The Reserve Bank of India (RBI) issued a circular on 12 February 2018 under sections 35AA and 35AB (Provisions) of the Banking Regulation Act, 1949, on the identification and resolution of stressed assets.
In case of occurrence of default on accounts of debtors with aggregate exposure of lenders exceeding ₹20 billion (US$272 million) in aggregate (including specified previous RBI schemes). The circular mandates formulation of a resolution plan (RP) within 180 days from 1 March 2018 or from the date of default. In the event that a debt is not repaid, even by a day, RBI requires banks to file an insolvency application under the Insolvency and Bankruptcy Code, 2016 (IBC).
The Independent Power Producers Association of India, Association of Power Producers and Prayagraj Power Generation Company filed writ petitions with the division bench of the Allahabad High Court. The petitioners sought reliefs including, inter alia, a declaration that the Provisions in the circular are ultra vires the constitution and an order for quashing of the circular. This is an analysis of the order of 27 August 2018 delivered by the court.
Main line of attack against the circular was in reference to the “sector agnostic” approach adopted by RBI. The challenge was made that the approach violates Article 14 of the constitution. Power sector should be treated differently due to “severe financial stress”. Fuel shortages, sub-optimal loading, unused capacity, absence of fuel supply agreement(s) and a lack of power purchase agreement(s) were cited as reasons justifying differential treatment. The 37th and the 40th reports of the Standing Committee on Energy (SCE) were submitted as evidence. It was argued that initiation of IBC proceedings would cause grave and irreparable harm to the sector and that the 180-day period should be extended. Petitioners applied for the circular to be suspended till the High-Level Empowered Committee (HLEC) tenders its report. Notably, RBI is not a part of HLEC.
The court observed that reliance could be placed on the SCE reports as the facts in them were not in dispute. However, the reports were not sufficient for granting interim relief as they are in nature of “advised relief”. On the issue of irreversible prejudice following IBC proceedings, the court stated that the core scheme of IBC includes timely identification of default, expeditious implementation of a resolution plan, suspension or removal of existing management.
The court noted that the 180-day period for RP under the circular (as opposed to under IBC) is in addition to the prescribed total period of 270 days under IBC. Further, judicial interference in the operation of economic legislation can take place only if the provisions of such legislation are patently arbitrary or in defiance of logic. As the circular is intended to expedite the resolution of stressed economic and financial assets, the court decided not to intervene. Agreeing with RBI, the court rejected the argument of violation of Article 14. It decided that RBI is a monetary and fiscal regulator, and hence, the formation of protective measures for a particular industry are outside its purview. Lastly, it held that the court cannot give lenders discretion whether or not to apply under IBC, as this would contravene the powers conferred upon RBI by statute.
The court therefore denied the petition for interim relief but directed the government to consider initiating consultative process under the Reserve Bank of India Act, 1934. It directed that HLEC should submit its report within two months from the date of its formation. The court went on to clarify that its order will not curtail the rights and powers of a creditor under IBC, or of RBI from issuing directions to initiate corporate insolvency resolution process.
No appeal has been filed against the order. However, application of RBI for transfer of all cases pending before high courts seeking relief from the provisions of the circular to the Supreme Court was allowed. Supreme Court agreed to transfer such cases to itself with an assertion to maintain status quo as on 11 September 2018 till further order. It appears that Allahabad High Court’s order stands effectively stayed considering the petitioners before the High Court and the Supreme Court are common, being associations of power producers. However, it is unclear if this interim order is applicable on the ongoing resolution plans. It is also unclear whether this order applies to initiation of IBC proceedings by banks in the event of default by these petitioners et al under section 7 of IBC.
Abhishek Dutta is the founder and managing partner and Astha Srivastava is a senior associate at Aureus Law Partners.
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