The High Court of Karnataka has held that a borrower is entitled to seek loan moratorium on the basis of the Reserve Bank of India's March 27 circular, on the ground that the non-grant of it would affect the continuity of buisness.
While acknowledging that the grant of moratorium as per the RBI circular is the discretion of the bank, the Court stated that it is "mandatory" for the banks to ensure that continuity of business is not affected due to the non-grant of moratorium.
"...though the Circular issued by the RBI dated 27.03.2020 is discretionary in so far as the power to grant or not a moratorium by a bank, it is mandatory for the Bank to ensure the continuity of viable businesses, in that, the non-grant of a moratorium should not result in adversely affecting the survival and continuity of a viable business", observed a bench of Justice Suraj Govindaraj.
The Court added that borrowers can seek the moratorium as a matter of right if they could establish that the growth and continuity of their business would be affected.
"All borrowers are eligible to seek for a moratorium, if a borrower were to seek for grant of a moratorium on the ground that continuity of its business would be affected and establish the same, the borrower would as a matter of right be entitled for the grant of moratorium so that such continuity is not adversely affected", the bench added.
The court also directed the RBI to monitor the implementation of the Circular, including verification of whether there are Board-approved policies formulated by each of the lenders, direct all the banks to submit the Board-approved policies for approval to the RBI, to approve such board-approved policy, verify if such a board-approved policy contains objective criteria, and to set up a proper and effective grievance redressal forum for any aggrieved borrower to approach on account of the improper or non-implementation of the Policy and/or Circular etc.
"The contentions of the RBI that the dispute is between the Petitioner and Respondents No.5 to 7 is not acceptable since the dispute arises out of the implementation or not of a Circular issued by the RBI", the bench observed.
"Admittedly, there is no mechanism which created for redressal of grievance on account of improper implementation or non-implementation of the recovery package or the Circular", observed the Court, noting that pending creation of such a forum, the court would have to intervene to provide for a remedy to the aggrieved Petitioner, to give effect to the principle, Ubi jus ibi remedium.
The Court directed the HDFC Bank Ltd, Federal Bank Ltd and Aditya Birla Finance Ltd to grant moratorium to the petitioner for three months from 01.03.2020 to 31.05.2020 as also for the extended period from 01.06.2020 to 31.08.2020.
Further, the bench restrained these institutions from either jointly or severally recovering the loan repayment instalments/EMI due in respect of loan accounts of the petitioner during the period of moratorium.
There was a further direction to reverse the recovery of loan repayment instalments/EMI already effected including that for the months of March and April, 2020 and transfer the same to the Current Account of the Petitioner.
The Petitioner was in the business of running an Information Technology Park (Technology park or Tech Park) and a 5 star Hotel, both of which have been constructed on the land belonging to the Petitioner.
The Petitioner had availed term loan facilities from Respondent Nos.5 to 7 viz., HDFC Bank Limited, Federal Bank and Aditya Birla Finance Limited, totalling up to Rs.475 crores.
In view of the lockdown and other measures announced by the Union of India and the State Government, the Petitioner was constrained to shut down its hotel business since the same could not be carried out adhering to the social distancing. However, the Tech Park was being functioned by the tenants of the Tech Park by following the applicable laws. In view of the shut down of the hotel business, the revenues of the Petitioner was adversely effected and as such, the Petitioner applied to Respondents seeking for grant of moratorium
"However, Respondent No.5-HDFC Bank vide its letter dated April 6th 2020 had informed the Petitioner that there were rentals which were being received by the Petitioner from the Tech Park, hence the moratorium could not be extended to the Petitioner and therefore rejected the said application", records the Bench.
The judgment further narrates that Respondent No. 5 post rejection of the moratorium application made by the Petitioner, debited the amounts due to it from and out of the Escrow Account wherein the lease rental amount were being deposited by the concerned tenants. This was also followed up with similar debiting by Respondent No.6, debiting being made for the EMIs payable for the months March and April, 2020.
Subsequently, Respondent No.7 informed the Petitioner that its loan was secured by way of a pari passu charge and though a request had been made by the Petitioner to all three lenders, Respondent Nos.5 and 6 had been unilaterally appropriating the dues from the rents received from the Technology Park without sharing any portion of the cash flow with Respondent No.7. They suggested that they could consider the request of the Petitioner for moratorium along with other lenders provided Respondent No.5 shares the cash flow in the escrow account proportionately.
