Essar case: RBI wins but bruises remain POWERPOINT

The Gujarat High Court’s decision to dismiss Essar Steel’s petition challenging the initiation of bankruptcy proceedings against the company came as a huge relief to the Reserve Bank of India (RBI). But will the RBI’s cheer last? There is no clear answer to that if one goes by the court’s other observations on the central bank in the 83-page order.

While the court had every reason to feel offended by the RBI’s ill-advised press release dated June 13, which said that the cases of 12 companies identified for insolvency proceedings “will be accorded priority by the National Company Law Tribunal (NCLT)”, what was jarring was the court’s decision to repeat its scathing observations against the central bank even though the latter had apologised for the mistake during the hearing itself and took immediate corrective action.

In its final order on July 17, the court again rubbed it in by saying judicial or quasi-judicial authorities are not supposed to be guided by the advice or directions of government institutions such as the RBI. What the court sought to suggest was that the RBI was encroaching on the domain of the NCLT, something that the court did not take too kindly to.

But consider the language used by the court: The RBI, it said, “is under the impression that now when jurisdiction of matters pertaining to company law has been transferred to NCLT by enacting IBC (Insolvency and Bankruptcy Code), the NCLT has to follow their advice and directions. This is a serious issue...”

During the hearing, the court also took objection to the RBI’s stand that the NCLT was vested with the requisite powers to decide insolvency matters and observed that the affected parties were free to approach the judiciary which had complete jurisdiction to hear such matters also. Questioning the NCLT’s insolvency powers whereby it appoints professional entities to manage insolvent companies, the court said – perhaps in jest – that those with professional degrees may not necessarily be competent to run companies.

There was more. By citing earlier press releases, the court commented on the RBI’s “way of functioning” and expressed surprise that the central bank has conveyed to banks that their boards have been advised to empower their executives to implement Joint Lenders’ Forum (JLF) decisions without further reference to them. “Therefore, it seems that the RBI wants bank’s officers to act upon the decision of JLF, and take steps for its implementation, without referring such decision to its own board of directors. It may be an administrative issue, but it speaks for itself”.

As if that was not enough, the court advised that insolvency resolution process should not be initiated “mechanically”, and before initiating such process, the RBI must ensure that there is some substance. One should not be surprised if future challengers to the insolvency process cite the court’s observation in the Essar case.

Essar’s petition had asked the high court to set aside the RBI’s directive to banks on the grounds that it was already discussing a restructuring proposal with its lenders. Though the court set the petition aside, it has observed that the schemes of the RBI must be applied to “all without discrimination”. Given that the RBI has many other schemes such as the “Scheme for Sustainable Structuring of Stressed Assets” (S4A) as an optional framework for the resolution of large stressed accounts, other companies with huge bad assets might latch on to the court’s observation in terms of equitable extension of its schemes, and challenge the lenders’ decision to drag them to NCLT. Though the new recovery law does not give powers to civil courts to stall bankruptcy proceedings, the companies can now feel encouraged to approach courts alleging discrimination. And if dragged to court again, the RBI will need to explain all over again its rationale behind pushing 12 accounts for insolvency while allowing 488 others six months to restructure their debt, thus delaying the process further.

The court didn’t stop at that and observed that even though they “may be drastic to some extent”, the provisions of the IBC must be followed, but in consonance with the constitutional mandate by all concerned – opportunity to be heard is to be given to the borrower company by NCLT before admission of the petition.

This is not the first time that the RBI has come under the courts’ glare. In an earlier case, the Supreme Court slammed the central bank for refusing to furnish information under the RTI Act about the irregularities of financial institutions and other commercial banks. In that case also, the court’s observations were scathing. The attitude of the RBI, the court said, “will only attract more suspicion and disbelief in them. The RBI in association with (banks and financial institutions) has been trying to cover up their acts from public scrutiny”. In an earlier observation, the court had directly slammed the Securities and Exchange Board of India and the RBI, saying they were largely responsible for “scams not just taking birth but flourishing unhindered”.

In the latest case, Essar Steel may have lost, but the Gujarat High Court has made sure that the company can look back with some satisfaction. For the RBI, which has won the case, that satisfaction may be missing.