Background –
Most of the companies in Power Sugar Fertilizer etc., are badly affected by the RBI circular, with mandated banks to refer the defaulting companies, where the debt is overdue ever for one day beyond 180 days.
Most of the companies in this sector viz., Sugar Power Fertilizer etc., are regulated and their business model depends on seasonal fluctuations, government controls tariff orders, subsidies etc.
They depend on Government for successful running of business. Many companies in the power sector were left high and dry due to stoppage of coal linkage, non-fulfillment of obligation to sign PPA by the state Governments, unviable tariff etc.,
This has badly affected the company’s financial performance. More than Rs. 2.20 lakh crores of loan were struck as bad loans in the banking system.
From Industry perspective, many felt that the RBI circular was too draconian and it hurt industry and Govt. more and contributed less to resolution process. All good, performing & potential assets were also classified as non-performing and referred to NCLT.
The Supreme Court judgement striking down the Reserve
Bank of India (RBI) circular that gave defaulting companies 180 days to agree
on a resolution plan with lenders or be taken to bankruptcy court to recover
debt of Rs. 2,000 crore and above, has given a respite to ailing industries.
The bench said the February 12, 2018, circular was beyond the scope of the
RBI’s powers.
“The
impugned circular will have to be declared as ultra vires as a whole, and be
declared to be of no effect in law,” said the two-judge bench led by justice RF
Nariman. “Consequently, all actions taken under the said circular, including
actions by which Insolvency Code has been triggered must fall along with the
said circular.”
The court’s decision restored the discretion of
banks on debt resolution. The ruling may affect stressed assets worth around Rs
2.2 lakh crore in many sectors and mean unwinding the insolvency resolution
process in some instances, legal experts said.
Supreme Court of India:
Circular beyond RBI powers—Government had only authorized RBI to issue orders on specific defaults
Impact
All action taken under RBI circular becomes void. But does not mean cases in NCLT go away automatically.
Parties in NCLT will have to prove if insolvency was under circular or not. If under circular, it will be withdrawn, else the process will continue.
Huge relief for stressed assets in sectors such as power, sugar and fertilizers.
Ruling restores banks’ discretion to take a call on whether to involve insolvency proceedings in IBC on case-to-case basis.
Unravels many pre-IBC cases which were on way to resolution, sets clock back on resolutions in advanced stages. These will have to be resolved.
Whittles down RBI powers to deal with NPA mess.
Senior advocate Abhishek Manu Singhvi, who
opposed the circular on behalf of the stressed power sector, said the verdict
would possibly have a knock-on effect on the resolution process, depending on
the circumstances in which it was invoked.
“Once the court declares a circular as ultra
vires, all necessary consequences will follow unless the court specifically
chooses to make it prospective,” he said. “All action taken up to now either by
banks or creditors under the circular and not been consummated will stand unraveled.
Individual cases pending under IBC (Insolvency and Bankruptcy Code) so long as
they were entirely under the circular would be withdrawn.”
Incidentally,
SC had upheld the validity of IBC in its entirety on January 25. That bench
comprised justices Nariman and Navin Sinha. There may be no change with regard
to companies that may have anyway gone to bankruptcy court under the IBC
process but this will have to be argued before the National Company Law
Tribunal (NCLT) benches, Singhvi said.
One-day default rule –
Proceedings will not lapse automatically and instances of companies changing
hands in the IBC may not have to be unwound, he said.
The order came as a relief to companies in
stressed sectors such as power, shipping, steel, telecom, infrastructure,
sugar, fertilizer and sports infrastructure, which had blamed extraneous
reasons such as regulatory controls that capped prices. They had claimed that
the circular treated them like willful defaulters — those that could repay but
didn’t — and narrowed the window within which a bad loan was to be resolved from
270 days as per the IBC to 180 days (plus a grace period of 15 days).
The February 2018 circular had directed lenders
to refer any loan account over Rs. 2,000 crore to the bankruptcy process if it
wasn’t resolved within 180 days of default. It also underscored the IBC’s
status as the cornerstone of India’s bad-loan resolution framework, scrapping
all previous mechanisms, such as corporate debt restructuring, strategic debt
restructuring and the scheme for sustainable structuring of stressed
assets.