When the complaint filed by the Petitioner before the Banking Ombudsman was taken up, the Federal Bank-Respondent No.6 submitted that in principle it has no objection for extension of a moratorium to the Petitioner subject however to Respondent No.5 extending a moratorium. In view of the above, the Petitioner once again approached the Respondent No.5 by submitting a representation to consider the request of a moratorium favourably, which was not so considered.
"It is in the above background and aggrieved by said actions on the part of the Respondent Nos.5, 6 and 7 that the Petitioner is before this Court", narrates the Single Bench.
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Is the Circular issued by the RBI dated 27.03.2020 mandatory, directory or discretionary? Whether the grant of a moratorium is at the discretion of the Bank or as a corollary would it be a right to be exercised by the borrower?
"A perusal of the Circular indicates that permission is granted to the banks concerned to grant moratorium of three months as regards the payment of all instalments falling due between March 1st 2020 and May 31st 2020", noted the bench. It deciphered that the permission is one which is accorded to a bank or lending institution to permit a moratorium, is on account of the fact that without RBI permitting the same, a bank of its own accord is prohibited from granting any moratorium to a borrower.
The Bench observed that the discretion to grant such a moratorium is that of the bank on the basis of a Board approved Policy containing objective criteria made available in the public domain.
"The consequence of such grant of moratorium is covered by the second part of Para 2 which states 'The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period'", noted the Court.
Besides, it reflected that the Circular more particularly Para 2,4 and 8 would have to be read along with the statement of development and regulated Policy released by the RBI on 27.03.2020, which inter alia addresses the stress in the financial condition or rather distress caused to the economy by Covid-19 inter alia to ensure the continuity of viable businesses.
"Thus, the exercise of discretionary power by the Bank or lending institution is predicated on ensuring the continuity of the business of a borrower. The decision of the Bank or lending institution if, were to, fall foul of this intention, then that decision would be contrary to the Policy as also the Circular", inferred the bench.
The bench took the answers to FAQs, as posted online by the various banks, to indicate that all corporate, as well as SME customers, are eligible for a moratorium and it is for the customer to choose whether to avail a moratorium, that is, to say that the offer for a moratorium having been made by the Bank, it is for the customer to accept the moratorium by choosing to do so and making an application in that regard. Once such a choice is made and an application was submitted, the rest of the process is automatic.
"Once the banks have in the public domain on their respective websites expressed their solidarity with all their customers and stated that all the customers are eligible for grant of a moratorium, in accordance with RBI guidelines, it is not permissible for such banks to nit-pick and later on, refuse the grant of a moratorium, to the Petitioner, who is otherwise eligible", remarked the bench.
The Court said that both the RBI and the banks have held out that all customers are eligible for a moratorium. The availing of or otherwise of the moratorium is at the sole discretion of the borrower more so when the borrower would be required to make payment of additional interest, during the said moratorium period. There being no waiver of interest and or the principal amount by the mere grant of a moratorium.
"Thus, though the Circular issued by the RBI dated 27.03.2020 is discretionary in so far as the power to grant or not a moratorium by a bank, it is mandatory for the Bank to ensure the continuity of viable businesses, in that, the non-grant of a moratorium should not result in adversely affecting the survival and continuity of a viable business", ruled the bench.
Can a request made by a borrower be rejected by a lender on the ground that the loan of the lender is structured and therefore, the lender can recover the amounts due on the making of such structured loan like an Escrow account?
"I hold that Circular is applicable to all loans/advances and facilities extended by a lending institution, including structured loans", declared the Judge.
Where multiple banks are involved in a loan transaction, can one Bank deny the extension of moratorium, when another is willing to extend the benefit of a moratorium?
"Once all the eggs are taken away by Respondents No.5 and 6, the default as regards the loan to Respondent No.7 would automatically result in the classification of the loan account of the Petitioner with Respondent No. 7 as an NPA, thus in effect killing of the golden goose", articulated the bench.
It proceeded to rule that the Respondents are required to ensure the survival and continuance of the Petitioner and its business.
"Thus, I'am of the considered opinion that one Bank cannot deny the extension of a moratorium, when another or others are willing to extend the benefit of a moratorium", the court held.
Case Title : Velankani Information Systems Ltd vs Union of India and others.
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