The Supreme Court recently struck down the Reserve Bank of India Circular dated 12 February 2018 (RBI circular), which directed banks to mandatorily initiate corporate insolvency resolution process (CIRP) for defaulting companies with loan exposure of more than ₹20 billion (US$290 million) where restructuring efforts failed. The lenders were directed to file applications singly or jointly under the Insolvency and Bankruptcy Code (code) within 15 days from the expiry of the 180-day deadline.
Following the ruling in Dharani Sugars and Chemicals Ltd v Union of India, dated 2 April 2019, the focus is now on various cases where the resolution of stressed assets for debts of more than ₹20 billion were initiated following the RBI circular and are now at an advanced stage of resolution. What will happen to these resolution plans still under the consideration of the Committee of Creditors (COC) or those that had been cleared by the COC and are awaiting National Company Law Tribunal (NCLT) approval?
The Supreme Court intervention came because of the overarching nature of RBI’s approach, which overlooked certain mandatory processes. Companies in the power, telecom, steel, infrastructure, sugar, fertilizer, shipyard sectors contended that the 180-day limit envisaged under the circular is arbitrary and discriminatory, and that by making it applicable across all sectors of the economy without going into the problems faced by each sector, the RBI risks treating “unequals equally”.
The Supreme Court held the RBI circular to be ultra vires for having failed to comply with the requirements of sections 35AA and 35AB of the amended Banking Regulation Act (act). In accordance with the banking regulation act, RBI can issue directions to banks and start proceedings under the code only if there is a central government authorization to do so, and in the case of specific defaults.
Following the Supreme Court ruling, the RBI, on 4 April 2019, said that it will come up with a revised circular for the expeditious and effective resolution of stressed assets. The ruling observes that there was no dearth of guidance for the RBI to exercise the powers delegated to it and that section 35AA of the amended act merely refers to the issuance of directions to banks in specific cases of default and not a general direction as was done through the RBI circular.
The question remains whether the fate of companies whose resolution plans were still under the consideration of the COC would hang in limbo until a revised circular from the RBI is issued, or whether the gap would provide an opportunity for the promoters to make another attempt at resolving the issues with the lenders and arrive at a settlement with them?
However, in case the promoters are not able to come up with a resolution plan before the revised RBI circular is issued (and this time after receiving the approvals from the central government), the promoters will be further hit by the provisions of section 29A of the code and their efforts for resolution will come to a standstill. The only window left for promoters is in the form of section 12A of the code, according to which upon the promoter presenting a settlement plan, the CIRP application can be withdrawn if the COC approves the withdrawal with a 90% vote.
The Dharani Sugar ruling comes along with other judgments passed by the Supreme Court aimed at making the code work efficiently. One such operational hurdle that was lifted was related to the withdrawal of insolvency proceedings against a company after the process has started. In the Brilliant Alloys Private Limited v S Rajagopal & Ors case, the Supreme Court observed that the provisions of regulation 30A must be read along with the main provision of section 12A, which contains no such stipulation and thus it can only be construed as directory depending on the facts of each case.
The Supreme Court, in the Swiss Ribbons Private Limited vs Union of India (2019) case, upheld the credibility of the code with an observation that “there may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid”.
Therefore, while crudities are slowing down resolutions and delaying repayment of debts, the hope still exists that the code will chart its own course and with minimal intervention by the NCLT, the National Company Law Appellate Tribunal and the Supreme Court.
(This article was originally published in India Business Law Journal - https://www.vantageasia.com/commercial-implications-of-rbi-circular-strike-down/)