Allahabad HC Refuses Interim Relief To Power Projects From RBI Circular On Revised Framework For Resolution Of Stressed Assets [Read Judgment]

The Allahabad High Court on Monday refused to grant interim relief to private power companies from the circular issued by the Reserve Bank of India (RBI) which gives borrowers 180 days' time to clear their dues— a deadline that ended on Monday.

The Bench comprising Chief Justice DB Bhosale and Justice Yashwant Varma ruled, "In the ultimate analysis, I have been unable to persuade myself to find the petitioners entitled to the grant of interim relief bearing in mind factors such as the state of the banking sector, rising status of NPA's, declining profitability of public sector banks, steady erosion of profits, majority of banks not even meeting the minimum capital requirements, the huge infusion of funds by the Union Government to shore up the banking system as a whole, the experience of RBI of existing schemes not being sufficiently strong to deal with resolution of stressed assets with expediency, all of which appear to have acted as the backdrop in which the impugned directive came to be issued."

The Court has now directed 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 has also been directed to submit its report within two months from the date of its constitution.

The Court, however, clarified that the order shall not curtail the rights/powers of a financial creditor under Section 7 of the Insolvency and Bankruptcy Code (IBC) or even of the RBI in issuing directions in specific case(s) under Section 35AA of Banking Regulation (BR) Act to initiate corporate insolvency resolution process under Chapter II of Part II of IBC.

The petitioners' averments

The order was issued on petitions filed by the Independent Power Producers Association of India (IPPA), Association of Power Producers (APP) and Prayagraj Power Generation Company Limited, challenging the RBI circular issued on 12 February this year as being violative of Articles 14 and 19 of the Constitution of India.

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 as suffering from non-application of mind, as it fails to draw a distinction between various forms of "stressed assets" from different industrial sectors. The petition further points out the failure of the Circular to distinguish between genuine and wilful defaulters.

The Petitioners 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 relied 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 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 Petition impugns 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.

Court's opinion

The Court began with tracing the object behind issuance of the circular as well as the RBI's power, and concluded that the RBI stands expressly conferred with the authority to issue directions to a banking company/companies on the subject of resolution of stressed assets.

With this observation, the Court rejected the contention that Section 7 of the IBC confers a discretion on financial creditors to choose whether to initiate proceedings under IBC, and that discretion stands taken away by virtue of the impugned directive. It asserted, "As I read the directions, it appears that the same have been essentially framed to underline, reiterate and emphasise the emergent need to deal with stressed assets and to initiate a RP with expedition. It primarily appears to emphasise a speedy resolution of a stressed asset. 

Banks cannot be accepted to state that while a default has occurred, a resolution process shall not be initiated. More fundamentally, to hold that individual banks would have the discretion not to invoke IBC notwithstanding a direction of the RBI would be to ignore the amplitude of the powers conferred upon the central bank by virtue of sections 21, 35A and 35AB of the 1949 Act."

It further opined that the petitioners had failed to lay in place a factual foundation providing requisite details of irreparable prejudice that may be caused to them. It, therefore, concluded that the petitioners had failed to establish a case for the grant of interim relief.

"In such situations, the Court must necessarily be circumspect and tread with caution keeping the principles of "judicial deference" and "institutional competence" in mind. Ultimately the question of weighing competing economic factors, choice of fiscal measures liable to be adopted must not be interfered with lightly unless established to be palpably arbitrary. The petitioners have failed to meet this benchmark at the present," it added.

Alleged conflict between the RBI and the Centre

The Court, however, emphasised on the "alleged and perceived conflict" between the views expressed by the Union Government and the stand taken by the RBI. While the RBI had raised a dispute regarding the recommendations made and opinion expressed by the Standing Committee Reports, the Centre had submitted that it is desirable, while considering the "sector (power) specific issues" that a timeline prescribed under the circular be made effective after 180 days from 27.08.2018 and subsequent steps be taken by the parties based upon the reports of the High Level Empowered Committee presided over by the Cabinet Secretary.

The Court then highlighted the need for unanimity between the Centre and the RBI on the issue of timeline for resolution, observing, "I am, prima facie, of the view that there should be unanimity amongst the different arms of the Government on such crucial issues like timeline for resolution and they should be flexible enough to address the problems in the proper perspective and resolve it in a positive manner… 

Along-with the economic health of the country, which is the direct concern of the RBI, progress and growth of the country including providing power/electricity to every village in the country, is the concern of the Government and, therefore, there should be unanimity amongst the different arms of the Government on such crucial issues."

The Court also highlighted the need for the Centre to take a stand on initiation of consultation process under Section 7, observing, "However as observed hereinbefore, the Union cannot remain irresolute and undecided. If it stand convinced that the impugned directive merits modulation, then it must consider taking recourse to the statutory mechanism placed and initiate the process of consultation. Its position of ambivalence cannot be permitted to perpetuate. Such issues should be resolved between the two governmental organs and should require no intervention of the Court."