The circular also imposed a one-day default rule
— a company was treated as a defaulter even if it missed one day of the
repayment schedule. This is said to have rattled borrowers and annoyed many
within the government, leading to a clamor for dilution. The circular had been
one of the key measures the regulator took under the governorship of Urjit
Patel, who quit before his term was over amid a dispute with the government
over various issues including autonomy. Patel was succeeded by former bureaucrat
Shaktikanta Das in December last year.
The order meant that “lenders can now use IBC as
a tool as per their commercial wisdom and that they are no longer required to
initiate proceedings under IBC compulsorily”, said Karan Mitroo of L&L
Partners.
The bench said the banking regulator could not
have issued such a general omnibus order based on the government notification
of May 5, 2017, which had only authorized it to issue orders on “specific”
defaults.
All resolution plans that may have been
concluded in the interim in the absence of a court stay on the circular may
well have to be renegotiated after a fresh exercise involving all stakeholders,
experts said, adding that this could delay resolution proceedings because of
the greater discretion given to lenders, impacting loan recoveries. Others said
that it also whittled down the regulator’s powers to clean up the bad loan
mess. The RBI would have to get government authorization under the existing statutory
scheme for any such omnibus orders.
Singhvi said the ruling was “fair” warning to
the RBI, which is a “big institution” and must hence function within the
“statutory scheme”. The RBI had issued the circular under Section 35AA of the
RBI Act as a phased programme to deal with stressed assets.
Among the challenges raised against the circular
was the requirement that a resolution plan could only be finalized if it was
agreed to by all lenders. Any discord would thus make bankruptcy
inevitable.
Singhvi said that the percentage was an issue
for banks to work out. “Why should the RBI poke its nose into it?”
The ruling will put Indian lenders on par with
foreign lenders as the circular didn’t apply to the latter, said Mitroo.
The government had on its part argued during the
hearing that it was committed to an expeditious resolution of stressed assets
in the banking system, defending the RBI’s powers. But it backed the power
sector’s demand to be treated differently and helped back to its feet instead
of being forced into insolvency.
In a detailed order, the court also drew a
distinction between the powers conferred on the RBI under Sections 35AA and
35AB.
“The RBI can only direct banking institutions to
move under the Insolvency Code if two conditions precedent are specified,
namely, (i) that there is a Central Government authorization to do so; and (ii)
that it should be in respect of specific defaults,” it said The Section,
therefore, by necessary implication, prohibits this power from being exercised
in any manner other than the manner set out in Section 35AA.”
RBI needed central government authorization to
issue the circular, which it did not obtain, said Dipankar Bandyopadhyay,
partner, Verus.
“The judgment has no impact on cases referred to
NCLT prior to the date of the circular. The judgment recognizes that before the
amendment in the Banking Regulation Act, RBI could have given direction to
banks to refer cases to NCLT without obtaining approval of the government,” he
said. “So, the earlier references to NCLT will stand fine.”
RBI’s general power to issue a wide variety of
directions will not be impacted by the judgment as the Supreme Court has noted,
he said, adding that it’s expected to be more cautious in the future while
exercising the legal provisions that entitle it to issue such directions. “The
court has left the door open for RBI to direct banks to move under IBC in
respect of specific defaults since it upheld the ordinance although such
notifications must survive the scrutiny of the Act,” Bandyopadhyay said. “The
current judgement impacts only those insolvency cases which were specifically
referred under the circular. The corporate borrowers do not have a carte
blanche to challenge reference to insolvency as a result of this
judgment.”
The Supreme Court has previously upheld the
constitutionality of the IBC and “absent a manifest error of law, it would
henceforth exercise restraint while hearing arguments which seek to disrupt the
functioning of the Act”, he said.
Conclusion
From industry perspective, this is a welcome judgement. Even from Banks’ view, they can take a view on case by case basis and take a decision on merits.
RBI should now come out with clear guideline, in line with the judgement, by taking a practical view and also smoothening the resolution process. Now that the legality of IBC (insolvency and Bankruptcy code) has been upheld ,RBI and Banks should work within the purview of IBC provisions for resolution of defaults/bad debts.
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Business Management 