The ruling is a boost to the government, which in May tweaked the banking laws to empower the Reserve Bank of India (RBI) to tackle India's bad debt issue, allowing the RBI for the first time to direct lenders to force defaulters into insolvency courts.
The ruling paves the way for the start of bankruptcy proceedings against Essar Steel, although the company could appeal the ruling. The company did not immediately respond to a Reuters request for comment.
Essar Steel had argued that it should have been given an opportunity to present its case before the Reserve Bank of India decided to include the company among 12 defaulters that would be referred to bankruptcy court.
The RBI had in June asked lenders to start insolvency proceedings against 12 companies, as part of new powers it gained this year to help India cut down on the more than $150 billion in stressed assets in the banking system.
Essar Steel owes lenders around 450 billion rupees ($6.99 billion), of which 316.7 billion rupees had become non-performing as of March 31, 2016, Mint newspaper previously reported citing court hearings.