RBI set to lose NPA battle as court halts recovery proceedings

The Reserve Bank of India (RBI) on Friday told the Gujarat High Court that it would issue a corrigendum to its 13 June circular that allowed insolvency proceedings against 12 high-risk companies at the National Company Law Tribunal (NCLT) after the high court's stay on the creditors' move to retrieve lost money effectively halted the government's and the RBI's efforts to ease the banking sectors' bad loan problem.

The court also adjourned till 12 July the hearing of Essar Steel's petition asking for a stay on insolvency proceedings and questioned RBI's according top priority to recovering the 12 non-performing asset (NPA) accounts.

The court ruling comes on Essar Steel's plea, filed on 4 July, against insolvency proceedings initiated against it at the NCLT by a consortium of 22 lenders led by State Bank of India as well as Standard Chartered Bank.

The June 13 RBI circular read: ''The Reserve Bank, based on the recommendations of the Internal Advisory Committee, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC (Insolvency and Bankruptcy Code) in respect of the identified accounts. Such cases will be accorded priority by the NCLT.'' The court had sought clarification from RBI on this statement.

The high court wanted RBI to drop a line its 13 June directive to send 12 large corporate accounts for immediate action under the Insolvency and Bankruptcy Code.

In an earlier hearing, the Gujarat High Court had asked the central bank to explain the part of its statement that read ''such cases will be accorded priority by the National Company Law Tribunal (NCLT)''.

The 12 NPA accounts, with outstanding debt of over Rs5,000 crore, were to be accorded priority by the NCLT as 60 per cent of the debt of these 12 companies had turned ''bad'' as of 31 March 2016.

The total debt of these companies is expected to be in excess of Rs1,50,000 crore.

The court ruling has frozen the NPA resolution process that was to begin with the banks approaching NCLT to appoint a professional to manage the insolvent company, and suspending the existing board.

The professional gets 180 days to come up with a workable solution for the company so that it can repay its loans. This timeline can be extended by another 90 days. If the company fails to come up with a solution within 270 days, a liquidator would be appointed.

On Friday, Essar Steel's counsel, led by Mihir Thakore, argued that as per Section 35 of the Banking Regulations Act, lenders could not have initiated insolvency proceedings at a time when restructuring process was on. The company's counsel also argued that Essar Steel could not have been categorised along with the other 11 companies merely on the basis of Rs5,000 crore since, unlike others, Essar Steel was in advanced stages of recovery.

As per the counsel, of the other NPA accounts, three were non-functional whereas Essar Steel was doing well since last one year and had paid almost Rs3,467 crore to its lenders even as it agreed to boundary conditions for a resolution plan with the lenders.

Arguing before judge S G Shah, Essar Steel counsel said the RBI overlooked the company's past record apart from its profitability as well as opinions of various banks and financial institutions in respect of viability of the company.

Essar Steel has a debt of around Rs42,000 crore. As per the company, its manufacturing capacity utilisation stands at 80 per cent and its turnover at Rs20,000 crore.

Meanwhile, Standard Chartered Bank's appeal to a division bench of the Gujarat High Court, which has been adjourned till 11 July, will come up before hearing begins on Essar's plaint against the SBI consortium's insolvency proceedings.

StanChart had appealed on Wednesday before a division bench of the court to quash the stay on insolvency proceedings, on grounds of suppressed facts by Essar Steel.

Standard Chartered Bank claimed that it was not party to any revival or restructuring package nor was invited in any lenders' meeting by Essar Steel, as the latter claimed in its petition.