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Allahabad HC grants temporary relief to Power sector firms from actions pursuant to RBI Circular

Varun Marwah

The Allahabad High Court has today issued a temporary injunction against a circular issued by the RBI which gave borrowers 180 days’ time to clear their dues. It also said that failure to do so would make them liable insolvency proceedings under the IBC. The injunction has been granted to firms belonging to the Power Sector.

The Independent Power Producers Association Of India has challenged the vires of the said circular which was issued on February 12, 2018 (Circular), as being violative of Articles 14 and 19 of the Constitution. At the same time, the vires of Sections 35AA and 35AB of the Banking Regulation Act have also been challenged.

These provisions were inserted by the way of an Ordinance one year back which empowered the Central Government to issue directions to RBI to effectively deal with stressed assets. As a result of this Ordinance, two circulars have been issued by the RBI so far, one on June 13 2017, which announced the decision to act against 12 large accounts under IBC, which lead to the infamous ‘RBI 12’.

Whereas, the second one being on February 12, 2018, which has been challenged in this petition. The Circular, inter alia, said that banks will have to disclose defaults even if the interest repayment is overdue by just one day and have to put a resolution plan in place within 180 days. It further said that failing to find a resolution within this stipulated time, the defaulting company will have to be referred to NCLT as the RBI had abolished all the extant debt resolutions mechanisms such as the S4A, SDR, JLF etc.

The Petitioner Association has challenged various elements of the Circular as being unconstitutional. The primary grievance of the Petitioner Association is that the Circular was a result of non-application of mind, inasmuch as it painted all forms of ‘stressed assets’ from various industrial sectors with the same brush.

They have argued that, firstly, there has been no distinction made between genuine and wilful defaulters. They say that they are genuine borrowers who are unable to service their loans for reasons beyond their control, such as want of Government Support in respect of allocation of natural resources, Power Purchase Agreement Support etc.

To substantiate its stance, the Petitioner Association has also relied on the report of the 31-Members Committee of Parliament on Energy, constituted in October 2017 which submitted its findings in March 2018. In its report, the Standing Committee has analysed, in great detail the issues crippling the power sector, the reasons for their becoming NPAs/Stressed Assets and recommended consideration of the precarious and unique distress of the power sector in the country.

Further, the 180 days time period for implementation of a resolution plan has also been challenged as being arbitrary insofar as this timeline is prescribed only for accounts with a debt of over Rs. 20 billion and not less than that. The said quantum has also been challenged as having no rational nexus to the object sought to be achieved either by Sections 35AA and 35AB.

The Petitioner Association further challenges the Circular as it seeks to introduce the consent of all lenders, which according to them completely destroys the concept of the majority and makes it virtually impossible for a restructuring proposal to be approved. They say that as a consequence of this provision, a single lender holding 1% can also derail the process.

The Petitioners also argue that the RBI has exceeded its authority in issuing such a circular, in view of its clear mandate,

to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in lndia and generally to operate the currency and credit system of the country to its advantage 

Senior Advocate Sajan Poovayya appearing for the Petitioner Association, took the Court through the impractical timelines under the Circular for resolution and reference under IBC, of the stressed assets, in case of defaults.

Poovayya, submitted further that the withdrawal of the extant instructions would imply that there would be no manner of a possible revival of these stressed assets.

He further submitted that while an illusory period of 180 days has been provided under the Circular for reference under IBC, this particular Clause, in effect, pushes these stressed assets to an inevitable liquidation under the Code.

In light of the submissions by the parties, the Allahabad High Court Bench of Chief Justice Dilip Bhosale and Justice Suneet Kumar was pleased to observe that “action may be avoided on the basis of the impugned Circular”. Consequently, vide the Order dated May 31, 2018, stressed assets pertaining to the power sector are now immediately protected from insolvency proceedings, subject to the condition that the member(s) is/are not wilful defaulter(s).

The Allahabad High Court has, accordingly, directed the Ministry of Finance to conduct a meeting in the month of June, 2018 along with the Secretaries from RBI, Ministry of Power, Ministry of Petroleum and Gas, and Ministry of Coal along with a representative of the Petitioner Association, to consider their grievance and see whether any solution to the problem is possible, in the light of observations made by Standing Committee Report.

The matter is now adjourned to 10.07.2018 for further proceedings.

(Read the order)

WRICA_18170_2018.pdf
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