Gujarat HC stays insolvency proceedings against Essar Steel

Directs RBI to explain how the 12 insolvency cases were accorded priority

The Gujarat High Court has stayed the insolvency proceedings filed against the Essar Steel by its lenders at the National Company Law Tribunal (NCLT)'s Ahmedabad bench till the next hearing on July 7. The high court also directed the Reserve Bank of India (RBI) to explain what it meant by according priority to the 12 cases of insolvency by the NCLT.

The Gujarat High Court observed that the petitioner company Essar Steel had paid almost Rs 3,467 crore in last one year and that the company was doing well since 2016 and would be revived in view of serious effort of its revival by the company.

The RBI had on June 13, 2017 came out with a press release asking banks to initiate insolvency proceedings at the NCLT benches against specific cases of non-performing assets which included steel players like Essar Steel and Bhushan Steel, among others.  

Among these, even as insolvency proceedings against Jyoti Structures Ltd were admitted by NCLT's Mumbai bench, Essar Steel had filed a special civil application in Gujarat HC to seek stay on such proceedings. 

On behalf of the petitioner Essar Steel, senior counsel Mihir Thakore and Mihir Joshi had argued that the company had been trying to restructure the package by the Board of Directors. However, before any concrete decision could be arrived at between the parties, the RBI press release came as a sudden development.

While hearing the petition, Justice S G Shah found "one line quite shocking" which read 'such cases will be accorded priority by the NCLT', the Gujarat HC judge observed. The Gujarat HC further observed that while RBI had classified few companies whose accounts were disclosed as NPAs, for taking action against them the effective date was considered as March 31, 2016 even though the press release was issued on June 13, 2017. 

In the wake of a back dated notification, Essar Steel apprehended in its petition that if action is taken according to the press release dated June 13, 2017, then considering the provisions of Section 7, 16 and 17 of the Insolvency and Bankruptcy Code (IBC), 2016, the administration of the company would go into hands of Interim Resolution Professional. 

It needs to be mentioned here that once a financial creditor files application under Section 7 of the IBC which is admitted by the NCLT, a suspension period of 180 days commences. During this period, the board of the defaulter company is replaced with a resolution professional. The professional discharges the functions of the board till the time resolution process is completed.

Essar Steel argued that an NCLT admission of insolvency proceedings would mean the company is closing at a time when it was almost in the stage of revival and was in the position to pay Rs 3,467 crore to the bank last year.

"In view of such fact, petitioner has come forward with a request to stay the proceedings. However, initially it would be appropriate to call upon the respondents to initially explain that what they mean by “Such cases will be accorded priority by the National Company Law Tribunal (NCLT).”, irrespective of filing detailed reply on returnable date. It would be appropriate for the National Company Law Tribunal to adjourn the matter, if any, listed before it before such date," the high court observed while calling for the next hearing on July 7.