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Essar Steel Bankruptcy Case: NCLT And IBC On The Cross Roads

Professor of Financial Economics and Part-time Value Investor, Transfin.
Jul 25, 2017 4:30 AM 3 min read

Thanks to legal salvos of Essar Steel, the all “empowered” Reserve Bank of India (RBI) and National Company Law Tribunal (NCLT) quickly descended into a labyrinth of messy juridical limitations.


The Insolvency and Bankruptcy Code (IBC), passed in 2016, aimed to consolidate all bankruptcy-related laws and create a time-bound NPA resolution framework. The IBC allows financial or operational creditors initiate proceedings against defaulting corporate borrowers at the NCLT (the “Tribunal”). As a quasi-judicial body, the NCLT is on paper the principal adjudicating authority in all such matters.


To tackle the ongoing bad debt debacle, the government passed an ordinance in May 2017 enabling RBI to direct lending banks towards legal restitution via NCLT. 12 “mega defaulters”, representing one quarter of all NPAs, were identified to execute this high priority plan.


Amongst the black sheep, Essar Steel attempted to block these proceedings via a ‘special civil application’ in the Gujarat High Court, questioning the grounds on which the RBI short-listed these cos. The steelmaker expressed concerns that if management goes in the hands of interim resolution professionals (IRPs), liquidation would be the natural outcome instead of restructuring.


Essar seeking a civil court’s intervention in a bankruptcy-related dispute, besides from serving as a tactical respite, raises questions on RBI and NCLT’s jurisdiction vis-a-vis the established judicial order. Whether Essar’s argument had any merit is a separate question.


Since its very inception, the NCLT’s constitution as a singular forum to deal with Company-law matters was aimed at providing a speedy and efficient framework to resolve bankruptcies. Pre-IBC, the average proceeding in India lasted for more than 4 years. NCLT’s conception envisaged a reduction in Civil Courts’ burden of Company-law related issues like arbitration, compromise, arrangements, reconstruction and winding up.


However, even with this new path in place, companies can still approach the High Court alleging discrimination as Essar has done. Under Article 227 of the Constitution of India, the High Court has jurisdiction over all subordinate courts and tribunals under its territory. Though decisions of a quasi-judicial body may often be legally enforced, they can be challenged in a High Court, which remains the final decisive authority. This clearly highlights a degree of ambiguity in the NCLT’s absolute powers. Speaking in the same vein, Justice Hidayatullah says, “They (tribunals) are very similar to courts, but are not courts.”


Even as Gujarat High Court eventually dismissed Essar’s plea, Bhushan Steel, another mega defaulter is reportedly following this precedent by seeking relief from the Delhi High Court.


There is still some way to go before the NCLT can seamlessly moderate and judge bankruptcy cases. From a very optimistic stand point, half the battle may be won with the IBC’s intent and foundation. But as Abizer Diwanji Head of Restructuring Services at EY said “The law is more an operational turnaround than a legal battleground.”


The IBC is still in its nascence and we should anticipate amendments as it is tested against actual cases. Essar’s episode reinforces the supremacy of the established judiciary, for now. From what it seems, it is going to be a nail biting contest to watch.