel companies – Essar Steel, Bhushan Steel and Electrosteel Steels.

Once the application filed by a financial creditor under Section 7 of the IBC is admitted by the NCLT, a moratorium period of 180 days commences. During this moratorium period, the board of the defaulting entity is replaced with a resolution professional, who discharges the functions of the board till the time resolution process is completed.

A committee of (financial) creditors is also constituted during this period by the resolution professional and a number of decisions listed in Section 28 of the IBC are taken with 75 per cent majority of the votes of members of the committee.

Besides Essar Steel, NCLT has taken up the issue of Jyoti Structures and Bhushan Steel on an immediate basis.