Challenge Against RBI Circular On Stressed Assets By Power Companies: SC Transfers All Pending Matters Before HCs To Itself, Orders Status quo [Read Order]

The Supreme Court Bench comprising Justice RF Nariman and Justice Indu Malhotra on Tuesday directed that twelve cases pertaining to the Insolvency Proceedings under the new RBI circular pending before High Courts of Madras, Gujarat, Allahabad, and Delhi be transferred to the Apex Court. Directing status quo to be maintained, the Court directed the listing of the petitions for final disposal on 14 November."we allow transfer of W.P. (C) No. 20672-20676/2018 [Dharani Sugars & Chemicals Limited vs. Union of India & Ors.] pending before the High Court of Judicature at Madras, Special Civil Application No. 12492 of2018 [Shipyards Association of India vs. Union of India & Ors.] pending before the High Court of Gujarat at Ahmedabad, Civil Misc. Writ Petition No. 18170 of 2018 [Independent Power Producers Association of India vs. Union of India & Ors.], Civil Misc. Writ Petition No. 23181 of 2018 [Association of Power Producers & Ors. vs. Union of India & Ors.], Civil Misc. Writ Petition No. 23183 of 2018 [Prayagraj Power Generation Company Limited vs. Union of India & Ors.] pending before the High Court of Judicature at Allahabad, W.P. No. 16095 of 2018 [The South Indian Sugar Mills Association – Tamil Nadu vs. The Reserve Bank of India] pending before the High Court of Judicature at Madras, Writ Petition (C) No. 7221/2018 [Vayam Technologies Limited & Anr. vs. Union of India & Ors.], Writ Petition (C) No. 6463/2018 [All India Bank Officers Confederation vs. Union of India & Anr.] pending before the High Court Delhi at New Delhi to this Court", states the Order.The petitions have challenged the circular issued by the Reserve Bank of India (RBI) which gave borrowers 180 days' time to clear their dues. Among other things, the Circular mandates that banks will have to disclose defaults even if the interest repayment is overdue by just one day, and will have to put a resolution plan in place within 180 days. Failing to find a resolution within this stipulated time, the defaulting company will have to be referred to insolvency courts as the RBI had abolished all the extant debt resolutions mechanisms such as the CDR, SDR, S4A and JLF.The Circular has been challenged by most petitioners as suffering from non-application of mind, as it fails to draw a distinction between various forms of "stressed assets" from different industrial sectors. They further point out the failure of the Circular to distinguish between genuine and wilful defaulters.Most petitioners essentially claim to fall in the category of genuine borrowers, asserting that they were 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 this end, they rely on the report of the 31-Members Committee of Parliament on Energy.The report discussed in detail the reasons for stressed/ non-performing assets in the electricity sector, the role of the RBI/ the Ministry of Finance/ Banks in the financing of power projects, and the need for consideration of the various factors that are responsible for assets becoming NPAs. It had specifically stated,"These projects were commissioned on the basis of national need/ demand of electricity, availability of all other essentials required in this regard. However, due to unforeseen circumstances, these plants are suffering from cash flows, credit rating, interest servicing etc. Hence, simply applying the RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery."Besides, the Circular has also been challenged for prescribing the 180-day timeline only for a debt of over Rs. 20 billion. This has been challenged as having no reasonable nexus to the object sought to be achieved by Sections 35AA and 35AB.The petitions impugn the vires of Sections 35AA and 35AB of the BR Act as well, both of which were inserted by way of an Ordinance in May last year. The provisions had empowered the Centre to issue directions to the RBI to effectively deal with stressed assets. It was pursuant to these provisions that the impugned Circular had been issued.Earlier, the Allahabad High Court had refused interim relief to private power projects from the circular, directing the Central Government to consider initiation of the consultative process contemplated under Section 7 of RBI Act, and conclude the same within 15 days. Section 7 embodies the consultative mechanism to be initiated in case the appropriate authorities do feel the need for amendment or modulation of a policy measure.The High-Level Empowered Committee to deal with the cross-sector concerns raised by various stakeholders was also directed to submit its report within two months from the date of its constitution.The Court had, however, clarified that the order shall not curtail the rights/powers of a financial creditor under Section 7 of the Insolvency and...

Challenge Against RBI Circular On Stressed Assets By Power Companies: SC Transfers All Pending Matters Before HCs To Itself, Orders Status quo [Read Order]

Apoorva Mandhani

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