RBI circulars to mitigate COVID-19 financial disruption not applicable to defaults that occurred before pandemic: Delhi High Court

The Delhi High Court held that the benefits rolled out by the Reserve Bank of India (RBI) to mitigate financial disruption caused by COVID-19 do not apply to defaults which occurred prior to the outbreak of the pandemic (Amit Khaneja vs IL&FS). .An order to this effect was passed by a single-judge Bench of Justice Prathiba M Singh. .The Court was dealing with a petition challenging IL&FS Financial Services' (IL&FS) decision to revoke the in-principle agreement granted to the petitioner's one-time settlement (OTS) in relation to repayment of a debt. .The petitioners had availed various credit facilities from IL&FS between the period 2006 to 2018. Following the defaults, the account was classified as a Non-Performing Asset in July 2018..After proceedings under SARFAESI Act were initiated before the Debt Recovery Tribunal, the petitioner, in January 2020, made a final proposal of Rs. 100 crores in respect of the outstanding loan of Rs 93 crore..On March 3, 2020, IL&FS agreed in-principle for the payment of 100 crores at one go, on or before March 27, 2020..The OTS did not fructify and IL&FS eventually revoked the settlement proposal. .It was the petitioner's primary contention that the revocation was contrary to RBI circulars on ‘COVID-19 Regulatory Package’ and Policy Guidelines titled “Statement on Developmental and Regulatory Policies”..The petitioner said that the object of the circulars and guidelines was to give breathing time to borrowers on loans and interest during the COVID-19 pandemic..IL&FS contested the maintainability of the writ petition as it argued the disputes were in the realm of contractual law and the only remedy available to the petitioner was in terms of the SARFAESI Act..It justified the revocation of the in-principle agreement on the ground that there was no definite settlement and the petitioner also failed to fulfil the conditions therein. .IL&FS further stated that neither of the RBI circulars protected any defaulters under the garb of the pandemic if they did not honour the loans which had become payable by or before the pandemic broke out. .After perusing the RBI circulars and policy guidelines, the Court stated that they were meant for mitigating the burden of debt which might have been brought about due to the COVID-19 pandemic..The present case, the Court added, was one wherein any disruption took place due to the COVID-19 pandemic as even prior to the OTS, the petitioner was already in default..It said, ."The circulars of the RBI and the guidelines thereunder relate to reliefs to be granted for payments of interest and declaration of accounts as NPAs etc., during the COVID-19 pandemic. These circulars and policy guidelines cannot lend any support to the Petitioners’ case where the defaults are prior to the outbreak of the pandemic itself. The legality of the revocation of the OTS in May, 2020 cannot be tested on the benchmark of the recent RBI circulars and the policy guidelines inasmuch as these settlements are independent of the said circulars and guidelines. Moreover, the RBI circular itself make it clear that the same is for “continuity of viable businesses” and not for accounts which are already declared as NPA, as is in the present case.".The court noted that much water had flown in respect of the loan transactions after defaults by the petitioner and there was no case to consider if the pandemic had caused any financial stress..The petition was accordingly dismissed. .Senior Advocate Meenakshi Arora with Advocates Vivek Jain, Nirvikar Singh, Manish Shekari, Zulfiquar Memon appeared for the petitioner. .Senior Advocate Rajeev Mehra with Advocates Atul Sharma, Abu John Mathew, Madhusudan, Baiju Mathew appeared for IL&FS. .[Read order]