Much ado about nothing?


Dear Editor,

Recently, the Supreme Court struck down a Reserve Bank of India (RBI) circular. The February 2018 circular was intended to overhaul the earlier restructuring frameworks and to mandate banks and financial institutions to take action against accounts that had more than 20 billion (US$ 290 million) outstanding debt with no resolution plan implemented within 180 days from the occurrence of default.

The RBI had earlier come up with a first list, comprising twelve defaulters, and a second list, of twenty-five defaulters, against whom the banks were asked to start proceedings under the Insolvency and Bankruptcy Code (IBC). By way of the circular, the RBI, rather than getting into a case or sector-specific defaults, set out conditions under which banks were required to initiate proceedings. The RBI’s rationale for the issuance of the circular was public interest and to drive a behavioural change in the credit system. However, there were practical challenges faced by various stakeholders, especially in certain sectors like power that were reeling under a default situation for reasons beyond their control.

The success of the IBC process is determined on the basis of value preservation of the corporate debtor on a going concern basis during the insolvency process and value maximization for stakeholders at the end of the process. If the circular were to be implemented, a lot of companies in sectors such as power, shipyards and sugar would be pushed into insolvency under the IBC resulting in a garage sale scenario. The deadline of 180 days to arrive at a resolution plan with consensus among all lenders under a contractual framework was becoming difficult to adhere to, and initiation of IBC proceedings was looming large in a number of cases.

The circular was thus challenged by corporate debtors across various sectors on the grounds that they were being pushed into the IBC process because of the time bomb set out in the circular. The Supreme Court tagged all matters on this subject in Dharani Sugar and Chemicals Limited v Union of India & Ors. The Supreme Court then struck down the circular as being ultra vires section 35AA of the Banking Regulation Act, 1949. There has been hue and cry raised in different quarters as to whether the IBC process gets undermined by the Supreme Court order and whether the matters admitted to the IBC may be ousted. The IBC process has not been undermined, and all cases that were admitted to the IBC including the cases in the first two lists will continue uninterrupted.

Only proceedings that were started because of the circular will be halted, and for this to happen, the financial institutions will have to confirm that a particular proceeding was initiated only because of the circular. Also, the earlier RBI frameworks do not automatically get reinstated on account of the circular being struck down. Nothing prevents the RBI from coming up with other circulars to address stress situations or another list of defaulters against whom the IBC proceedings may be started provided that such a list is issued in compliance with section 35AA of the Banking Regulation Act.

Ajay Shaw
Partner and head of IBC practice
DSK Legal Mumbai


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